Establishing how to calculate annual leave entitlements of employees is arguably one of the more challenging parts of payroll and compliance in New Zealand.
This is because the Holiday’s Act specifies that the annual leave pay (or holiday pay) that an employee will receive entirely depends on the payment periods before they go on holiday. In other words, the annual leave pay must be calculated each time an employee decides to take annual leave.
So, although the New Zealand holiday pay system aims to promote fair compensation for employees, it can get pretty tricky staying on top of how much you need to pay each employee every time they take a holiday.
To help provide some clarity, we’ve put together this guide to help you understand your employee’s leave entitlements and how much you should be paying them.
What Are The Annual Leave Entitlements NZ?
Otherwise commonly referred to as holiday pay or holidays entitlement, annual leave is an employee’s leave entitlement in New Zealand, per the Holidays Act, to take paid time off.
Except for casual and part-time employees, regular employees are entitled to four weeks of paid annual leave or holiday pay each year.
An employee’s leave accrual will begin from the day they start working, but they’ll only be eligible to utilise their leave entitlements 12 months after starting their employment agreement.
Casual and part-time employees receive different entitlements depending on their regular work pattern. For example, if an employee has a regular work pattern but only works three days per week, their holiday leave entitlement is 12 days per year compared to four weeks per year.
Other types of leave in New Zealand include:
- public holidays,
- sick leave, and
- bereavement leave.
You may be interested in reading about the 16 types of leave your employees can take.
Calculating Annual Leave NZ
Two different kinds of calculations apply when calculating an employee’s annual holiday pay. The applicable calculation method will be dependent on whichever rate is greater.
The two-holiday pay calculation methods include:
- the employee’s 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 before the annual holiday.
Ordinary Weekly Pay Calculation For Annual Holidays
As the name suggests, an employee’s ordinary weekly pay is the pay they would normally receive each week, such as their salary or wages.
Their regular pay can also include:
- allowance entitlements such as shift allowances,
- regular productivity or incentive-based payments such as commission,
- the cash value of boarding or lodging entitlements, and
- regular overtime rates.
It won’t, however, include any one-off, intermittent or discretionary payments such as annual bonus payments. Contribution to superannuation schemes is similarly not considered their ordinary weekly pay for the purposes of annual leave payments.
Most of the time, the ordinary weekly pay calculation when an employee takes annual leave is pretty simple because your employee will generally receive the same weekly pay for each week.
However, in some circumstances, such as when the employee earns sales commission, it may be difficult to identify what is a regular payment and what isn’t.
It may be difficult to establish their ordinary weekly pay where your employee:
- earns varying amounts of commission each week,
- earns commission periodically (for example, every other week),
- regularly works overtime, but the amount of overtime significantly varies each week, or
- works drastically different hours each week for whatever reason.
Fortunately, if you find yourself in one of these situations, there’s a formula that you can use to calculate how much you should be compensating your employee before they go on holiday:
[(gross earnings at the end of the last pay period) - (one-off or irregular payments)] ÷ 4
Example:
Oliver is a permanent employee at a local art gallery in Christchurch, New Zealand.
In addition to his regular weekly wages, Oliver gets paid a $300 commission for every art piece sale above $3,200. He’ll usually make three of these sales each week, but on some occasions, he has sold up to five pieces above the commission threshold.
Although the art gallery employer pays his commission payments as one lump sum each monthly pay cycle, the payments are still considered regular weekly payments and must be included in Oliver’s ordinary weekly pay for his holiday pay calculation.
Oliver’s gets paid $33 per hour and works an average of 38 hours per week. Over the last four week pay period, he made nine sales above $3,200:
- three in week one,
- two in week two,
- one in week three, and
- three in week four.
