When can you require an employee to take annual leave?

Unused annual leave is a financial liability for any business. Allowing leave to accrue poses a financial burden if an employee leaves the company, and there’s a risk that the employee may want to use the leave all at once, leaving employers having to cover that position over a long period.

Employers can require an employee to take leave, however, they must do so in line with the Holidays Act.

Last year, the case of E Tū Inc and others v Carter Holt Harvey LVL Limited [2022] NZEmpC 141 saw the Employment Court consider an employer’s rights to require its employees to take annual holidays under the Holidays Act, in the context of the initial lockdown in March and April 2020.

“The Holidays Act provides that annual holidays are to be taken at times that are agreed between the employer and employee. The right to require an employee to take annual holidays only applies if the parties have not been able to reach agreement on when the employee will take their annual holidays,” said Jennifer Mills, director and head of practice at Jennifer Mills and Associates.

“That means the parties are expected to engage with each other only when the employee would take their annual holidays, and the employer’s rights only apply after the parties have dealt with each other in good faith on this topic.”

Under section 18(3) of the Holidays Act, when “annual holidays are to be taken by the employee is to be agreed between the employer and employee”. Section 19(1)(a) provides that an “employer may require an employee to take annual holidays if… the employer and employee are unable to reach agreement under section 18(3) as to when the employee will take his or her annual holidays”. Further, under section 19(2), “an employer must give the employee not less than 14 days’ notice of the requirement to take the annual holidays.”

Case looks at annual leave

When New Zealand went into lockdown, like most businesses, Carter Holt Harvey was under pressure to get its operations ready for lockdown. The organisation wanted to ensure that employees had clarity about pay before entering lockdown and considered the most appropriate approach was to pay employees but require them to use some of their paid leave entitlements.

Once this decision was communicated to staff, it was forwarded to a union delegate from E Tū. The union tried to contact Carter Holt Harvey to persuade it to change its approach – the union considered that employees should be paid in full without using their leave entitlements — but CHH did not respond.  

CHH submitted, “The Holidays Act does not impose any specific process obligation on an employer before it reaches an assessment that it was unable to reach agreement on when annual holidays are to be taken.”

“That it had made a reasonable assessment that the parties would be unable to reach agreement on when annual holidays are to be taken, taking into account the significant practical constraints at the time, including the difficulty and limited time available for engagement, and the need to provide clarity to staff at a time of uncertainty.”

The court said that while CHH had other priorities in considering its workforce arrangements, it still had to comply with the Holidays Act noting, the circumstances may have called for a more truncated process for attempting to reach agreement. But the Court did not accept that CHH was unable to reach agreement when it had made no attempt to do so and concluded that CHH was not entitled to require the plaintiff employees to take annual holidays.

Best practices for HR with annual leaves

Mills says the main objective is to reach agreement with the employee on when they will take their holiday entitlements.

“We would generally advise employers to engage in constructive communications with their employee, to advise the employee of the reason, or reasons why the employer is seeking to compel the employee to take their annual holiday entitlement and provide them with an opportunity to select the date, or dates on which they would take their annual holidays,” said Mills.

“If agreement cannot be reached despite trying, then the employer may make that decision under the Holidays Act by giving at least 14 days’ notice to the employee,” Mills continued.

When requiring employees to take holidays, Mills said there are three things that employers must consider: First, the right to require an employee to take their annual holiday entitlement once the employee is entitled to those annual holidays.

“That means the employer’s right will not apply to any holidays that an employee is still ‘accruing’ prior to the completion of each 12-month period of continuous employment,” said Mills.

Second, the right to require an employee to take annual holidays only applies if the parties have not been able to reach agreement on when the employee will take their annual holidays.

“That means the parties are expected to engage with each other on when the employee would take their annual holidays, and the employer’s rights only apply after the parties have dealt with each other in good faith on this topic, and the parties have reached an impasse on this,” said Mills.

Third, while the Holidays Act does allow an employer to “require an employee to take annual holidays”, the Act also contemplates that the employee is able to influence the precise dates on which their annual holidays are to be taken.

“While an employee cannot flat-out refuse to take their annual holiday entitlements, they are able to request to take their annual holidays on dates that they consider to be suitable, and their employer cannot unreasonably withhold consent to approve their request to take annual holidays,” said Mills.