Weird: Annual Leave, Closedown Periods, & New Employees

In New Zealand, under Section 16 of the Holidays Act 2003, employees become entitled to a minimum of four weeks of annual leave when they have worked continuously for their employer for 12 months.

If a new employee wishes to take annual leave before they have worked continuously for their employer for 12 months, under Section 20, their employer may allow them to take an agreed portion of their annual leave entitlement in advance.

During annual closedown periods (e.g. around Christmas), this is how annual leave for new employees is handled by many (most?) New Zealand companies:

The company tells the new employee “we are shutting down for two weeks over Christmas”, the employee asks “can I receive some of my annual leave entitlement in advance so I can pay rent?”, and the employer says “no problem”.

The amount the employee takes in advance is then deducted from the four weeks they will later become entitled to.

This seems logical and fair.

Apparently, it is illegal.

The Correct(?) Approach Under Section 34

According to the Employment Court in Metropolitan Glass & Glazing Limited v Labour Inspector [2020] NZEmpC 39, under Section 34(2), regardless of what Section 34(4) appears to imply, employers must pay new employees who are not yet entitled to annual leave 8% of their gross earnings-to-date (less any annual leave already taken in advance) at the start of the closedown period.

The Court emphasised that Section 34(2) is "expressed in absolute terms" and there is "no reason for the words to be read down."

The word "must" means exactly that - it's not optional or negotiable.

Employees can then either take the closedown period as unpaid leave or request leave in advance (as affirmed by Section 34(4)) if they need a ‘top-up’ to match their usual remuneration.

In either case, the employee's anniversary date for their annual leave entitlements resets to the closedown period start date (or a nearby date) and they are not entitled to any annual leave for a further 12 months.

Bizarre Consequences

Consider an employee who has worked for 11 months before a Christmas closedown:

They might have accumulated nearly four weeks' worth of annual leave, but instead of being able to use this gradually throughout the following year or beyond (potentially at a higher value, if they get a pay rise before using it), they must receive an 8% payout and then wait another full year before becoming entitled to annual leave again.

The 8% payout will be treated as a lump sum payment for tax purposes, so the employee won’t see half of it until tax return time.

What about a closedown period that only lasts one or two days?

The employer must pay out 8% of gross earnings, potentially several weeks' worth of salary, for just a couple of days off.

Both the employer and the employee might not like it - but the employer “must” do it!

I have sympathy for employers trying to explain this to their employees.

Reality

Many employers are not following the Employment Court’s interpretation of Section 34.

Nicer employers are allowing employees to take leave in advance to cover the days off. Nastier employers are forcing their employees to take unpaid leave. Both approaches are apparently unlawful unless paired with the 8% payout.

Are many New Zealand companies just not following the law?

Is it a lack of awareness of the Employment Court's decision?

Deliberate disregard?

An “if the employee and employer agree, who cares?” approach?

Or, are there employers and lawyers more creative than me out there coming up with creative workarounds?

One idea a colleague mentioned was avoiding Section 34 entirely by structuring Christmas shutdowns in ways that prevent them from falling within the definition of a “closedown period” as defined by the Act.

I am skeptical if such an approach would stand up to any real scrutiny.

But perhaps it should?

If employers and employees are coming to mutually acceptable arrangements that are fair to all involved, maybe this is one of those situations where the law needs to catch up with common sense and standard practice, rather than the other way around.