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employment

The 8% holiday pay rule for casual workers

Key Takeaway

The '8% holiday pay rule' applies to employees whose work is genuinely intermittent or irregular, or on fixed-term contracts under 12 months. Instead of accruing annual leave, they receive 8% of their gross earnings as holiday pay with each pay. This arrangement requires a written agreement and is outlined in the Holidays Act 2003.

The 8% Holiday Pay Rule for Casual Workers in New Zealand

In New Zealand employment law, certain employees, often referred to as 'casual workers', may be paid their holiday pay on a 'pay-as-you-go' basis, typically calculated as 8% of their gross earnings. This approach is an alternative to accruing and taking paid annual leave, which is the standard entitlement for most employees. This rule is governed by the Holidays Act 2003.

What is the "8% Holiday Pay Rule"?

The '8% holiday pay rule' refers to the practice of paying an employee 8% of their gross earnings in addition to their regular wages, instead of them accruing and taking annual holidays. This payment is made with each pay cycle and is intended to cover the employee's entitlement to annual holidays [Source: Holidays Act 2003, s 28A].

Who is Eligible for 8% Holiday Pay?

This method of paying holiday pay is only permissible under specific circumstances. An employer may pay an employee annual holiday pay on a 'pay-as-you-go' basis if:

  • The employee's employment is for a fixed term of less than 12 months; or
  • The employee's employment is so intermittent or irregular that it is impracticable for the employer to provide the employee with not less than 4 weeks' annual holidays [Source: Holidays Act 2003, s 28A(1)(a)].

Crucially, the employment agreement between the employer and employee must also state that the employee will be paid annual holiday pay as part of their regular pay, and the employee must agree to this arrangement [Source: Holidays Act 2003, s 28A(1)(b)].

It is important to note that this method cannot be used as a way to avoid providing regular employees with their statutory annual leave entitlements. If an employee's work pattern changes and becomes regular, they may no longer meet the criteria for this 'pay-as-you-go' arrangement, and the employer may be required to transition them to accruing annual leave.

How is 8% Holiday Pay Calculated?

The holiday pay is calculated as 8% of the employee's "gross earnings". "Gross earnings" are defined as all payments the employee receives from their employer in their capacity as an employee, including wages, salary, allowances, and commission [Source: Holidays Act 2003, s 4]. It excludes certain payments like reimbursements for expenses, payments for medical insurance, or payments of holiday pay itself [Source: Holidays Act 2003, s 4(1)].

For example, if an employee's gross earnings for a pay period are $500, their holiday pay for that period would be $40 (8% of $500).

Employer Obligations

Employers have specific obligations when using the 8% holiday pay rule:

  • Agreement: A written employment agreement must clearly state that holiday pay will be paid on a 'pay-as-you-go' basis, and the employee must agree to this [Source: Holidays Act 2003, s 28A(1)(b)].
  • Payslip Disclosure: The holiday pay component must be separately identified on the employee's payslip for each pay period [Source: Holidays Act 2003, s 28A(4)]. This ensures transparency and confirms that the payment is for holiday entitlement.
  • Eligibility Check: Employers must regularly review whether an employee's work pattern still meets the criteria for 'intermittent or irregular employment' if this was the initial basis for the arrangement.

Employee Rights

Employees subject to the 8% holiday pay rule are entitled to:

  • Receive 8% of their gross earnings as holiday pay with each pay, provided they meet the eligibility criteria and have agreed to this arrangement in writing [Source: Holidays Act 2003, s 28A].
  • Have the holiday pay clearly itemised on their payslips [Source: Holidays Act 2003, s 28A(4)].
  • Be transitioned to standard annual leave accrual if their employment becomes regular and no longer fits the intermittent or fixed-term criteria.

It is important for employees to understand that receiving holiday pay on a 'pay-as-you-go' basis means they are not entitled to additional paid annual leave during the year, as this entitlement has already been paid out.

When to Seek Independent Legal Advice

Individuals and organisations are encouraged to seek independent legal advice if they have specific questions about their employment situation, the application of the 8% holiday pay rule, or their rights and obligations under the Holidays Act 2003. This includes questions about the interpretation of 'intermittent or irregular' employment, the validity of an employment agreement clause, or disputes over holiday pay entitlements. Community Law Centres throughout New Zealand offer free legal advice to eligible individuals.

Key Resources