Christmas Closedown Confusion

Thursday 17 December, 2020

As the holiday season approaches, we have recently been receiving a lot of questions from employers about how to correctly manage closedown periods for their staff who are not yet entitled to paid annual holidays at the time of the closedown.

Employees become entitled to four weeks of paid annual holidays once they have worked for the employer for 12 months.  So, if the closedown rolls around before they have had a chance to complete their first 12 months and secure an entitlement, what happens to them?

The short answer is – section 34 of the Holidays Act 2003 applies.  Previously though, this section has been the source of much confusion for employers.  The confusion lies within the apparent mismatch between subsection (2), which says that:

“An employer must, in respect of the closedown period, pay the employee 8% of the employee’s gross earnings since the commencement of the employee’s employment…”,

and subsection (4) which goes on to say that:

“This section does not prevent an employer and employee from agreeing that the employee may take the period of the closedown as annual holidays in advance [of entitlement]…”.

Many have interpreted this section as presenting an option between two methods – either paying the employee 8% of their gross earnings from their commencement date OR allowing them to take paid leave in advance by agreement.

An Employment Court judgment released earlier this year (Metropolitan Glass & Glazing Limited v Labour Inspector) has clarified the correct position, which is that the subsection (4) ability to pay holidays in advance is additional to the subsection (2) requirement that employees are paid 8% gross, not an alternative to it.  The reasoning for the decision was based in the reading of the surrounding sections and the effect of the word “must” in reference to payment of 8%.

Section 35 provides that when an employee who is not yet entitled to annual holidays is required to discontinue work during a closedown period, their anniversary date, for the purpose of determining annual holiday entitlement, will move to the date that the closedown began (or a nominal proximate date).

We appreciate that this process can seem convoluted and confusing.   We provide a couple of scenarios over the page which may make it easier to understand.

Although potentially problematic in the first year after commencing employment, the process will be streamlined in the years to follow.  Moving the employee’s anniversary date will mean that all staff will become entitled to annual holidays at the same time, which will conveniently coincide with the customary closedown period.

If your business has a closedown period coming up, we recommend that you check how your staff, particularly those not yet entitled to annual holidays, are to be paid.  System and process changes may be necessary in light of the Metropolitan Glass decision. 

Scenario one

Hank is paid $1,200 per week gross and commenced work 12.5 weeks before his employer’s two-week customary closedown period commencing on 23 December 2020:

• Pursuant to section 34(2) –

Hank will be paid $1,200 at the commencement of the closedown period, being 8% of his gross earnings for the term of his employment (total gross earnings for 12.5 weeks = $15,000). 

• Pursuant to section 34(4) -

As the 8% payment equals a week’s pay for Hank, and does not cover the full two-week closedown period, Hank and his employer can agree that Hank can take the second week of the closedown (which is not covered by the 8% payment) as paid annual holidays in advance of entitlement.

• Pursuant to section 35 –

Hank will next become entitled to annual holidays on 23 December 2021 and annually thereafter.  If he takes a week in advance, that week will be subtracted from his four-week entitlement on 23 December 2021. 

Hank’s anniversary date for other types of leave will remain unchanged. 

Scenario two

Dorothy is paid $1,200 per week gross and commenced work 37.5 weeks before her employer’s three working day closedown period between the Boxing Day and New Year public holidays (Tuesday 29 to Thursday 31 December 2020).

• Pursuant to section 34(2) –

Dorothy will be paid $3,600 at the commencement of the closedown period, being 8% of her gross earnings for the term of her employment (total gross earnings for 37.5 weeks = $45,000). 

• Pursuant to section 34(4) -

As the 8% payment equals three weeks’ pay for Dorothy, there would be no need for Dorothy to agree to take additional paid holidays in advance. 

• Pursuant to section 35 –

As the specific dates of the closedown may change year to year depending on whether the public holidays fall on working days or weekends, Dorothy’s employer nominates 23 December as the proximate date to be treated as the date the closedown will begin.  Dorothy will next become entitled to annual holidays on 23 December 2021 and annually thereafter. 

Dorothy’s anniversary date for other types of leave will remain unchanged. 

Dorothy will not become entitled to paid annual holidays for another 12 months, but her employer may allow her to take unpaid leave during that time.  It would be a good idea for Dorothy to save some of her 8% to cover any leave that she would like to take.

If you have any questions regarding the article, our employment team would be happy to help, get in touch with one of our experts below.