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Calculating annual holiday payments

Payment for annual holidays (annual leave) is made at the start of the employee’s holiday and paid at a rate which is the greater of the employee’s ordinary weekly pay or average weekly earnings.

Calculating payment for annual holidays (for employees with 12 months continuous service)

For an employee who has completed 12 months service, annual holidays are paid at the rate of the greater amount of:

  • ordinary weekly pay (at the beginning of the annual holiday), or
  • the employee’s average weekly earnings for the 12 months just before the end of the last pay period.

These calculations need to be done at the time the employee takes the annual holiday. They apply to all employees, including those whose pay has varied over the year or whose work pattern has changed during the year. 

Ordinary weekly pay

For many people, ordinary weekly pay is quite clear because they are paid the same amount each week. If an employment agreement has a specific amount for ordinary weekly pay, this can only be used if it is the same or greater than the amount calculated by using the following method.

Ordinary weekly pay includes everything an employee is normally paid weekly, including:

  • regular allowances, such as a shift allowance
  • regular productivity or incentive-based payments (including commission or piece rates)
  • the cash value of board or lodgings
  • regular overtime.

Intermittent or one-off payments as well as discretionary payments and employer contributions to superannuation schemes are not included in ordinary weekly pay.

When ordinary weekly pay isn’t clear, it can be worked out by:

  • going to the end of the last pay period, then
  • from that date, going back 4 weeks (or if the pay period is longer than 4 weeks, go back the number of weeks in the pay period), and
  • taking the gross earnings for that period (a), and
  • deducting from the gross earnings any payments that are irregular or that the employer is not bound to pay (b), and
  • dividing the answer by 4 (c):

a − b
   c

Average weekly earnings

Average weekly earnings are worked out by calculating gross earnings over the 12 months prior to the end of the last payroll period before the annual holiday is taken, and dividing that figure by 52.

These payments make up gross earnings and should be included in the calculation:

  • salary and wages
  • allowances (but not reimbursing allowances)
  • all overtime
  • piece work
  • at-risk, productivity or performance payments
  • commission
  • payment for annual holidays and public holidays
  • payment for sick and bereavement leave
  • the cash value of board and lodgings supplied
  • amounts compulsorily paid by the employer under ACC (ie the first week of compensation)
  • any other payments that are required to be made under the terms of the employment agreement.

Unless the employment agreement says otherwise, reimbursement p ayments and discretionary or ex gratia payments (eg genuinely discretionary bonuses) are not included in these calculations.

Other payments not included are those:

  • made by ACC
  • when an employee is on voluntary military service
  • for cashed-up holidays.

Scenarios

Heena works for $22 per hour, 4 days per week; she does 6 to 9 hours per day depending on how busy her workplace is. She decides to take 1 week’s annual holiday to go to Fiji. The payroll system incorrectly sets Heena’s pay for all leave entitlements at 6 hours per day at $22 per hour (6 x $22=$132), so for 4 days it calculates her pay as $132.00 x 4 days = $528.00 for a week’s annual holidays.

The right calculation for Heena’s pay for a week’s annual holidays should have been the greater of her ‘ordinary weekly pay’ and ‘average weekly earnings’.

  • Ordinary weekly pay – gross earnings for the last 4 weeks immediately before the holiday is taken is $3080.00 divided by 4 = $770.00
  • Average weekly earnings – gross earnings for the last 52 weeks immediately before the holiday is taken is $34,320.00 divided by 52 = $660.00.

Ordinary weekly pay is the greater and Heena should have got this for her annual holidays. Heena should talk to her employer and if they don’t agree, she should contact us for help.

Sione works 4 days per week; his hours vary between 6 and 9 per day at $22 an hour. If Sione works at night, he gets time and a half for all hours after 6pm. These regular payments for working past 6pm must be included in the calculations of payment for leave. In this case, Sione takes one week’s annual holidays.

  • Ordinary weekly pay – gross earnings for the last four weeks immediately before the holiday is taken (including regular payments) is $3245.00 divided by 4 = $811.25
  • Average weekly earnings – gross earnings for the last 52 weeks immediately before the holiday is taken (including regular payments) is $42,900.00 divided by 52 = $825.00.

Average weekly earnings is the greater and should be paid for the week Sione is on annual holidays.

Calculating payment for annual holidays (for employees with less than 12 months' service)

During the first year of employment an employee is not entitled to annual holidays, but employers may need to calculate annual holiday payments in three situations:

  • The employee asks to take annual holidays in advance.
  • The employer has a regular annual closedown of their workplace.
  • The employee’s employment ends.

Read more about annual holidays or annual closedowns.

Impact of parental leave on payment for annual holidays

If the employee becomes entitled to annual holidays during parental leave or in the following year, that holiday pay is paid at the rate of their average weekly earnings over the year before the annual holiday so will generally be paid at a lower rate. (Note that if the employee has annual leave they were entitled to before going on parental leave but hadn’t used yet, then the normal rate of calculation for annual leave still applies to that leave.)

Usually payments for annual holidays are based on the greater of:

  • the employee's ordinary weekly pay as at the beginning of the annual holiday, or
  • average weekly earnings for the 12 months immediately before the end of the last pay period before the annual holiday is taken.

However, if an employee becomes entitled to annual holidays:

  • while they are on parental leave, or
  • in the 12 months following any parental leave,

then the calculation changes and the payment amount is based on only the employee's average weekly earnings for the 12 months immediately before the end of the last pay period before the annual holidays are taken (with no comparison with the ordinary weekly pay as would normally happen).

This means that if the employee takes their annual holidays soon after coming back from parental leave there’s a high likelihood that the payment for annual holidays would be a smaller amount than if they took their annual holidays at a later time.

It’s important for the employer and employee to discuss leave plans as early as possible to make sure all parties are fully informed of their entitlements and obligations to each other, including where to find out further information or assistance. Their discussion should include the employee’s current annual holidays’ balances, when their anniversary date is, and the effect of parental leave on annual holiday entitlement.

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