Purchasing Annual Leave

Buying an extra week's Annual Leave by reducing your Salary

Over the last couple of years, we have received several requests from clients wanting to know how to set up a purchased leave scheme. There is nothing in the legislation that covers this situation, so firstly, it must be an agreed scheme and the employer is under no obligation to provide it to any employee. If you plan to go down this track, an initial assessment needs to be done to identify the benefits to the business and its employees. In addition, consideration should be given to how it will be done in payroll and the impact on payroll processing and activities.

When we had three weeks of annual holidays provided under the Holidays Act 2003 (prior to 1st April 2007), many employers gave four weeks. The fourth week at that time was an agreed term and the rules of the Holidays Act did not apply (such as the value it was paid).

From the 1st April 2007, the legislation was changed to move from three to four weeks of minimum annual holiday entitlement. At that point, there were a number of employers that started to offer the fifth week of additional annual leave so they could be seen as an employer of choice and retain more staff with this additional benefit. Then in 2009 the financial crisis hit New Zealand and that all stopped.

What is a purchased leave scheme?

Purchased leave is a scheme provided by an employer that gives the employee the option to purchase additional leave (up to a maximum set by the employer).
It is effectively taking leave without pay as the employer is not paying anything in addition to the employee’s agreed salary or wage.
The employee funds the purchased leave by approving a deduction from their salary or wage (made through payroll).
The point of this deduction is so the employee does not get a financial hit in one go, the cost is instead spread over 12 months.

What needs to be considered BEFORE implementing a purchased leave scheme?

There needs to be a real investigation and cost-benefit analysis undertaken by an employer with payroll fully involved BEFORE a decision is made to implement any form of leave purchasing scheme. Here are just a few things to consider (this is not an exhaustive list):

Firstly, do employees want this (or is this driven by HR as the latest fad)? Do employees take all of their annual holiday minimum entitlement now? If not, why add another leave type that won’t be used by employees? Instead, focus on getting staff to take the minimum entitled leave that they have.
If leave is purchased, what leave is to be used first, annual holiday minimum entitlement or the purchased leave? I would always ensure minimum entitlement is used first before purchased leave (always focus on reducing minimum entitlement as this is affected by what the employee has earned through gross earnings and on their termination – 8%).
How much leave will an employer allow an employee to purchase?
Will purchasing leave be an agreed term in the employee’s written employment agreement or will it be company policy? We would advise having this in company policy. In addition, it should be clearly stated that the employer can change, update, or even terminate the scheme at their discretion. (And if you do so, then it needs to be stated how this will affect leave presently purchased by the employee).
How will an employee qualify for it? Do they get it on day one or must they be employed for a specific period to qualify and are then invited to be part of the scheme?
How will the employee apply for this leave (online or paper-based)? Will it just be another leave entitlement available for the employee to use? How will payroll receive this application? What impact will it have on payroll processing?
If leave has been purchased how and where will it be displayed, tracked, and reported to the employee and in payroll?
When the employee takes the purchased leave at what rate will it be paid? As this is an agreed term please do not use the calculations under the Holidays Act. I would suggest it is paid at the ordinary or the base rate of pay for a week. This needs to be clearly stated so payroll knows what is to be paid and the employee is also clear on what they will receive as they have purchased it.
Is purchased leave based on a start and end date (when an application can be made to purchase) such as the tax year (1st April to 31st March)? Or could it be purchased anytime but the deduction set lower or higher depending on when purchased?
Can purchased leave be rolled over into another period such as annual holiday entitlement?
If employees take purchased leave who will cover them while they are away? What impact will this have on the business?
What happens if an employee purchases leave, and they don’t take it, or they decide to leave the business, or the employer terminates their employment? How will this affect tax already paid or not paid?
Can the payroll system apply a leave purchase scheme? Are there any issues or limitations that could impact the payroll system that is doing this? Could it mean payroll ends up doing manual workarounds to cover this and how would this impact on the payroll?

So, there are quite a few things to consider. Spend the time researching and if you do decide to implement a purchase leave scheme all this initial work will make for a more well-designed, robust scheme that will hopefully meet the needs of employees, the business, and of course payroll. (David Jenkins – NZPPA Director)

How it gets implemented in Payroll

The two general options are:

On day one, the employee is ‘given’ the additional weeks' leave in full and their salary is reduced each pay period by the equivalent of one week's leave/number of pay periods.
On day one, the employee starts ‘accruing’ additional leave, and their salary is reduced each pay period by the equivalent of one week's leave/number of pay periods.

In all cases the employer should have one prescribed date that employees can opt-in and opt-out, no exceptions should be allowed to this fixed date as administering it becomes even harder.

It should be set at the start and end of your structured pay periods, not part way through a pay period.

It should be set up under a different Leave Type so clearly not part of Legislated Leave.

Issues with each option.

Option – 1

What happens if the employee takes all the additional leave and then leaves the company before the employer has recovered the full value of the leave
How do you value a week when an employee receives commission or bonuses as the value of leave will keep changing and you would have to constantly re-evaluate the amount of your salary reduction each pay? This can be managed by clearly stating the Purchased Leave sits outside Statutory Leave so will be paid at an employee’s Ordinary Rate, but what happens when that rate changes partway through the leave year, essentially you will have to do a catch-up deduction to correspond with the new Ordinary Rate.
The leave should be separated from Annual Leave, perhaps called Purchased Leave, but rules need to be put in place around what leave must be taken first.
If the Purchased Leave is not taken then (a) why was it provided, (b) what happens to it, must the week be used up prior to any further purchase of leave (c) the value will have to be re-evaluated every time there is an Ordinary or Salary rate change.

Option – 2

How do you value a week when an employee receives commission or bonuses as the value of leave will keep changing and you would have to constantly re-evaluate the amount of your salary reduction each pay? This can be managed by clearly stating the Purchased Leave sits outside Statutory Leave so will be paid at an employee’s Ordinary Rate, but what happens when that rate changes partway through the leave year, essentially you will have to do a catch-up deduction to correspond with the new Ordinary Rate.
The leave should be separated from Annual Leave, perhaps called Purchased Leave, but rules need to be put in place around what leave must be taken first.
If the Purchased Leave is not taken then (a) why was it provided, (b) what happens to it, must the week be used up prior to any further purchase of leave (c) the value will have to be re-evaluated every time there is an Ordinary or Salary rate change.

At Ezypay, we can handle Purchased Leave but it creates a whole new level of complexity around leave that does not exist at present and we charge a monthly Admin Fee of $100 to oversee such arrangements as these fall outside our Statutory obligations.