Overview

Purchased Leave is a voluntary arrangement where employees may purchase additional leave. An employment agreement would normally 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 any Purchased Leave arrangement is clear on how the leave can be taken, what the effects of the leave there are should there be a pay rate change or change in contractual hours, and if leave can be cashed up rather than taken. The arrangement should also be clear about what happens to unused leave, in the event of termination of the employee's contract.

As this is a voluntary arrangement and not tied to minimum standards, the legislation does not give guidance on this. If a company decides to implement this scheme, Datacom recommends that the Client seeks professional advice first.

Setting up the leave in Payroll

Datacom will set up a separate leave type as this is different from the statutory leave entitlements specified in the Holidays Act.

Additional leave given to the employee that falls outside of the Holidays Act 2003 should not be combined. This is 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 clear which leave is governed by the Holidays Act 2003 and which is not, this cannot be done if all leave is coded as Annual leave.

What does Datacom and the 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 their Basic Hourly Rate but this needs to be clearly stated in their Employment Agreement.
• Can this leave be cashed up?
• Is this payable on termination?
• Whether the deduction from gross has an impact on the Gross Earnings (section 8 Holidays Act 2003) for holiday calculations should be clearly communicated to Datacom. There are two ways this can be done:
  1. Usually Purchased Leave treated and recommended as a non- taxable deduction like a salary sacrifice within the pay. The deduction itself has no impact on the gross earnings for holiday calculations. This means that the total gross is recorded pre-sacrifice would be treated as Gross Earnings for the purposes of Gross Earnings as defined by section 8 of the Holidays Act 2003. The deduction is merely there to reduce the gross taxable payment for the employee.
  2. Once the deduction is 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 does the policy say?
• What unit is the leave going to be held in? If this is in hours, this could be easier to manage should there be changes in the 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 change their 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 set up 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 reconcile the amount owed or monitor if the employee has purchased leave. Any changes in debt owed will need to be advised by the Client.
• The Client will need to advise how to this leave is entered in the payroll. Will the employee use the leave request in Employee Self Service or should be done manually?

If you are unsure of 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