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COVID-19 Annual Holiday Impact

COVID-19 Annual Holiday Impact

COVID-19 Annual Holiday Impact

Wednesday 22 April, 2020

We have been receiving a lot of questions from employers and employees about the effects that a reduced income and/or wage subsidy will have on annual holiday entitlements.  The answer, in short, is – it depends.  Let us explain…

An employee becomes entitled to four weeks’ annual holidays at the completion of 12 months employment, and at the completion of each subsequent 12 months. Even where an employee is not working at all and receiving no payment, so long as their employment isn’t terminated, they will be entitled to four weeks’ annual holidays on the completion of 12 months.

Where changes to working hours and pay levels will make a difference is what that four weeks of entitlement looks like when converted from weeks, to days, to payment for those days.  That conversion is only undertaken at the time the holiday is taken or at termination (if the employment ends before the holiday entitlement is used).

Example

Pre-pandemic, Hugh was working five days per week.  He became entitled to his four weeks’ annual leave just before going into lockdown. During lockdown and through level three, Hugh was not working at all.  He came back to work at level two doing three days per week, which has continued for several months.  Hugh wants to take one week of holidays. “One week” for Hugh is three days, as that is what he has been working at the time at the time he takes the holiday – not what he was working at the time he became entitled. 

Holiday entitlement is paid at the greater of the employee’s ordinary weekly pay (OWP) or average weekly earnings (AWE). 

OWP is what the employee would have received for an ordinary working week.  If that cannot be determined, it can be calculated by averaging the employee’s gross earnings over the four calendar weeks before the holiday is taken.

AWE is the average of the employee’s gross earnings over the 52 weeks before the holiday is taken.

All wages, salary, commission, paid leave, special leave will form part of the employee’s gross earnings.  Any wage subsidy that an employer claims for an employee will be paid onto the employee as usual wages or salary, so will be captured as gross earnings.

What this means in effect is that the extent of the impact of reduced income on holiday pay will entirely depend on when the holiday entitlement is taken.  It has nothing to do with when the entitlement is earned.

Example

Pre-pandemic, Hugh was earning $1,000 per week.  During levels three and four (12 weeks’ total), Hugh’s pay was reduced to $600 per week.  After that he started earning $1,000 per week again.

If Hugh took a week’s holiday in the last week of the reduced income period, his week would be worth $915.38, which is his AWE ($600x 11 weeks plus $1,000x 41 weeks, divided by 52 weeks). His OWP at the time of the holiday is $600. AWE is greater than OWP.

If Hugh took a week’s holiday two months’ after returning to his pre-pandemic pay, his week would be worth $1,000, which is his OWP.  His AWE at the time of the holiday is $907.69 ($600x 12 weeks plus $1,000x 40 weeks, divided by 52 weeks). OWP is greater than AWE.