With Christmas fast approaching, many businesses and employees are getting ready for their annual closedown periods. Some new businesses may even think about closing down for Christmas for the first time and potentially making this a customary arrangement in the future. So, what are the rules around customary closedowns and their handling from a payroll perspective? You may be surprised to find out. What are Closedown Periods under the Holidays Act 2003? Under the Holidays Act 2003, any employer can decide to close down all or part of its operations once every 12 months and force employees to take leave, by giving 14 days’ notice. Most customary closedowns occur during the Christmas/New Year period. However, an employer can nominate a different time of the year, and can even nominate different closedown periods for different parts of their business, and even exempt parts of their business entirely from closedown periods. Closedown arrangements are ordinarily recorded in the employment agreement, or at least in a workplace policy.
The Holidays Act does not specify how long a closedown period may be. Common durations range from one to two weeks, sometimes three weeks. Given an employee’s overall annual entitlement for annual holidays being four weeks, we generally recommend that a closedown period should not exceed two weeks. To be clear, the closedown we are talking about here is not to be mixed up with the kind of closedowns we have seen during the Covid-19 lockdowns where businesses (had to) temporarily shut down. The closedown periods under the Holidays Act are different, in that they do not apply to non-customary closedowns, for example in response to adverse business conditions, or to renovate or refit business premises. What are the Payroll Implications of a Closedown? The way closedowns are to be managed from a payroll perspective varies and depends on the circumstances of each single employee. Anecdotal evidence is that many employers simply agree to annual holidays in advance if their employees do not have sufficient or any annual holiday entitlements. Whilst this may seem logical and even sensible, a recent Employment Court judgment clarifies that this practice does not comply with the Holidays Act. Thankfully, the Court outlined how closedown periods must be administered from a payroll perspective in order comply with the Holidays Act. So, let’s go through the scenarios, so that you can ensure that your arrangements comply with the Holidays Act:
Employees with more than 12 months’ service and enough entitled annual leave to cover the closedown period
The employee must use their annual holidays entitlement to cover the closedown period. In terms of payment, the leave must be paid at the rate of the greater of ordinary weekly pay at the beginning of the holiday or average weekly earnings for the 12 months before the end of the last pay period.
Example: Tinsel’s employment agreement provides for their employer’s workshop operations to be closed down every year from 23 December until 7 January of the following year, while the delivery part of the business remains open until 26 December. Tinsel started their employment on 20 December the year before. Tinsel will be required to take annual holidays for the entire period of the closedown, except for the public holidays that fall within the closedown period. |
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Employees with more than 12 months’ service and enough entitled annual leave to cover some but not all of the closedown period As per the above, except with regard to the part of the closedown period for which the employee does not have an annual holidays entitlement, the employer and the employee may agree for the employee to take annual holidays in advance (of their upcoming entitlement). Any such annual holidays in advance are also paid at the Example: Tinsel’s employment agreement provides for their employer’s workshop operations to be closed down every year from 23 December until 7 January of the following year, while the delivery part of the business remains open until 26 December. Tinsel started their employment on 20 December the year before. Tinsel will be required to take annual holidays for the entire period of the closedown, except for the public holidays that fall within the closedown period. rate of the greater of ordinary weekly pay at the beginning of the holiday or average weekly earnings for the 12 months before the end of the last pay period. The portion of annual holidays taken in advance is then later deducted from the employee’s next annual holiday entitlement. If the employee’s employment ends before they next become entitled to annual holidays, the annual holidays that were taken in advance is to be deducted from the employee’s final pay. Before agreeing to annual holidays in advance of entitlement, the employer should think about the implications and where this may leave the employee in respect of their plans for taking annual holidays during the upcoming 12-month period and the annual closedown in the next Christmas period. The alternative to agreed annual holidays in advance could be leave without pay but this needs to be carefully considered due to the potential implications of periods of leave without pay on the employee’s entitlement anniversary.
Example: As per the earlier example, but this year, Tinsel has already used 16 days of annual leave prior to the beginning of the closedown on 23 December. He has four days of annual holidays entitlement left which he will be required to utilise. This will not cover the entire closedown period, even though there will also be a few public holidays during the closedown period for which Tinsel will get paid in any event. Tinsel and Santa may agree that Tinsel takes the remaining days as annual holidays in advance of Tinsel’s next entitlement that will arise on 20 December next year and will be deducted from that allocation. Alternatively, Tinsel would be on leave without pay for the parts of the closedown period that is neither covered by his annual holiday entitlement nor by public holidays. |
Employees without any annual leave entitlement
If the employee is not entitled to annual holidays by the time the closedown period starts (for example, because the employee has not yet been employed for 12 continuous months or they have exhausted their entire annual holidays entitlement), the employer must pay the employee eight per cent of their gross earnings since they started with the employer, or since their last anniversary date (for employees with more than 12 months service). From that, the employer must deduct any amount paid for holidays the employee has already taken in advance of becoming entitled. At the same time, the employer must move the employee’s new anniversary date for their annual holidays entitlement to the date the closedown begins or a date that is in close proximity to this. In addition to being paid the eight per cent of gross earnings, the employer and the employee may agree for the employee to take annual holidays in advance (as outlined above), but again need to be mindful of the potential implications in respect of the employee’s leave plans for the upcoming year and also the closedown for the next closedown period. The same applies if the employee’s anniversary date for annual holidays has been moved (for example, because the employee took leave without pay of more than one week, which results in a disruption of the continuity of service and therefore the employee may not be entitled to annual holidays at the time of the closedown period beginning), or where the employee has been paid annual holidays as eight per cent pay-as-you-go to the extent that they are not entitled to annual holidays at the time the closedown period begins.
