Author: David Jenkins, NZPPA CEO
I get this question from time to time, and it’s great to see that it is usually driven by employees wanting to help colleagues (in a time of need), and payroll is asking if it can actually be done.  I have seen a range of leave donation schemes over my time in payroll and have always been concerned that payroll is usually the last to know if it’s being implemented, and then they also find there is little or no detail on what is included in the scheme, leaving payroll to make it workable.
In this article, I want to talk about donating leave – what can be done, what should be done, and what payroll may need to know and ask (if management or HR want to implement a scheme).  As always, I am writing in plain language for payroll from a payroll perspective.

The key to any donating leave scheme is not to rush into it just because someone in management or HR wants to show how progressive and supportive the business is (the latest fad and what I call “keeping up with the Joneses”).  There should be an assessment if this is needed in the business and if employees want it.  For payroll, any scheme needs to be simple, straightforward and fit payroll processing.  So, in this article, the following will be covered:

  • What does donating leave mean?
  • What leave can be donated?
  • How much leave should be allowed to be donated?
  • What are the different types of donating leave schemes?
  • What should not be allowed when donating leave?
  • What happens if donated leave is not used?
  • What about leave donated by the employer?
  • At what rate should leave be paid at?
  • How will this be taxed?

What does donating leave mean?
This is where an employee or employer provides additional leave to an employee that has run out of leave or has not yet met the requirement to get leave under the Holidays Act.

The aim of donating leave to an employee is that they have had some sort of event that has impacted the employee or their dependants.  Being away from the business on leave may help in their recovery or provide additional support in what the employee is facing in their private life.  Donating leave is usually not about going to Bali for an extra week to party.  It’s usually a life-changing event that is impacting the employee.

What leave can be donated?
So, to start with, let’s clearly define the two types of leave: minimum leave entitlement set by law (Holidays Act) and additional leave provided by agreement.  Now, donating leave is about the additional agreed leave only.  Donated leave cannot come from an employee’s minimum entitlement provided by law (Holidays Act: annual holidays, sick, bereavement and family violence leave or even earned alternative holidays).

No provision in the Holidays Act allows an employee to donate their minimum leave entitlement.  If you did this, it could be seen that the employee had not received their minimum entitlement, and the employer could end up having to replace it.  Now, you may say that the employee agreed to this and signed a form, so it is all OK if they wanted to donate a week of annual holidays.  However, you cannot contract out of an Act, and the leave entitlement, once earned by an employee, is either used or, in the case of annual holiday entitlement, paid out on termination when not used by the employee.

Also, we are only talking about entitlement rather than accrual.  For example, the employee has only been in the workplace for nine months and in the accrual field (in the payroll system), it may show three weeks on annual holidays and, in the entitlement field, zero.  This is because the payroll system has changed the accrual, which is 8% of gross (money), into time (three weeks).  In reality, the three weeks in the accrual field is not an entitlement.  If the employee asked to take it, the employer could say “No” as it would be annual holidays in advance (section 20) because the employee has not yet qualified (12 months of continuous employment) to get their four weeks of annual holiday entitlement.

How much leave should be allowed to be donated?
There are some employees, for whatever reason, if they had the choice, would give all their leave to a colleague when they believe they need help.  It’s just part of who they are.  As an employer, the big picture must be viewed, and in the short term, that may help another employee, but what will happen to the employee who has no leave left (agreed leave) and something happens to them?

This is why any leave donation scheme must be capped so that even if employees have the best intentions, they are protected for their wellbeing and good.

So, a couple of things here:

  1. A minimum leave level must be set so employees cannot drop below when they donate leave.
  2. A period should be defined when a minimum to a maximum amount of leave can be donated.

This can be reset when the employee receives their subsequent entitlement of leave.

What are the different types of donating leave schemes?
I have seen two main schemes used for donating leave:

  1. A central scheme where all employees donate a percentage of their extra agreed leave into a central pool that any employee can draw from based on criteria.
  2. An employee can make a one-off direct donation of extra agreed leave from their balance to the balance of another employee.

The benefits of the central scheme are that having all employees involved means the leave pool can grow rapidly, so any employee can be supported if they need additional leave.  As a central scheme, it also means everything is the same and can be standardised across the business.  The deduction of a percentage of leave would need to be included as a sub-part of the additional leave being provided to the employee in their employment agreement or company policies.  Some work will be involved in developing the criteria for an employee to apply for leave from the pool (applying for leave, approval or refusal, donated leave moved to the employee if approved, payment of leave and recording when taken).  Furthermore, some reports will have to be created to report back to the business (a decision on who should see these reports would also need to be made).

