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employment

Cashing out annual leave: What are the limits?

Key Takeaway

In New Zealand, employees can request to 'cash out' up to one week of their annual leave entitlement per year, meaning they receive payment instead of taking time off. Employers can agree or refuse these requests, and any agreement must be in writing. Other types of leave, like sick leave, cannot be cashed out.

Cashing Out Annual Leave in New Zealand

Cashing out annual leave, also known as 'cashing up annual holidays', refers to an arrangement where an employee receives a payment for a period of their annual leave entitlement instead of taking that time off work. New Zealand law sets out specific rules and limits regarding this practice.

Legal Basis and Limits

The ability to cash out annual leave is governed by the Holidays Act 2003. An employee may request to cash up (receive payment for) not more than one week of their minimum annual holidays entitlement in any 12-month period [Source: Holidays Act 2003, s 28A(1)]. This means that beyond this one-week limit, annual leave must be taken as time off from work.

Employee Request and Employer Discretion

The process for cashing out annual leave begins with the employee. An employee must make a request to their employer to cash out a portion of their annual leave [Source: Holidays Act 2003, s 28A(1)].

Employers have discretion in deciding whether to approve such a request. An employer may agree or refuse the employee's request, and they are not required to provide a reason for their decision to refuse [Source: Holidays Act 2003, s 28A(2)].

Requirement for a Written Agreement

Any agreement between an employer and an employee to cash up annual holidays must be in writing [Source: Holidays Act 2003, s 28A(3)]. This written agreement helps to ensure clarity and avoid disputes regarding the arrangement.

Furthermore, an employment agreement cannot include a provision that requires or allows an employee to cash up annual holidays before the employee's entitlement to those holidays arises [Source: Holidays Act 2003, s 28A(4)]. This means that any agreement to cash out leave must be made for an existing entitlement, not for future leave.

Calculation of Payment

When annual holidays are cashed out, the payment for that period must be at the employee's ordinary weekly pay at the date of the agreement [Source: Holidays Act 2003, s 28A(5)]. 'Ordinary weekly pay' (OWP) is the amount an employee would normally earn in a week, calculated according to specific rules outlined in the Holidays Act 2003, and it generally includes regular payments like wages, salary, and some regular allowances or commissions [Source: Holidays Act 2003, s 8].

What Cannot Be Cashed Out

The provisions for cashing out leave under the Holidays Act 2003 apply exclusively to annual holidays. Other types of leave, such as sick leave, bereavement leave, or public holidays, cannot be cashed out. The Holidays Act 2003 sets out separate entitlements and payment rules for these types of leave, and does not provide a mechanism for employees to receive payment in lieu of taking them as time off [Source: Holidays Act 2003, s 45, s 64, s 70 (referring to public holidays, sick leave, and bereavement leave respectively)].

When to Seek Independent Legal Advice

Navigating employment law can be complex. If there are disputes about annual leave entitlements, cashing out leave, or any employment rights, it is advisable for individuals to seek independent legal advice. Information can be obtained from official government bodies such as Employment New Zealand, or by contacting a Community Law Centre for free legal help.

Key Resources