Available ver Accrued leave

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Last Updated: Wednesday, 26 February 2025 14:28

There appears to be great difficulty for both employers and employees in understanding the difference between available (entitlement) and "accruing" leave when the situation is clearly documented in the Holidays Act.

Section 16 (1) reads:
After the end of each completed 12 months continuous employment, an employee is entitled to not less than 4 weeks paid annual holidays. (The actual hours this represents is determined by their employment contract, typically 40 per week. Calculated by the number of hours per day and days worked per week.)

The key words are AFTER, COMPLETED and ENTITLED. This available leave is the employees of right to be used at his/her convenience with employer approval.

Section 30 reads:
An employer may allow an employee to take an agreed portion of the employee's annual entitlement in advance.

N.B. There is no actual mention of "accrued" anywhere in the act - only that leave in advance means an annual holiday taken by an employee before the entitlement to the holiday has arisen under section 16.

What is clear to us from the above, is that leave does not in any way accrue throughout the year - the employee just receives a minimum of 4 weeks on their anniversary! So Legally there is NO ACCRUED LEAVE. i.e no specific hours of leave earned per week worked as applied in Australia and elsewhere.

Leave in advance, if granted, occurs when the employee's available leave is exhausted and causes their balance, (as shown on payslips) to become negative. In KeyPay both the time and $ value of this are separately recorded. At the pay following the next anniversary their standard entitlement will be added in, and the time balance (should) become positive again. The value paid for the advanced leave is deducted from the 4/52 of gross earnings since last anniversary. This balance represents the amount an employer would be liable to pay for that portion of the year if employment ended. The time worked can also be used to determine the available leave at anniversary when this represents a part year, such as for a Christmas period close down or when day-to-day work-pattern hours vary greatly.

The 4/52 of gross earnings can be displayed on the payslip, but is not recommended due to the confusion it can create. It is only relevant if employment ends.

End of Employment:

Sections 23 and 25 are rather long, but basically cover the calculation of annual holidays when employment ends, either before the employee has completed 12 months, or, if employment ends prior to completion of a subsequent 12 month period. The employer must pay to the employee 8% of the employees gross earnings since starting or from the last anniversary date, less any amount paid to the employee in advance. It's all calculated in $ not time. The 8% is calculated on the gross pay after any available leave, time-in-lieu, and public holidays are included. This results in the employee receiving the same money as if employment ended after the available was taken.

(The 8% is specifically referred to in the act, but is actually 4/52 rounded up to a whole number. For 5 weeks leave it would be 10%. This is an anomaly, because the act refers to 8% in some places and 4/52 in others, such as when an anniversary occurs and the employee has worked less than 51 weeks.)

N.B. The employer only has a liability to an employee when employment ends - not before.

From a strictly accounting point of view, the employer does have an accruing liability which would need to be paid if the business was to fail or be wound up, and is a valid reason to determine and include it on financial reports.

Also, when an employer wishes to grant leave in advance to an employee, the employer needs to know the maximum value it is safe to advance without incurring further liability that it may not be able to recover. This amount is, of course, 8% of the gross earnings to date.

This value is not a convenient measure to determine how much time can be taken in advance. It is constantly changing with the leave average rate. At any instant, the 8% gross (minus any value already paid in advance) can be divided by the greater of average or ordinary rate (that leave must be paid at), to determine what time is currently safe to advance to the employee. It is not, and never is the time accrued. Any changes to pay rate or work pattern can greatly affect the calculation. The employee simply has a $ value than can be used to buy time at the current average rate, like many commodities. The time quantity should never be revealed to employees themselves. All they need to know is that they have taken a certain amount of time which will be deducted from their full entitlement when it becomes available on their anniversary. In KeyPay this is simply shown on their payslip as a minus figure that comes off their entitlement at next anniversary.

Key Pay produces two leave reports:

  1. A liability report shows the employer the total amount owed to each employee if employment ended. It is calculated as: available time x average rate, plus the % of leave YTD $, minus any $ paid in advance. Time is only shown for available leave, everything else is converted and represented as money.
  2. A summary leave report which shows the employer the situation after the last pay day for each employee. It includes: available leave time, time taken, and the time that an employer may safely advance to an employee at the next pay. It is clearly marked as being an indicative guide only for the purposes of leave planning. While for many employee's, it may represent a close figure to what they may proportionally get, for others, such as when commission based with no defined work hours, it can be meaningless.

Because the calculated "accrued" time shown is so dependent on the average rate, the arguments and confusion it generates about accruing leave, particularly for employees with changing work patterns, it is highly recommended that leave-in-advance is never granted.
How would your bank view it if you placed an amount on fixed term and asked for the interest immediately, or asked your supermarket to supply your Christmas club purchases in advance.?

An option used by a growing number of employers, is to provide employees with an additional day or two of discretionary or birthday leave in each year. This can be made available immediately or after a short period and is paid at the ordinary rate. This allows the employee a little flexibility for special occasions without getting either party tied up in the intricacies of the holidays act.

Clearly a little flexibility is in order when considering paying leave in advance and each situation should be judged on its merits. For example, in our opinion, an employee with an anniversary only a short time away should be granted advance leave to synchronise with school holidays, weddings, etc.