Managing pay and leave can be a real challenge for business owners and managers, and it’s even harder when your employees don’t work regular hours or have consistent schedules.
We regularly see the problems that managing employee leave and payroll cause businesses, whether it’s miscalculating sick leave or underpaying workers for holidays.
Rectifying these mistakes can be costly. At best you might have to pay people their backdated leave or worse, be fined by a Labour Inspector or the Employment Relations Authority (ERA) for breaching the Holidays Act.
To help employers, managers, and professionals who have part-time or casual staff, we’ve put together this handy resource to ensure you meet your obligations to your employees and stay on the right side of payroll and employment law.
Just to clarify, we’re not discussing relationships with contractors (who are in a commercial relationship and are therefore subject to commercial law, rather than employment law), temps hired through an agency (known as triangular employment relationships), or volunteers.
Before we go further: the reality of the work defines the relationship, not what you name it
Each type of employment relationship - whether it’s permanent, fixed-term, or casual - has varying degrees of rights and obligations around pay, leave, consultation requirements etc.
It’s critical to be aware that the reality of someone’s working pattern and hours of work define the nature of the relationship - if the reality of their working pattern doesn’t line up with what the documentation says, then the reality trumps the paperwork.
Employers can get in trouble by defining an employment relationship at the start and then find the reality of the work is something else, which will mean that they haven’t been providing the employee the correct entitlements, such as accruing annual leave or allowing them time off for sick days.
Doing the upfront work to properly scope and define the role before you hire someone will help. If you find the reality of the role is not what you and the employee thought, or the nature or terms of the job change over time, make sure you update the employment agreement (amendments must be discussed with the employee and be made in writing) and your payroll system.
Learn more about creating employment agreements.
Permanent employees who work part-time
Employees who work less than 40 hours a week are often described as “part-time”. This has nothing to do with the nature of their employment, and only describes the quantity of hours that they work.
This can cause some confusion, as many people think that only full-time employees are permanent.
If a part-time employee’s work is considered ongoing, unless the employment relationship is terminated, e.g. the person resigns or is dismissed, and there’s an expectation that you will regularly provide work (and the person will be available to work), then they are a permanent employee.
Annual leave
Permanent employees start accruing annual leave on day one - this annual leave accrual becomes annual leave entitlement once they have worked for their employer for 12 months, at which point they can apply to take paid annual leave (the employer can agree for the annual leave accrual to be taken as leave in advance, it’s at their discretion).
Permanent and fixed-term employees get 4 weeks’ paid annual leave every 12 months.
Working out entitlements for part-employees is pretty simple if they have a regular work pattern. For example, a person who works 2 days a week would be entitled to 8 days’ annual leave a year (2 days x 4 weeks = 8 days every 12 months).
It gets a bit more complicated if the employee works a variable number of hours a week, has flexibility in the number of days or hours they work, or they work a pattern that’s not based on a weekly cycle, e.g. 3 days on, 3 days off.
In these cases, the two parties can come to an agreement on how to work out the holiday entitlement, e.g. in days or hours, or the average week in a pattern.
Be aware that the way you calculate annual leave entitlement can lead to quite different outcomes for the employee, and you should discuss the effects with them in good faith so they are not disadvantaged.
Fixed-term employees
A fixed-term employee’s employment ends on a specified date, e.g. when a person they are covering for returns from parental leave, or when a particular event occurs, e.g. a project is delivered.
There must be a “genuine commercial reason” for the fixed-term relationship, the employee must be told about the reason, and it must be written into their employment agreement.
Fixed-term employment isn’t the same as a trial or probationary period, as testing an employee’s suitability for a role isn’t a genuine reason for a fixed term. You can, however, include a trial or probation period for a fixed-term employee if it’s reasonable to do so.
Annual leave
Fixed-term employees are entitled to 4 weeks paid leave a year, too, but employers have some flexibility about how this is managed.
If the fixed term is for less than 12 months, the parties can agree that their “leave” will be paid out at 8% of their gross earnings, instead of accruing as time they can take off work.
If the fixed-term is for 12 months or longer, then (like permanent employees) the employee must accrue annual leave - you can’t choose to pay it out.
Casual employees
The term “casual employee” doesn’t appear anywhere in employment legislation, but it has been established by case law to be employment on an “as and when required” basis.
Casual employees don’t have fixed hours or an ongoing expectation of employment (the person works when it suits both them and the employer). This means the employer doesn’t have to offer the casual employee work and the casual employee can turn work down, or choose not to be available. It goes both ways.
A casual employee must still have a written employment agreement, and it’s important to note that every time the employee accepts an offer of work it is treated as a new period of employment.
You don’t need to create a new employment agreement each time you engage the person. We do recommend keeping a written record, e.g. email or text, or a more formal letter, if you really want.
Annual leave
Typically, casual employees have their annual leave paid out as they earn (at 8% of their earnings).
It’s legal to have casual employees accrue annual leave (like permanent and some fixed-term employees do) - it’s just not practical. Your casual employee doesn’t know when they’ll next work, so how can they schedule annual leave?
Sick leave
All employees (including permanent part-time, fixed-term, and casual employees) are entitled to 10 days' sick leave a year if:
- They have 6 months’ current continuous employment with the same employer, or
- They have worked for the employer for 6 months for:
- an average of 10 hours a week and
- at least one hour in every week or 40 hours in every month.
