22-09-2021

What's all this fuss about "leave in weeks?"

Here we look at why annual leave calculations are so confusing and how to easily demonstrate compliance by calculating leave in weeks.
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The root of the problem

 

The Holidays Act 2003 is a very complex piece of legislation and one of the significant issues with leave calculations stems from Section 16 which states:

 

“After the end of each completed 12 months of continuous employment, an employee is entitled to not less than 4 weeks’ paid annual holidays.”

 

Sounds straightforward right? In other words, “employees get 4-weeks holiday pay”. Unfortunately, it’s not that easy. Most payroll systems record annual leave in hours and what starts out as simple math can quickly morph into something far more complicated. Most affected are employers with staff that work highly variable hours and days or who have changes in work patterns.

 

The easiest way to demonstrate compliance is to hold leave balances in the time units stated in the legislation – i.e. weeks.

Hours, weeks – what’s the difference?

 

Although it’s perfectly OK to hold your leave balance in hours, those hours must be clearly equivalent to the employee’s 4-week entitlement. They must also genuinely reflect what constitutes a week for the employee at the time the leave is taken, not when earned – and that’s where things get tricky.

 

Last year, Chris Mar, the Product and Compliance Manager at Datacom, presented about Leave in Weeks and announced that Smartly was working on a solution that makes it easier to remain compliant with the Act. We now hold leave balances in weeks and we have been transitioning customers over to this calculation method since the beginning of 2021.

Holding leave in weeks:

  • Removes the need to recalculate balances when work patterns change
  • Demonstrates the principle that entitlements can only be determined in relation to the work pattern that exists at the time leave is taken
  • Makes it clear that employees receive their correct entitlements

Work scenarios

 

Let’s look at how to calculate leave for three different types of employees in hours vs weeks.

 
Regular full & part-time employees

 

The “9 to 5er” is a regular full-time employee and converting weeks from hours is simple math. Part-time employees are also simple to convert from hours to weeks. Take Fred and Mary for example.

Scenario 2
The “transformer”

 

But, what about someone that starts out as a part-time employee and moves into a full-time role like Caroline who is coming up to her 12-month anniversary.

Scenario 2

One of the fundamental principles of calculating leave is that the entitlement is determined by the work pattern at the time the leave is taken, not from the time their employment starts. So, the answer is 160 hours.

 

The “complicator”

 

Finally, let’s look at James who is the most problematic type of employee when it comes to calculating leave entitlements.

Scenario 3

The problem with James is you can’t offer a fixed entitlement in hours or days on his anniversary, because what represents a week for him is a constantly moving target.

 

There really is only one logical answer – 4 weeks. It’s not possible to work out what 4 weeks of entitlement is for James. Therefore, holding his leave balance in weeks is the best way to ensure that he receives his correct leave entitlements.

 

As you can see, the Act is complex and requires regular monitoring for compliance if employment arrangements change. If you feel a little overwhelmed, you’re not alone and we’re here to help. If you have any questions about compliance with the Act or how Smartly can help to support you and your business, get in touch. We’re committed to making payroll easy and we would love to chat!

Not using Smartly? Switch today.

 

Payroll can be complex, we’re here to help make it simple. Smartly takes care of most of the faffing, but if there’s something you want to talk through our support team are always there to help. We offer free support and training to our customers. End of year payroll is made simple with Smartly.

 

If you’re interested in signing up to Smartly, please check out what we have to offer here. Everything mentioned in this blog is something our product or awesome support team can help you with. We’ll make it simple for you and your people.

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