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How to require your employees to go on holiday and avoid a huge wage bill

Bill was a conscientious employee of MNO Investments but over the last 3-6 months he had started making stupid mistakes which were costing the company money. Those who worked with him were becoming concerned that he wasn’t looking well and wasn’t his usual happy, cheery self. There was speculation that there may be problems at home contributing to his present state. However, the main problem was at work and was one MNO could have avoided and at the same time saved them a lot of money.

Bill was a conscientious employee of MNO Investments but over the last 3-6 months he had started making stupid mistakes which were costing the company money. Those who worked with him were becoming concerned that he wasn’t looking well and wasn’t his usual happy, cheery self. There was speculation that there may be problems at home contributing to his present state. However, the main problem was at work and was one MNO could have avoided and at the same time saved them a lot of money.

It was an expensive mistake for the company

When Bill handed in his notice it was a great relief to management. In view of the sensitive nature of his work the Company decided to not to require him to work his 4 weeks notice. However, what they didn’t appreciate was that over the last 5 years Bill had accumulated 8 weeks holiday. That meant a payout of 12 weeks – something the company hadn’t budgeted for – as a small business that was going to hurt. They should have made Bill take his holiday before resigning.

Why MNO ended up with a huge wage bill

The reason MNO ended up with a huge wage bill when Bill resigned was because the Holidays Act says that on termination of employment an employee must pay all outstanding holiday entitlements with the employee’s final pay. MNO had allowed Bill’s holiday entitlement to get too high which caused a problem when it came to paying out the lump sum.

Wouldn’t MNO have had to pay this anyway?

The real problem for MNO wasn’t so much having to pay holiday pay but having to pay so much at one time. This created a cash flow problem for them which in a small business can be fatal. Had Bill taken holiday regularly over the last 5 years MNO would have spread the payments over that time. But now it was all payable at once and that wasn’t the only cost.

The wage bill wasn’t the only cost for MNO

The fact that Bill hadn’t had a decent holiday for about 5 years was the reason why Bill’s mental state had deteriorated. That in turn had led to mistakes which cost the company money and eventually led to Bill’s decision to resign. Bill had reached burnout and MNO were losing a valuable employee – it all could have been avoided.

How MNO could have avoided the cost

The first thing MNO should have done was implement a policy which said that holiday entitlement could not be carried over from one year to the next. This would have set the ground rules for Bill. Next, MNO should have enforced the policy by requesting Bill to take annual leave, preferably at quiet times for the business. The Holidays Act allows you to enforce annual leave on an employee where the entitlement to leave has arisen and upon giving the employee 14 days notice (you should first try and agree a time with the employee).

Make sure you get the timing right

The best time to require an employee to take annual leave is when your business is quiet. The Holidays Act helps out here by allowing you to have one closedown period per year. A closedown period is a time when you actually shut down your business for a period. Common times when this would occur would be over the Christmas period or perhaps if you were having an office or shop refit. When you nominate a closedown period you can require an employee to take holiday during this period. If an employee doesn’t have any holiday available then he or she must take unpaid leave.

MNO left themselves exposed to prosecution

When MNO realised the reason Bill was resigning it left them very nervous. Under the Health and Safety in Employment Act employers have a duty to minimise hazards in the workplace. The Act includes occupational stress as a workplace hazard. If Bill could show that he was suffering occupational stress MNO could be prosecuted under the Act. Fortunately for MNO Bill wasn’t so inclined but the worry of a potential prosecution was enough to persuade MNO that things must change.

Make sure you don’t make the same mistakes as MNO

So, if you don’t want to end up with a huge wage bill, the threat of prosecution, and losing valuable staff members then make sure you monitor your employee’s holiday entitlements and ensure that they don’t accumulate too much entitlement at one time. Do this by:

Having a policy requiring employee’s to take their annual leave in the year they become entitled to it;
By requiring employees to use up any entitlement during a closedown period;
By using the 14 day notice period to require employees to take holiday where their entitlement becomes to high.

Do you have a holiday policy in your employee manual? If not, speak to me about drafting one for you which avoids the problems which MNO faced in this case study. Just drop me an email...

The characters and events in this case study are fictional. If you would like reprint rights to this article then I would be happy to provide them providing due credit is given. To obtain permission call me on: 09 358 2725.

© Approachable Lawyer Limited and Michael Smyth