The one-off event is an ad-hoc situation based on when the employee has a problem and if an employee is willing to help.  The main issue is how will the employee that wants to donate leave know that another employee needs a donation of leave (as this is private to the employee).  So, this would be when an employee finds out there is an issue and wants to help and approaches the business or even the co-worker to offer the donation.  In this situation, confidentially is also essential as the employee donating leave may want to keep it private that they donated leave to another employee.  Also, the employee receiving the donated leave may not want anyone to know they are using donated leave.  And one final point in this section is that just because an employee wants to donate leave does not mean the other employee wants to accept what has been offered.

What should not be allowed when donating leave?
The purpose of donating leave is that the employee that has leave donated to them uses it.  It is not for the purpose of having it paid out.  So, it must be clear that if the leave is provided, it is to be used, and any approach to have it cashed up should be declined.  This also applies if the employee that donated leave resigned, it won’t be paid out on termination.  Of course, if the employer and employee (the one that donated the leave) agree, then that option should also be available.  If agreed that the employee can cash out donated leave or have it paid out on termination, it would be taxed as extra pay and, on termination, is included in the 8%.

What happens if donated leave is not used?
If an employee has donated leave and this has been accepted, but the leave is not taken, then it should be returned to the employee who donated it (if this is a one-off direct donation).  So there needs to be a check on why it has not been used and confirmation obtained from the receiver that there is no need for it now.  Then a process is documented to credit the leave donated back to the original employee who made the donation.  It would be harsh to have a clause like “use it or lose it” for this donated leave, with both parties losing out.  The bottom line is that the cost of this leave has been budgeted, so crediting it back won’t cost the employer more, and it shows fairness and goodwill from the employer.  Also, this is another important reason to separate minimum entitled leave by law and leave provided by agreement, so this type of activity crediting back donated leave does not affect a minimum entitlement leave balance.

What about leave donated by the employer?
This often happens, and you may be amazed, but New Zealand has far more good employers than bad ones.  I see employers supporting staff all the time with additional leave paid out of the business’s pocket.  And I am not talking about leave in advance of minimum entitlement (even though that is an available option).  For example, I have seen employers providing leave to employees that have little time left (diagnosed with a terminal illness), pretty much just telling your valued employee we will pay leave as long as is needed or offering flexible work options for the employee that still wants to work during this time.  The other side of this is where the employee has a partner, parents or family members who have either had a serious injury or been diagnosed with a terminal or life-threatening illness.

At what rate should donated leave be paid at?
I always advise keeping this clear and concise.  Base it on a base hourly rate for a waged employee or the base salary rate (this would be from the employee’s employment agreement).  Or I have seen leave donation schemes (centralised) where the rate is based on 80% of the employee’s standard rate (like ACC but not based on the last seven days).  The key to the payment, especially for payroll, is to keep it simple (please fight any complexity if put forward by management or HR for payroll’s good and your sanity!).  For example, providing additional agreed annual leave and stating the rules of the Holidays Act will apply.  This is just a waste of time and does nothing to keep the payment simple, as the Holidays Act is a nightmare.

How will this be taxed?
As long as the donated leave is being paid when the employee is taking the donated leave, then it is taxed as salary or wage under RD5 of the Income Tax Act 2007.  This is because it is not in addition to what is paid in the pay period.  If, for any reason, this donated leave is paid as a lump sum, then it would be taxed as extra pay.

So, if donated leave is taken, it becomes part of the employee’s gross earnings, meaning PAYE and all standard payroll deductions apply (child support, student loan, KiwiSaver etc., court fines (attachment orders etc.). This will also mean it is part of the gross for leave and could become part of the 8% paid on termination (based on when it was paid from the last entitlement date for annual holidays).

In conclusion, the reasoning behind donating leave is to support an employee in a time of need.  It is a worthy aim if the donating leave scheme has been well developed (with payroll’s involvement).  It should be something that payroll supports because it is for employees, and one day it maybe you in payroll.  So, as soon as you hear this is being considered, it is important to get involved (if you can) and make payroll’s needs known, as payroll will be the one administering the scheme and making it work for your employees.

Penny Varley

Payroll Administrator