Example: Tinsel’s employment agreement provides for their employer’s workshop operations to be closed down every year from 23 December until 7 January of the following year. Tinsel started their employment on 2 August this year. By the time the closedown period begins, Tinsel will not be entitled to annual holidays because they have not been employed for 12 months at that stage. Tinsel’s employer will have to calculate their gross earnings for the period of Tinsel’s employment to date and pay eight per cent thereof to Tinsel. At the same time, Tinsel’s employer will need to move Tinsel’s anniversary date for his annual holiday entitlement from 2 August to 22 December. Come next year’s closedown period, Tinsel will get their annual holiday entitlement on 22 December, which means that Tinsel will have an annual holiday entitlement that can be (and must be) utilised for the closedown period in that year. Now, if Tinsel has used all of their annual holiday entitlement because the employer agreed that Tinsel can take annual leave in advance (i.e., before Tinsel would become entitled to holidays on 22 December), then the same situation as in Tinsel’s first year will occur, except that the employer will deduct from the eight per cent payment the amount that Tinsel received for taking annual leave in advance of entitlement. Tinsel will be out of money that Christmas. Tinsel’s employer may want to consider not agreeing to providing Tinsel with annual leave in advance, so that Tinsel can have an actual annual leave entitlement at some point. |
What if a public holiday falls in the closedown period, or if my employee gets sick or has a bereavement, or needs to take family violence leave? If a public holiday falls on a day that would have been an otherwise working day for the employee if they were not already on annual holidays due to the closedown, that day will not count as an annual holiday and must therefore not be deducted from the employee’s annual holidays balance). Similarly, if the employee is entitled to be paid for an alternative holiday, or sick leave, bereavement leave or family violence leave falling during a closedown period, they will be entitled to this if, but for the closedown, the day would have been a working day for the employee. Can an employer implement a closedown for the first time now? The aforementioned rules apply to customary closedowns, i.e., they necessitate some consistent past practice. However, logically there is nothing stopping an employer from establishing a new practice and custom at some point, so in our view, other employers, particularly new employers in their first year of operations, can presumably commence the practice of a customary closedown. The implementation would of course require the employer to consult with their employees in good faith. Can an employer close their business down and require their employees to take annual holidays even if they do not operate a customary closedown? Yes, principally this is possible. However, the mechanics will be slightly different. In such circumstances, the employer can try reaching an agreement with the employee/s regarding the taking of leave, and if an agreement cannot be reached, the employer can give 14 days’ notice to the employee and require them to take annual holidays. The interaction with the employee needs to be fair and reasonable and conducted in good faith. This obviously does not work in respect of employees who are not entitled to annual holidays (for example, because they have not been employed for 12 continuous months or they have exhausted their entire annual holidays entitlements). The employer would have to continue to pay those employees as per normal even if they were not required to be working, unless of course, the employees would agree in good faith to leave without pay. What about the ‘new’ Holidays Act? Will that Affect the Management of Customary Closedowns? As you may know, the Holidays Act is (over)due for a major overhaul. In its 2019 report, the Holidays Act Taskforce made recommendations that, if implemented, would change the current law as it applies to customary closedowns. Specifically, the Taskforce recommended as follows:
Employers should have an obligation to inform prospective employees before they sign the employment agreement of any ‘customary’ closedown, with an indication of the general time of year and length of the closedown
Employers should provide employees with a reasonable notice period before they establish the ‘custom’ of a closedown
The requirement to pay out holidays at eight per cent of gross earnings and to reset the employee’s anniversary date should be removed and employees should be able to take holidays in advance of entitlement, on a ‘pro-rata’ basis (but without employers being able to compel employees to take leave in advance)
Legislation is yet to be drafted and it is therefore unknown when a new Holidays Act may be introduced. For now, and in the foreseeable future, employers remain bound to comply with the current Holidays Act 2003. Need Help? Administering closedown periods correctly can be tricky. If you have any questions, or need any assistance, advice, or a clause for your employment agreements that reflects the current law, reach out to us on lowdown@cinchhr.co.nz and we will be happy to help.