Business mentor: More holidays a question for the pay office

What do I have to do to prepare for annual holidays going from three weeks to four weeks on April 1, 2007?

Small business sector specialist Sarah Trotman asked Jim Roberts, a partner at Auckland law firm Hesketh Henry, for some advice:

The Holidays Act 2003 does not require employers to do anything prior to April 1, 2007. However, it is a good idea to understand how it works, and think about the easiest way for your business to make the adjustment.

This may result in you starting to make provisions now, or you may decide to do nothing. The key is to compare what the act will require with the systems you use.

The Holidays Act 2003 adopts the same basic annual holiday philosophy that has existed since the Annual Holidays Act 1944.

An employee becomes entitled to annual holidays at the end of each year of employment. Also, if they leave employment during the first year or any subsequent year before the next entitlement to annual holidays, the employee is entitled to holiday pay calculated from the employee's last anniversary of employment.

At any moment, other than on an employee's actual anniversary, an employer is likely to have in respect of every employee:

* Annual holidays the employee is entitled to. We'll call this the "entitlement"; and

* A calculation of the liability of holiday pay that an employee would be entitled to if they left at that moment. We'll call this the "accrual", which is currently 6 per cent.

Employer systems should account for these separately and show them separately on pay slips, particularly as the "entitlement" is to holidays on pay whereas the "accrual" is a contingent liability that roughly reflects payment for holidays that an employee is not yet entitled to.

The accrual roughly equates to the proportion of annual leave an employee is earning but not yet entitled to in a year.

On April 1, 2007, the law changes and employees become entitled to four weeks' annual leave instead of three. However, employees are only entitled to the four weeks on their next anniversary after April 1, 2007.

This means an employee whose anniversary is April 1 immediately becomes entitled to four weeks' annual leave on April 1, 2007, but an employee whose anniversary is on March 31 has to wait until March 31, 2008.

Okay, so that's the entitlement, what about the accrual?

Well, the accrual changes from 6 per cent to 8 per cent and this is where it gets tricky. From April 1, 2007, any employee who leaves employment is entitled to holiday pay (the accrual) calculated at 8 per cent from the employee's last anniversary date.

So when the anniversary date clicks over to the accrual at 8 per cent it will roughly equal the four weeks' holiday the employee is entitled to.

However, this also means that on April 1, 2007, all employee accruals need to be adjusted from 6 per cent calculated from each employee's last anniversary (which is each employee's entitlement as at March 31, 2007) to 8 per cent but still calculated from the last anniversary. For an employee with an anniversary date of October 1 this means calculating the 8 per cent from October 1, 2006.

This is why many people have been telling employers to start preparing from April 1, 2007. They are recommending that employers account now for the 8 per cent to make sure that the right amount is there on April 1, 2007. This would mean a calculation of 8 per cent from each employee's anniversary after April 1, 2006.

Before taking any steps employers need to think about exactly what they need to do in their own business. Talk to your finance and payroll people. Can you get away with just making sure it is budgeted for and updating all of the figures on March 31, 2007? Can your payroll system calculate the 8 per cent early but not allocate it until April 1, 2007? Are there other ways of calculating in advance if you wish to do so?

Preparing for April 1, 2007, is not about what you have to do. It is about how your finance people want to account for the sudden change to 8 per cent and four weeks' leave entitlement, and the most practical means of doing this within your business.

* For more information on your employees' holiday entitlements, contact Jim Roberts by phone on (09) 375-8723, or by email on the link below.