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Understanding Annual Leave

The Holidays Act 2003 provides for all employees to have a minimum entitlement to four weeks’ annual holidays (annual leave) after each period of 12 months of continuous employment with their employer. This leave is expressed in weeks – not days, and regardless of whether a person is full-time, part-time, permanent, fixed-term, or casual, all employees are entitled to the minimum of four weeks’ leave. An employment agreement can provide for more than this minimum but must not provide less.

Once a person has been employed continuously for 12 months with their current employer, they become entitled to their annual leave. This entitlement becomes an absolute entitlement and remains in force until the employee has taken all their leave, or, if their employer does not have a policy preventing it, has cashed out a maximum of one week of annual leave per year.

While an entitlement does not fall due until the completion of 12 months, the employer may allow the employee to access their accruing leave (the leave that accrues from one anniversary date to the next). This ability to anticipate leave may be provided under the employee's employment agreement however will generally be at the employer’s discretion. This means there may not be an absolute right to anticipate leave in advance of the employee's anniversary date.

An employee should make use of their leave once it has becomes an entitlement and ideally should not bank that leave for the future, unless they have a genuine reason for doing so and their employer has agreed. The Act states that annual leave is provided "for the opportunity for rest and recreation." The employer should therefore not put any unreasonable barrier to an employee being able to take at least two weeks of their leave in one continuous period.

Where an employee is permitted to take their leave in advance (i.e. use some of their accruing leave), that leave is deducted from the employee’s entitlement when it becomes due on their anniversary date. Employers should therefore exercise some discretion to ensure an employee does not take too much of their accruing leave as that may mean the employee is not able to take a decent two-week holiday once they become entitled to that leave.

Annual leave continues to accrue while an employee is on the following types of leave:

  • Annual leave

  • Sick Leave (both paid and unpaid)

  • Public Holidays

  • Bereavement Leave (both paid and unpaid)

  • Parental Leave

  • Protected voluntary service or training

  • ACC leave

  • Leave without Pay of up to one week (unless otherwise agreed)

Leave that accrues during a period of Parental Leave, does not hold any value on the employees return to work – this leave takes 12 months after the employee’s return to gain its full value. There is proposal in the wind to allow annual leave that accrues during parental leave to have its full value. Some employers already provide for this to occur within their employment agreements.

If an employee takes a period of leave without pay for greater than one week during the year, an employer can choose to move the employee’s leave entitlement date by the length of the period of unpaid leave. Alternatively, the employee’s average weekly earnings calculation may be modified to reflect the time the employee was on unpaid leave, or the parties may agree that leave without pay has no effect on the leave entitlement.

Where an employee is holding onto their current annual leave, the employer is entitled to require the employee to come up with a plan to use that leave within a reasonable timeframe. If the employee fails to do so or the employer and employee cannot reach agreement on when the leave will be taken, the employer may give the employee a minimum of 14 calendar days’ notice of the requirement to take some or all of their leave.

Casual and fixed-term employees (of less than 12 months fixed term) generally do not accrue annual leave. Instead, their employment agreement will provide for a payment of 8% of their gross pay in lieu of receiving annual leave. These employees are still entitled to sick, bereavement, domestic violence, and any other leave provided in their employment agreement.

Leave Entitlement on Termination

If a person’s employment ends before all outstanding annual leave has been used, the employer must pay the employee for that unused entitlement. This means the employee is entitled to their current leave, plus any leave accrued since their last anniversary date. Generally, the accrual will be calculated at 8% of the employee’s gross pay since their anniversary date. If the employee has anticipated any leave (i.e. taken leave in advance), the value of that leave taken is deducted from their leave calculation. This is done to ensure a person does not get paid a second time for paid leave they have already taken.

If you have any questions about annual leave, contact McKone Consultancy today.

Photo Credit: Ben White on

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