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employment

What happens to annual leave when you quit?

Key Takeaway

When an employee resigns in New Zealand, employers must pay out untaken annual leave. For those who have completed 12 months of service, this includes payment for accrued but unused leave. For any period where 12 months of service has not been completed, an employee is paid 8% of their gross earnings for that period, as per the Holidays Act 2003.

Annual Leave Entitlements Upon Resignation in New Zealand

When an employee resigns from their employment in New Zealand, specific rules apply regarding the payment of their annual leave entitlements. These rules are primarily governed by the Holidays Act 2003, which outlines the obligations of employers and the rights of employees concerning annual holidays.

What is Annual Leave?

Annual leave, also known as annual holidays, refers to paid time off that employees are entitled to take for rest and recreation. In New Zealand, employees generally become entitled to 4 weeks of annual holidays after completing 12 months of continuous employment with the same employer [Source: Holidays Act 2003, s 16(1)].

Payment for Untaken Annual Leave on Termination

Upon an employee's resignation, the employer has an obligation to pay out any outstanding annual leave entitlements. The calculation of this payment depends on whether the employee has completed 12 months of continuous employment and whether they have any untaken annual leave from previous entitlement years.

Untaken Annual Holidays (for employees with 12+ months service)

If an employee's employment ends and they have completed 12 months or more of continuous service, the employer must pay the employee for any annual holidays that the employee is entitled to but has not taken [Source: Holidays Act 2003, s 28(1)(a)]. This payment must be calculated based on the employee's ordinary weekly pay or average weekly earnings, whichever is higher, at the time of termination [Source: Holidays Act 2003, s 21].

  • Ordinary weekly pay is generally the amount the employee would normally earn in a week, excluding certain payments like overtime.
  • Average weekly earnings are calculated by taking the employee's gross earnings over the past 52 weeks (or shorter period if employed for less than 52 weeks) and dividing by the number of weeks in that period [Source: Holidays Act 2003, ss 9, 10, 11].

Pro-Rata Annual Leave (for all employees)

In addition to any untaken annual holidays from previous entitlement years, an employee is also entitled to a payment representing their annual leave for the current, incomplete entitlement year, or for the period where they have not yet completed 12 months of continuous employment. This is often referred to as pro-rata annual leave.

Specifically, if an employee's employment ends, the employer must pay the employee 8% of the employee's gross earnings since the later of these two dates: the commencement of employment, or the date on which the employee last became entitled to annual holidays (i.e., their last anniversary date). Any annual holidays taken in advance will be deducted from this amount [Source: Holidays Act 2003, s 28(1)(b)].

Gross earnings include salary, wages, allowances, payments for overtime, and other payments for work done. It essentially covers all taxable earnings [Source: Holidays Act 2003, s 13].

Summary of Payment Calculation

Therefore, on resignation, an employee typically receives:

  1. Payment for any untaken annual holidays from previous full 12-month entitlement periods [Source: Holidays Act 2003, s 28(1)(a)].
  2. Payment of 8% of their gross earnings for the period since their last annual leave entitlement date, or since the start of employment if they haven't yet reached their first 12-month anniversary [Source: Holidays Act 2003, s 28(1)(b)].

Other Types of Leave

It is important to note that unlike annual leave, untaken sick leave and bereavement leave are generally not paid out to an employee upon termination of employment [Source: Holidays Act 2003, ss 66, 73]. These types of leave are intended to provide paid time off for specific circumstances during employment and do not accumulate as a payout entitlement upon leaving.

When Payment Must Be Made

The payment for outstanding annual leave entitlements should be made to the employee as soon as practicable after the employment ends [Source: Holidays Act 2003, s 28(2)]. This payment is typically included in the employee's final pay.

When to Seek Independent Legal Advice

Employees or employers requiring specific clarification on annual leave entitlements or calculations, or who have disputes related to final pay, should seek independent legal advice. Information can be obtained from official government bodies such as Employment New Zealand, or from a lawyer specialising in employment law. Free assistance is also available through Community Law Centres.

Key Resources