Even if an employee does not meet either of the 6-monthly criteria, that does not mean that their entitlement to sick leave is deferred for another 12 months. Instead, you need to monitor every pay period going forward to see if their rolling 6-month work pattern meets the entitlement criteria.
Unused sick leave can accrue to a maximum of 20 days.
Find out more about sick leave entitlements.
What are the laws about hours of work?
Every employee’s employment agreement must contain the agreed hours (or at least an indication of the hours) that the employee will work. This includes agreement on either the number of hours in each pay period, start and finish times, or the days of the week the person will work, or all of those.
It’s fine to build in flexibility - you could have a range of hours (e.g. “the employee will work between 15 and 25 hours a week”), or seasonal adjustments (e.g. “the employee will work 45 hours a week during our high season [November to March], and work 30 hours a week during our low season [April to October].”)
Remember that it’s illegal to use zero-hours contract agreements (where an employee has no guaranteed hours of work but must be available for whatever hours the employer offers them).
The law assumes that an employee will work a maximum of 40 hours a week unless agreed otherwise. If you need some flexibility around working hours, e.g. to meet changing workload demands, be sure to document this requirement in the person’s employment agreement.
If an employee works less than 40 hours, you must try to limit days worked to 5 a week.
Be sure that the hours of work include the full scope of an employee’s duties and requirements, e.g. opening and closing the site, after-hours team meetings, on-the-job training.
Changing work patterns: what happens if there’s variation?
As said, the reality of someone’s working pattern trumps the documentation. You may have a permanent employee whose employment agreement says they work 10 hours a week, but if she has regularly been working 30 hours a week, then regardless of what her agreement says, her weekly hours are now 30 a week.
If you have a casual employee who is working regular hours (i.e. not on a “as and when required” basis), that person is a permanent employee.
If you know there’s going to be variation, build flexibility into the employment agreement. If things change over time, even subtly, you need to update your documentation and ensure your payroll and leave management systems are capturing the reality of the person’s employment.
How to define a typical week for annual leave calculations
Employees on regular schedules should be able to take 4 full weeks of time off in every 12-month period, regardless of historic work patterns. However, calculating a week isn’t always straightforward and what a week looks like can change - sometimes often.
So to ensure you are calculating annual leave correctly, we recommend you:
- Look for predictable patterns in days or hours, e.g. the person works 25 hours a week.
- Make sure you’re looking at their current pattern defined at the time the person takes leave (this is especially important when you have employees on variable schedules as their ordinary week could well have changed from the previous leave period).
- If the pattern is unclear, use the average from an “appropriate period”. We recommend using a 6-13 week period to ensure you are capturing recent work activity and it represents the person’s current pattern.
Storing annual leave in weeks (rather than hours) is crucial for compliance.
Paying annual leave
You must calculate payments for annual leave (and other forms of leave) each time an employee takes leave, because the rate of payment may well have changed.
Annual leave is paid at whichever rate is the higher of the employee’s:
- ordinary weekly pay (at the beginning of the annual leave), or
- average weekly earnings for the 12 months just before the end of the last pay period before the annual leave.
This is an important point and one that employers often get wrong.
Other forms of leave, e.g. sick leave, bereavement leave, alternative holidays, unworked public holidays, are paid at the rate of relevant daily pay, or in some situations, at the rate of average daily pay.
What about holiday pay as you go (HPAYG)?
Certain employees can agree with their employer to receive their annual holiday pay as part of their regular package (“pay-as-you-go” holiday pay).
HPAYG is only applicable for:
- Employees on a genuine fixed-term agreement lasting less than 12 months.
- Employees whose work is so intermittent or irregular that it is impracticable to provide 4 weeks’ annual holidays (i.e. casual employees).
HPAYG is calculated at 8% of the employee’s gross earnings and it must be clearly stated on their pay records.
If you are employing staff on a casual basis, this doesn’t mean the employee can be automatically paid HPAYG, though some may meet the requirement. This is a common cause of non-compliance with the Holidays Act and may mean you have to pay the employee their correct entitlement on top of what you already paid.
Learn more about HPYAG at the Pay Hero website.
How to determine ‘otherwise working days’
An ‘otherwise working day’ is a day that an employee would normally have worked if the day had not been a public holiday, annual holiday or alternative holiday, or they had not taken sick or bereavement leave on that day (taking leave without pay on a day an employee would be required to work is not classified as an otherwise working day).
Determining whether a day is an otherwise working day for an employee on a variable schedule can be tricky. If it’s not clear, start by reviewing the last couple of months and work out if the employee has worked the majority of a certain day, e.g. Mondays.
However, your payroll should keep a close eye on work patterns and what is stipulated in the employment agreement for determining ongoing otherwise working days.
You should also look at rosters or other scheduling systems, whether the employee works for you only when work is available, reasonable expectations that the employee would have worked, and any other relevant factors.
Make sure you pay all workers the current minimum wage
All employees over the age of 16 must be paid at least the minimum wage for every hour worked in a pay period, unless they agree to a higher rate in their employment agreement.
If you have employees on a complex commission structure, you still have to ensure they get the minimum wage for each hour they work in a pay cycle.
