A fourth week of annual leave

December 2003

The Prime Minister has announced that the Government will introduce a fourth week of annual leave in 2007. Business New Zealand calculates that it will cost $908 million annually. This newsletter discusses the impact that this proposal will have on businesses in New Zealand.

Government will legislate for longer holidays

It is that time of year again. The Christmas holidays are approaching fast and many New Zealand workers are counting down to the day that they can head away from the workplace and indulge in a well earned break. Traditionally, the average New Zealand worker has enjoyed a minimum of three weeks? leave each year. However, this seems set to change.

On 8 November 2003 at the Labour party conference in Christchurch, Prime Minister Helen Clark announced that the Government will legislate in favour of four weeks? annual leave for all New Zealand workers.

This provision will be incorporated into the Holidays Act 1981 and will take effect on 1 April 2007.

Labour Minister Margaret Wilson believes that this three and a half year lead-in period will reduce compliance costs for the Government as well as employers.

The 1 April 2007 date has been specifically chosen as it coincides with the end of the tax year, which is when businesses normally update their payroll systems.

Adding up the costs

While some will see more holidays as a positive step towards assisting New Zealand?s society in achieving a work/life balance, the issue remains that there are costs associated with the additional week?s leave.

Business New Zealand has estimated, in its submission earlier this year to a parliamentary select committee looking at the issue, that a fourth week of annual leave will cost $908 million per year. The majority of these costs will be absorbed by the business community rather than by public finances.

From a practical point of view, many employers have already discovered that it can be difficult to require an employee to take his/her annual leave.

As a result, businesses find that employees? annual leave entitlements may accumulate up to fairly significant levels. This represents a cost which employers carry in their books.

Employers cannot contract out of the Holidays Act, which means that they cannot pay employees their leave entitlements without granting the actual time off.

Employers often find it difficult to allow employees to take large chunks of accumulated annual leave without it having an impact on the operation of the business.

Many workers, particularly white collar and long serving employees, already enjoy a fourth week of annual leave. These workers may view this extra week as payment for or recognition of the long hours they have worked, the extra responsibilities they have undertaken and, for some, the budgetary targets they are expected to meet.

If all workers become entitled to a fourth week?s holiday, will there be a ?knock on? effect? Employers would not be required to increase any contractual entitlement to annual leave beyond the statutory four weeks, but they may face pressure to do so.

This may take the form of even more leave or a cash bonus which will place a further financial burden on employers who need to retain valued staff and reward hard work. The move to standardise annual leave may make it harder for employers to reward employee excellence in a way that attracts skilled workers to enter into or remain in the New Zealand workforce.

Good for work/life balance

The rationale for introducing this extra leave comes from the Government?s ?work/life balance? policy which emphasises the importance of workers spending less time in the workplace and more time with their families and in their communities.

However, will an extra week?s holiday be advantageous for all New Zealand workers in the manner that the ?work/life balance? policy envisages?

For smaller-business owners this is unlikely, rather, it seems that small- business owners may now be faced with the possibility of having to work longer hours.

Small-business owners have already voiced concerns over the short staffing problems they experience when employees take annual leave ? an extra week of leave will only add to this burden.

Similarly the ?work/life balance? for small-business owners seems to have been overlooked, as many small-business owners may now have to forego their own holidays and time with their families in order to fill the gap that increasingly absent employees will bring to their businesses.

Is there now the possibility that some small businesses and factories may decide to close down for the whole of the holiday period?

In order to absorb the cost that extra annual leave will generate, some employers may have to rethink the way in which they run their businesses.

Commentators have said that if an employee on what we think of as standard conditions of service works 235 days a year (365 minus 104 weekend days minus 11 statutory holiday minus 15 days? annual leave), it follows, that if Parliament decides to enact an extra five days? annual leave, that employees will have to justify 1/230 of their annual salary on each working day.

In some circumstances the only way that this cost can be justified is if employees? salaries or employee numbers are reduced.

Alternatively, the price of the product produced or the service supplied by businesses could increase to compensate for this cost.

This increase in cost will necessarily translate into increased product and services costs for consumers and employees may be faced with a tighter labour market and/or possible redundancies.

While many employees will welcome an extra week?s holiday each year, the cost that this extra leave may have on employers, small-business owners, the New Zealand economy and employees themselves may be greater than was first contemplated.

Advice and information

Bell Gully's Employment Team can advise you on all types of employment issues, including holiday entitlements and provisions. Contact the team at the numbers below for more information.

AUCKLAND

Rob Towner
Partner

WELLINGTON

Andrew Scott-Howman
Partner