Overview

Purchased Leave is a voluntary arrangement where employees may purchase additional leave. Employment Agreement would set out an Employee's entitlement to purchase additional weeks of leave each year by reducing their annual rate of pay to purchase the leave. Once a Purchased Leave arrangement has been entered into an Employee may be granted the additional week(s) leave upfront for use within the 52 week arrangement or be granted the additional week(s) leave on an accrual basis (as agreed with the Employer).
A Purchased Leave arrangement may have taxation, superannuation or other financial implications for Employees. An Employee wishing to enter into such an arrangement should be encouraged to seek financial advice.
Datacom recommends that it is make clear on the agreement how the leave can be taken, what the effects of the leave be should there be a pay rate change or change in contractual hours and if leave can be cashed up rather than taken. The agreement should also be clear about the used leave, in an event of termination of the employee's contract
As this is a voluntary arrangement, the legislation does not have an guidance on this. If the company decides to implement this scheme, Datacom recommends that the Client has had professional leave advice.

Setting up the leave in Payroll

Datacom will setup a separate leave type as this is different from the statutory 4 weeks annual leave as specified in the Holidays Act.

Additional leave given to the employee that falls outside of the Holidays Act 2003 should not be combined. This to ensure that the leave can be reported and reconciled separately and there is an ease of finding the transactions. If the payroll were to be audited by MBIE, you need to be cliear which leave is governed by the Holiday Act 2003 and which is not, this can not be done if all the leave is codes as Annual leave.
What does Datacom and Client need to know?

• What rate will the leave is paid at when the employee takes the leave? As this is not covered by the Holidays Act 2003, this can be paid at the Basic Hourly Rate but is clearly stated in the Employment Agreement.
• Can this leave be cashed up?
• Is this payable on termination?
• How the deduction from gross should have an impact on the Gross Earnings (Section 8 of the Holidays Act 2003) for the holiday calculations should be clearly communicated to Datacom. There are two ways this can be done
  • Usually Datacom would see this treated and recommend this as a non taxable deduction like a salary sacrifice within the pay. The deduction itself has no impact on the gross earnings for holiday. This means that the total gross is recorded pre sacrifice would be treated as Gross Earnings for the section 8 of the Holidays Act 2003. The deduction is merely there to reduce the gross taxable payment for the employee.
  • Other option is that once the deduction is put in place, the Gross Earnings is also reduced by the same amount so that the amount after the pay sacrifice is what gets recorded

Datacom recommends seeking legal advice

• What process is there in place by the Client
• What unit is the leave going to be held in? If this is  hours, this could be easier to manage should there be changes in employee's work pattern after the leave is purchased. The employment agreement will need to be clear that hours at the time when the leave is purchased will be what the leave would be based on. If days or weeks are mentioned in the agreement, care must be taken should the employee changes work pattern in the year the leave is purchased. Datacom will not any stage make adjustments to the leave already earned or taken should there be a change in work pattern. This should be monitored and advised by the payroll administrator
• When the employee is granted the purchased leave, the payroll administrator will need to advise the hours earned and the gross deduction that should be implemented.
• The Gross Deduction advised can be setup as a fixed amount deduction with or without a debt stipulation. This deduction will be a deduction made from Gross Taxable Pay in the pay period. If the deduction is a fixed amount with no debt stipulation, when the deduction is to be stopped must be communicated to the payroll consultant by the payroll administrator.
• Should the employee's pay rate change after the leave has been purchased Datacom will not be reconciling the amount owed or monitoring if employee has purchased leave. Any changes in the debt owed will need to be advised by the Client
• The client will need to advise how to they will the leave to be entered into the payroll. Will the employee used the leave request in the  Employee Self Service or should be done manually.

If you are unsure if anything and need further clarification, please contact your payroll consultant. If the Company is looking at implementing this scheme, Datacom strongly recommends to seek legal advice