Working out what an employee gets paid for taking a day off on annual holidays will depend in part, on what they have earned in the previous 12 months.
Calculating rate of payment for annual holidays an employee is entitled to
For an employee who takes all or part of their annual holiday entitlement, the annual holidays are paid at the rate of at least the greater amount of:
- ordinary weekly pay (OWP) as at the beginning of the annual holiday, or
- the employee’s average weekly earnings (AWE) for the 12 months immediately before the end of the last pay period before the annual holiday.
Both of these calculations need to be done every time the employee takes annual holidays. They apply to all employees taking entitled annual holidays. If an employee takes a period of annual holidays that covers more than one pay period, even if the employee has agreed to be paid for the annual holidays as part of their normal pay cycle, the calculation for the entire time on annual holidays is still done at the start of the annual holiday, rather than being done each pay period. However, if the holiday pay is recalculated during the holiday (as some payroll systems do) and the amount received is greater than would have been received if the calculation was just performed at the start of the annual holiday, this is still compliant. If it is less, it isn’t.
Annual holidays are paid at the rate of the greater of ordinary weekly pay and average weekly earnings.
Ordinary weekly pay is the amount an employee receives under his or her employment agreement for an ordinary working week, 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.
This means that OWP includes everything an employee is normally paid weeklypaid for a week’s work, such as their salary or wages, but can include other payments as well if they are a regular part of the employee’s pay and relate to the work done each week. For example, if the employee receives commission payments for sales at the end of each month, then these payments would need to be included on a prorata basis. For many people, ordinary weekly pay is clear because they are paid the same amount for each week they work.
If it is unclear whether a payment is regular or not, consider the following:
- The employee shouldn’t be disadvantaged because they took annual holidays rather than worked during that time.
- Consider the frequency of the payment, if the employee usually receives the payment then this is likely to be ‘regular’ (even if they don’t always receive it).
- If the employee works different but predictable shifts, then the ordinary pay (and the payments which are included) should relate to the week they are taking annual holidays.
Ordinary weekly pay formula
When it isn’t possible to work out ordinary weekly pay in terms of the amount the employee normally receives for an ordinary working week then ordinary weekly pay must be calculated in accordance with the ordinary weekly pay formula as follows:
a − b
- go to the end of the last pay period, then from that date, go back four weeks (or if the pay period is longer than four weeks, go back the number of weeks in the pay period), and
- take the gross earnings for that period (a), and
- deduct from the gross earnings any one-off or irregular payments (or other payments) that the employer is not bound to pay (b), and
- divide the answer by four.
Situations where it might not be possible to calculate ordinary weekly pay and the employer may need to use the formula include if the:
- employee’s hours each week vary more than by a minor amount
- employee’s overtime payments are regular but the amount varies unpredictably
- employee earns commission or incentive bonuses each week but the amount varies unpredictably.
In some situations the employer may need to spend some extra time thinking through and discussing with the employee how the regular payments will be included in ordinary weekly pay.
Vikram gets paid a commission of $500.00 (on top of his wages) for every sale he makes over $5,000.00. He usually makes two of these sales each week but sometimes he makes more, or less. Vikram’s employer Erika pays him his commission in a lump sum on a quarterly basis for the previous three months. His commission payments are paid quarterly but they do relate to commission he earns on a weekly basis so Erika realises that they should be considered regular payments and should be included in his ordinary weekly pay for the calculation of annual holidays.
Erika knows that she should use the ordinary weekly pay formula to work out Vikram’s ordinary weekly pay because the amount he earns each week varies, but she is unsure of how to include the payments as she can see two ways of doing this.
- If Erika chose to go with using the approach of when the commission was paid then:
- if Vikram took annual holidays just after the commission payment, the whole commission payment would be included in the ordinary weekly pay formula. This would mean Vikram would receive a ‘windfall’ amount in his ordinary weekly pay for annual holidays payment calculation.
- If Vikram took annual holidays 6 weeks’ after the commission payment, he would effectively not be paid any commission as part of his ordinary weekly pay because none of the commission payment was paid in the last 4 weeks.
- If Erika chose to go with an approach based on when Vikram actually earned the commission she would only include commission payments relating to the sales made during the four week period over which the formula is applied. If he made eight sales over this period, then his ordinary weekly pay would include a $1000 commission payment.
In Vikram’s situation, Erika decides that the second approach is the better approach to take because it fairly represents what Vikram would be paid if he had been at work rather than on annual holidays for the week, no matter when he took annual holidays. Erika discusses her approach with Vikram so that he understands how the ordinary weekly pay calculation is being worked out. This calculation must still be compared to Vikram’s average weekly earnings and the greater amount will be the payment he actually receives for his annual holidays.
Ordinary weekly pay in employment agreements
Some employment agreements have a special rate or formula for ordinary weekly pay, this should be compared to the actual ordinary weekly pay and the greater amount must be used (and compared to average weekly pay to calculate payment for entitled annual holidays).
Average weekly earnings are worked out by calculating the employee’s 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.
