A guide to calculating payments for holidays and leave Posted by Angela Millward on Dec 23, 2016

New Zealanders love to take time off to enjoy summer. In this blog, we provide a useful guide to calculating payments for holidays and leave.

 It’s very important to calculate the right rate of pay for leave and holidays. Annual holidays are calculated differently from public and alternative holidays, sick and bereavement leave.

Holidays and leave payment rates must be calculated each time an employee goes on leave or holiday, as the payment rate may change even from pay period to pay period.

More information can be found on the Employment New Zealand website, or by speaking to your Diprose Miller team.

Calculating annual holiday payments

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.

You need to calculate the annual holiday payment when the employee takes the annual holiday. The calculations 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 easy to determine 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 method outlined below.

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
• 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)
• 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.

The following 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 (i.e. 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 payments and discretionary or ex gratia payments (for example, 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.

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.

Public Holidays, alternative leave, sick leave, bereavement leave

Public holidays, bereavement and sick leave payments are calculated using relevant daily pay or average daily pay.

Relevant daily pay

Relevant daily pay means paying an employee what they would have earned if they were at work on the day.

This also:

• includes payments such as commission and bonuses if the employee would have received them on the day
• includes overtime, if the employee would have received it on the day
• includes the cash value of board or lodgings if this has been provided by the employer, but
• excludes any employer contribution payment into an employee superannuation fund.

Employment agreements can have a special rate of relevant daily pay for calculating payment for a public holiday, an alternative holiday, sick leave or bereavement leave, but only if the rate is the same as, or more than, the rate worked out above.

If it’s not possible or not practical to work out relevant daily pay, or if an employee’s daily pay varies in the pay period in question, an employer may use average daily pay.

Average daily pay

Average daily pay may be used if it’s not possible or practical to work out relevant daily pay, or if an employee’s daily pay varies in the pay period in question.

Average daily pay is a daily average of the employee’s gross earnings over the past 52 weeks. This is worked out by:

• adding up the employee’s gross earnings for the period
• dividing this by the number of whole or part days the employee either worked or was on paid leave or holidays during that period.

If an employer can use either relevant daily pay or average daily pay, they should try to work out both; this may help them to decide which option is the more appropriate.