When to use gross earnings in calculations
Gross earnings is used to calculate:
- ordinary weekly pay for determining payment for annual holidays (when the ordinary weekly pay formula is used)
- average weekly earnings for determining payment for annual holidays
- average daily pay (when this can be used instead of relevant daily pay) for calculating payment for public holidays, sick and bereavement leave and alternative holidays
- payment for annual holidays if the employee meets the criteria for being paid on an 8% pay-as-you-go basis.
- the 8% of gross earnings component in an employee’s final pay.
What gross earning means
For the purposes of calculating payments for holidays and leave, gross earnings means all payments that the employer is required to pay to the employee under the employee’s employment agreement for the period during which the earnings are being assessed. If all of the components of gross earnings are not included in the relevant calculations for holidays and leave, the employee will likely be underpaid and the employer will not comply with the Holidays Act 2003.
‘Employment agreement’ can include more than just the employee’s written employment agreement. ‘Employment agreement’ includes: all documents and other agreements that form part of the contractual agreement between the employee and employer. Agreements do not have to be written down to form part of and be considered alongside the employee’s written employment agreement. In some situations, the ‘employment agreement’ may include verbal agreements or agreements created by the conduct of the parties (‘custom and practice’).
Agreements which make up the ‘employment agreement’ may include eg:
an offer of employment
the employee’s written individual employment agreement (if they are not on a collective agreement)
the employee’s written collective agreement and additional agreed terms and conditions not inconsistent with the collective agreement
any variations or updates to an employee’s agreement
other agreements (that are written down or verbal)
workplace policies, procedures, “House Rules”, and codes of conduct
incentive, commission, or bonus scheme rules
agreements created by the conduct of the employer and employees.
What gross earnings includes
Gross earnings includes (but is not limited to):
- salary and wages
- allowances (but not reimbursing allowances)
- all overtime
- piece rates
- productivity or performance payments, eg most commissions, bonuses and incentives
- 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 s98 of the Accident Compensation Act 2001
- any other payments that are required to be made under the terms of the employment agreement.
What gross earnings don’t generally include
- any weekly compensation payable under the Accident Compensation Act 2001 that the employer doesn’t have to make
- payment for leave from work when an employee is on volunteers leave for military service
- payment for annual holidays that have been paid out instead of taken (ie up to one week per entitlement year)
- any payments that the employer is not bound, by the terms of the employee’s employment agreement, to pay the employee. These payments will be truly discretionary, and will be relatively rare.
- redundancy payments
- If an employment agreement states that a payment is included in gross earnings, then it must be included even if that type of payment would not usually be included.
- If it is unclear whether a payment should be included in gross earnings, it is recommended that employers err on the side of caution and include the payment or obtain legal advice before making a decision to exclude the payment. For example, whether employee share benefits are included in gross earnings will depend on their specific nature.
If an employer is bound under the employment agreement to make a payment, then it is not a discretionary payment. Discretionary payments are ex-gratia payments that an employer doesn’t have to pay the employee under the employment agreement.
‘Employment agreement’ should be considered widely ie to include variations of employment agreements, letters of offer, rules of commission schemes, bonus scheme rules, policies etc especially if the employment agreement can be said to incorporate the entitlement to participate.
If the terms of a payment scheme are intended to be binding on the employer and employees, it is unlikely to be a discretionary payment.
If an employment agreement states that a payment is a discretionary payment for the purposes of the Holidays Act 2003, this in itself doesn’t make it a discretionary payment. Whether the employer is bound under the employment agreement to make the payment is what determines whether or not it is discretionary.
If an employer is bound by the employment agreement to make a payment to the employee even if the amount is discretionary (and could be zero), it is not a discretionary payment.
If the payment is dependent on the employee and/or the organisation meeting eg any type of targets, quotas, performance criteria or indicators this does not make it a discretionary payment.
If payments are made on a regular and consistent basis eg annually if criteria are met, it is unlikely to be a discretionary payment.
If employees have a reasonable expectation of payment based on past practice, to the extent that the payment forms part of the employment agreement, it is unlikely to be a discretionary payment.
As it is rare for payments to be excluded it is recommended that employers seek advice before determining that a payment is discretionary, or else err on the side of caution and include the payment.
Examples of payments which are unlikely to be discretionary payments for the purposes of the Holidays Act 2003.
An employee’s remuneration statement includes a bonus amount at 100%. The bonus is covered by bonus rules that state that payment of and amount of the bonus is dependent on company and employee performance.
An employee’s employment agreement has an amount for on target earnings (OTE) for commission. The actual amount of commission earned by the employee will depend on how many sales they make.
Each year the company decides who will be participating in the bonus scheme. Letters are sent out to employees who will be participating telling them that they are eligible to participate this year. The letters state that the amount they receive depends on their performance and could be zero.
A company gives all employees a Christmas bonus each year. This helps them recruit and keep good staff and employees are told about it by their employer when they start work with the company.
Examples of payments which are likely to be discretionary payments for the purposes of the Holidays Act 2003
A business has had a really good year and the owner decides to give everyone a one-off bonus to reward their hard work. They do not do this regularly.
A company gives all employees a Christmas bonus from time to time.
A company decides that one employee has had an outstanding year and will be given an ex-gratia lump sum payment of 10% of their wages for the last 12 months.