Included in gross earnings
Gross earnings includes all payments that the employer is bound to make under the employment agreement or legislation. Employment agreement in this situation covers all the documents (such as the written letter of offer and employment agreement) that are part of the contractual agreement between the employee and the employer. It also may include other agreements (that are written down or verbal), workplace policies, bonus scheme rules, or agreements created by the conduct of the employer and employees.
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
- payment for annual holidays and public holidays
- payment for sick and bereavement leave
- the cash value of board and lodgings supplied
- the first week of compensation payable by the employer under s97 of the ACC Act 2001
- any other payments that are required to be made under the terms of the employment agreement.
Not included in gross earnings
Unless the employment agreement says otherwise, reimbursement payments, ex gratia payments and discretionary payments (eg genuinely discretionary bonuses) are not included in the gross earnings calculations. ‘Discretionary payments’ has a special meaning in relation to the Holidays Act 2003. ,If an employer must make a payment to the employee, under their employment agreement, commission scheme, bonus scheme rules etc, then it is not a discretionary payment and it must be included. This is the case even if the payment amount is discretionary and could even be $0. It is rare for payments to be excluded so if you are unsure, you should seek advice or err on the side of caution and include the payment.
Other payments not included are those:
- any weekly compensation payable under the Accident Compensation Act 2001 that the employer isn’t bound to make
- made when an employee is on voluntary military service
- for cashed-up holidays that are part of the employee’s minimum entitlement.
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 annual holidays. In this case, Sione takes one week’s annual holidays.
Ordinary weekly pay - Sione’s pay varies each week because his hours and the amount of night rate work he works changes (although he regularly works at night any night work is offered to the whole team on a first in first served basis). It is appropriate to use the ordinary weekly pay formula to calculate ordinary weekly pay because his employer doesn’t know how much night work Sione would have done that week (and so it isn’t possible to determine ordinary weekly pay without using the formula. Sione’s gross earnings for the last four weeks immediately before the holiday is taken (excluding irregular or one-off payments) is $3,245.00, divided by 4 = $811.25. This is Sione’s calculated ordinary weekly pay.
Average weekly earnings - Sione’s gross earnings for the last 12 months immediately before the end of the last pay period before the holiday is taken is $42,900.00. $42,900.00 divided by 52 = $825.00.
Sione’s average weekly earnings ($825.00) is greater than his ordinary weekly pay ($811.25) and so his average weekly earnings should be paid for the week Sione is on annual holidays.
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 holidays and 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 – Heena’s pay varies each week depending on how many hours she works, so it is appropriate to use the ordinary weekly pay formula to calculate ordinary weekly pay. Heena’s gross earnings for the last four weeks immediately before the holiday is taken (excluding irregular or one-off payments) is $3,080.00, divided by 4 = $770.00
Average weekly earnings – Heena’s gross earnings for the last 12 months immediately before the end of the last pay period before the holiday is taken is $34,320.00 divided by 52 = $660.00.
Heena’s ordinary weekly pay is greater than her average weekly earnings so Heena should have been paid this for her annual holidays ($770.00). Heena should talk to her employer and if they don’t agree, she should contact us for help.
There may be times when an employee has no entitlement to annual holidays but employers need to calculate annual holiday payments. This can happen in three situations:
- The employer agrees that the employee can take annual holidays in advance. For annual holidays taken in advance, the employee gets paid the greater of:
- their ordinary weekly pay at the beginning of the annual holiday, or
- their average weekly earnings:
- for the 12 months just before the end of the last pay period before the annual holiday, or
- for the total time they have worked for the employer (if the employee has worked for the employer for less than 12 months) ending at the last pay period before the annual holiday. In this situation the employee’s average weekly earnings is calculated by taking their gross earnings for the total time they have worked for their employer and dividing this by the number of whole or part weeks they have worked for the employer, (rather than dividing it by 52).
- The employer has a regular annual closedown of their workplace and the employee is either in the first 12 months of their employment or has taken all their annual holidays in advance.
- The employee’s employment ends and the employer must calculate holiday pay for the time worked since the employee’s last anniversary date.
If the employee has unused annual holidays that they were already entitled to before going on parental leave, then the normal calculation for annual holidays will apply to those holidays regardless of when they are taken, they are paid at the greater of ordinary weekly pay or average weekly earnings at the time they take the annual holidays.
If the employee becomes entitled to annual holidays:
- during parental leave or
- in the next 12 months after their return from parental leave,
the pay for those annual holidays is calculated at the rate of the employee’s average weekly earnings over the 12 months just before the end of the last pay period before the annual holiday is taken (with no comparison to ordinary weekly pay).
An employer can always choose to pay these annual holidays using the greater of ordinary weekly pay or average weekly earnings.
It’s important that the employer and employee discuss parental leave plans as early as possible to make sure they have a shared understanding of their rights and responsibilities to each other. , including where to find out further information or assistance. Their discussion should include the employee’s current entitled annual holidays’ balance, their anniversary date for annual holiday and the effect of parental leave on payment for annual holidays.