The Government has announced a planned replacement of the Holidays Act 2003 (Act) and, given the consistent confusion the Act has caused in the past, reform is welcome news.
Employers have long struggled with complicated leave calculations and paid significant amounts in remedial payments. From our perspective, the move to an hourly-based accrual and simplification of the formulae for payment is an important and positive change.
That said, the proposed changes have still attracted some controversy, particularly as they reduce entitlements for some employees.
Upsides for employers
For employers, the biggest benefit is the clarity that comes with the move to hourly accrual of annual and sick leave.
Annual leave will be accrued at a rate of 0.0769 hours per ‘contracted’ hour, rather than being provided in a lump-sum format after 12 months’ continuous employment. This will make calculating leave entitlements much clearer, especially for those employees with variable patterns of work.
The complicated and different formulae for calculating the payment of leave is also changing. The same hourly leave pay rate will be used for all types of leave, based on a worker’s base wage for the day of leave.
This all sounds promising, but we will need to see the detailed proposed wording in order to breathe a sigh of relief that the headaches for employers are at an end. If the wording is clear and effective, it will reduce the number of disputes and back-pay obligations, lessening the risk of employers being ordered to pay significant amounts in remedial payments – a number of which have made headlines in the past.
Upsides for employees
Employees also benefit, with sick, annual, bereavement and family violence leave to begin accruing from the first day of employment. Employees no longer have to wait 12 months for annual leave and six months for sick, bereavement and family violence leave.
Casual employees also benefit from a leave compensation payment of 12.5% of their hourly rate for every hour worked. This is an increase from the 8% “pay as you go” amount, paid to casual employees in lieu of annual leave.
Employees also get the option to cash up 25% of their leave balance every 12 months, rather than just one week. For employees who have banked a larger leave balance, this is a positive change while it also decreases leave liability for employers.
It makes sense for employers to be required to provide mandatory pay statements. This will provide employees with clarity and remove the need for them to request this from their employer. It will also assist employers with keeping their payroll organised and clear.
In a significant change for employees planning to utilise parental leave, annual leave paid to employees after returning will now be paid at the standard rate of pay that they were receiving before going on parental leave. This was proposed by the previous government as part of reform and in our view is a no-brainer that should have been implemented years ago.
Some trade-offs
The most controversial impact of the proposed system is that part-time employees will no longer receive a minimum entitlement of 10 days of sick leave. Instead, the sick leave they receive will be proportional to their hours worked at a rate of 0.0385 for each contracted hour of work.
Also, employees who currently earn a base salary topped up by annual bonuses or commission from sales, will not have these included in their annual leave calculations. Under the new system, annual leave will only be calculated using the employees’ base salary, unless negotiated otherwise. As things stand, these bonuses and commission-based payments are often not included in leave calculations anyway, due to their discretionary nature. But the reform appears likely to give a hard-and-fast rule and remove any doubt.
Some of the trade-offs for employers are the higher costs of paying leave for employees who have returned from parental leave, and the higher costs of employing casual employees. Both of these changes may prove difficult for smaller employers who are already struggling.
The transition period may also prove operationally challenging for employers because they need to implement a new payroll system for leave and understand their new obligations. However, the proposed 24-month period gives a good deal of time to get up to speed.
Are these changes the answer?
We think an overhaul of the Holidays Act is absolutely necessary and the shift to hourly accrual and one simple formula for payment of leave is a sign of common-sense prevailing. This is a difficult area to get right though, so we look forward to seeing the draft of the Bill and examining the specific wording and implications.
There are some trade-offs for employers and employees, but overall, the proposed Bill is a positive step forward in an area desperate for reform.
Put simply: it is too early to say for sure, but the new Holidays Act does appear likely to be an improvement on the current one.
Our specialist Employment Law Team is keeping a close eye on progress of the Bill and will be on-hand to assist employers and employees with adapting their systems to comply with new legislation.
