When can you pay Casual Holiday Pay
Below is an article from David at NZPPA
LET’S GET CLEAR ON WHAT YOU CAN DO IN PAYROLL REGARDING PAYING 8% “PAYG”
Paying out the 8% annual holiday pay (Section 28 of the Holidays Act), commonly known as “Pay As You Go” (PAYG), has several options and is linked to what has been agreed with the employee. I have seen this is not clearly understood or applied correctly in payroll. So, let’s get clear about what you can and cannot do regarding PAYG.
Firstly, 8% PAYG is not the default. The employee accruing leave to take it once it becomes entitlement (after 12 months continuous employment) is the actual default. You can only do PAYG if it has been agreed with the employee. The first mistake is the business (manager or HR) or even payroll taking it for granted they can just do this without the employee’s actual agreement.
And when I state agreement, I mean a written clause in the employee’s employment agreement. The clause should make it clear that because of the type of employment (we will cover this shortly), the 8% PAYG will be paid out in each payroll period, and the employee will not receive annual holiday entitlement because they do not meet the criteria.
Which employees can receive the 8% PAYG?
Presently, only two types of employees can get 8% PAYG:
1. An employee on a fixed term of less than 12 months. Just keep it in the back of your mind that one of the recommendations of the Holidays Act review is to remove the fixed-term option to be able to use the 8% (but that won't be until 2023!). There are some options regarding the fixed term, which will be covered later in this post as that is one area not well understood.
2. The ‘other employee’ has a poorly worded description that has caused problems in how it has been applied in payroll. This other employee is described as working "on a basis that is so intermittent or irregular that it is impracticable for the employer to provide the employee with 4 weeks annual holidays". The safest way to identify this employee would be as a casual (as and when required, with no expectation to work and no pattern of continuous employment).
One of the common issues I see with point 2 above is these so-called casuals seem to be working every week, week after week, even when payroll informs management that they don’t fit the criteria. This situation opens the business up to challenge with a real potential that the 8% paid up to the point if it is found that PAYG should not have been used will mean payroll is unable to recover what has been paid up to that point. When they take annual holidays (if they meet the criteria to get annual holidays entitlement), the employee will be paid their full leave rate.
Paid as an identifiable component
If the 8% PAYG is paid, it is important for payroll to ensure that the 8% is clearly seen as an “identifiablecomponent”. On numerous occasions, I have seen the 8% is stated as already being included in the rate payable to the employee. If it cannot clearly be shown as an identifiable component, such as a separate pay component, separate line on the payslip etc., then payroll is not meeting the requirements and could result in the business having to pay 8% on top of what has already been paid to again meet the requirements of PAYG.
Not paid at less than 8%
I have noticed some payroll people pay 10% because their business provides an additional week of annual holidays, and they assume the accrual must be paid for everyone at the 10% rate. This is not correct. Paying 10% instead of 8% is nothing to do with the Holidays Act as providing an extra week of annual holidays is an agreed term. If it is a business decision to do so, then ALL GOOD. However, the mistake I am seeing is that it is being provided because it is just not understood and not because the business actually wanted to offer it to the employee as an extra benefit.
Fixed term greater than 12 months or multiple fixed-term agreements less than 12 months
Now, there are some other areas that must be understood regarding being able to keep paying the 8% PAYG when the employee is on a fixed term, either greater than 12 months or on a series of fixed terms less than 12 months. The key to the options in this section is that they must be agreed with the employee. And this is what is missing from many of the problems happening in this area.
Employee working a series of fixed-term agreements less than 12 months
If an employee works on a series of fixed-term agreements less than 12 months, the employer and employee can AGREE that 8% PAYG can be applied. There is no limit on how many fixed-term agreements the employee can undertake while being paid 8% PAYG. So as long as there is a clause in the fixed-term agreement each time, this can be done by payroll ongoing. Just make sure it is for a fixed-term agreement less than 12 months (each time) and that the fixed term is genuine and not the same position/job worked continuously for the purpose of not providing the employee with actual annual holidays entitlement (their 4 weeks).
Employee becoming a permanent employee from a fixed-term agreement
If the employee on a fixed term less than 12 months that has agreed to get 8% PAYG is then offered permanent employment, then when the employee reaches 12 months of continuous employment and takes annual holidays, what was already paid out under the 8% PAYG is deducted from what would be paid under Section 21 (greater of AWE and OWP). It could mean that the amount paid out under the 8% PAYG before becoming a permanent employee effectively cancels out what the employee gets paid for their annual holidays. Payroll could face questions from the employee taking leave on why they have received no payment or a reduced leave rate. It may be a better idea to discuss this with the employee when they are considering moving to a permanent position, so they understand the impact of having been paid the 8% PAYG on when they take annual holiday entitlement.
What’s a better way to do this?
Easy – don't do it in the first place! I have seen the 8% PAYG in payroll cause so many problems because payroll tells management or HR that the employee does not meet the criteria, especially when defined as a casual but they are not, or employees on fixed terms that work over the 12 months, but nothing has been included in the employment agreements. In these situations, it means payroll ends up cleaning up the mess.
The bottom line is that 8% PAYG is an agreed term, and the default is to accrue. Look at it this way. If the employee is on a fixed term for 3 months, by accruing leave at the end of the 3 months, the employee will get 8% of gross earnings for the 3-month period (simple for payroll and great for the employee). For the casual employee, even if they are not one, by accruing when the issue is sorted, no money has been paid up to the point, so it’s good for the business and payroll.
In conclusion, the key to getting the options under 8% PAYG correct is to ensure the employment agreement includes the agreed terms needed for the different situations that may result for the employee. Or, at the very least, when changes are required, a variation to the agreement is created and in place so payroll can apply this section of the Holidays Act correctly. Alternatively, just don’t do the 8% PAYG to start with!
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