How does a period of unpaid leave affect an employee's entitlement to annual holidays?
The Holidays Act states that an employee is entitled to a minimum of four weeks annual holidays after completing twelve months of continuous employment. Twelve months of continuous employment includes all periods where the employee was not at work, but still employed (e.g. they were away sick/on ACC or were on parental leave) except a period of agreed unpaid leave of more than one week.
In a situation where an employee takes agreed unpaid leave for more than one week, the date the employee becomes entitled to annual holidays will be extended by the number of weeks (not including the first week) that the employee is on unpaid leave.
However, the employer and the employee can alternatively agree that the unpaid leave of more than one week will be included in the twelve months of continuous service to become entitled to annual holidays. If this is the case, when calculating the employee's annual holiday pay, their total gross earnings must be divided by 52 weeks less the period of unpaid leave of over one week. This would still be compared to the employee's ordinary weekly pay.
The greater of these two amounts will be the employee's annual holiday pay for each week of holidays they are taking.
For example, if an employee took four weeks of unpaid leave, they would have to work for twelve months and three weeks before they become entitled to annual holidays. Alternatively, they could agree with their employer that they will still become entitled to annual holidays after twelve months, but their average weekly earnings will be calculated by dividing their total gross earnings for the 12 months and dividing it by 49 weeks as opposed to 52 weeks.