So, his gross earnings at the end of the last pay period amounted to:
$5,016 gross wages + $2,700 commission = $7,716
According to the ordinary weekly pay formula, the art gallery employer must compensate Oliver the following weekly amount if he took annual leave now:
[$7,716 - $150,40 (superannuation contribution)] ÷ 4 = $1,891.40
Holiday Pay Entitlements: Average Weekly Earnings
Your employee’s average weekly pay is calculated by using their gross earnings over the 12 months before the end of the last payroll period before the annual holiday is taken and dividing that figure by 52 weeks:
Employee’s gross earnings ÷ 52 = average weekly earnings.
The following payments will make up employees’ gross earnings:
- salary and wage payments,
- allowance entitlements such as shift allowances,
- regular productivity or incentive-based and performance-based payments,
- commission,
- payment for annual leave,
- payment for public holidays,
- payment for sick and bereavement leave,
- the cash value of boarding or lodging entitlements,
- the first week of compensation payable by the employer under section 97 of the Accident Compensation Act,
- regular overtime rates, and
- any other payments mentioned in the employment contract.
Unless the NZ employment agreement specifically references these payments, the employer isn’t bound to include the following payments in the gross earnings calculations:
- allowance reimbursements,
- ex gratia payments,
- discretionary payments such as bonus payments,
- weekly payments made in terms of the Accident Compensation Act,
- payments made while the employee was on voluntary military service, and
- cashed up holidays (when an employer pays out some of the employee’s annual holidays as part of an agreement).
Example
Isabella is a receptionist at a local dentist practice in Gisborne, New Zealand.
Her ordinary working week consists of three days per week, but her hours are pretty different each day depending on how many clients the dentist sees and how much admin she has to catch up on from the days she wasn’t at the practice.
So, she’ll generally work anywhere between five and eight hours per day at a rate of $25 per hour.
Depending on demand, the dental practice offers after-hour services once or twice a week, so Isabella sometimes works in the evening to accommodate the after-hour clients. If she works after 6 pm, she gets paid a time and a half for each overtime hour.
After using the ordinary weekly pay formula (as with Oliver’s example), her employer at the dental practice calculated that her gross earnings for the last four weeks (minus the one-off and irregular payments) was:
$3,542 ÷ 4 = $885.50
To compare which annual leave calculation would give Isabella the greater weekly holiday pay, her employer at the dental practice also calculated her average weekly earnings.
Isabella’s gross earnings for the last 12-month pay period was $46,930 (including her wage, overtime payments and shift allowances):
$46,930 ÷ 52 weeks = $902.50
So, Isabella’s average weekly earnings is greater than her ordinary weekly pay, and that should be the amount of her annual holidays payment.
Cloud Payroll as a Solution To Annual Leave Compliance
One of the common nuances of using manual processes to calculate holiday pay is keeping track of which payments needed to be included in the calculation - especially if staff worked irregular hours and were getting paid on a commission basis.
Moreover, manual processes don’t always accurately identify overtime, piece rates and penalty rates - so there is always the risk that you end up not calculating your employee’s annual holiday entitlement correctly.
It’s also common to see some form of manual timesheet being used. While time and attendance records are essential in calculating annual leave payments, manual records would require clerical staff to enter the data into payroll software, opening up the doors to data entry errors.
Having worked with many businesses in various industries, we found the introduction of cloud payroll and time and attendance software as a critical solution to addressing many of the nuances highlighted when calculating annual leave entitlements for NZ employees.
Having cloud payroll software as a solution will significantly reduce risks associated with compliance while improving payroll efficiency. For example, one company we worked with managed to reduce their payroll turnaround time from 2-3 days to 2-3 hours.
And if that’s not enough to convince you, switching to cloud payroll software will significantly reduce the time you spend on administrative tasks such as calculating annual leave and issuing payslips.
Key Takeaways
As a New Zealand employer, to calculate your employee’s annual leave weekly rate of pay, you’ll need to use different methods and compare which weekly rate is the greater of the two.
These two methods include:
- the employee’s ordinary weekly pay; and
- the employee’s average weekly earnings.
To complete these calculations accurately, you’ll need to consider the different formulas, what needs to be included and what should be excluded from their holiday pay. So, calculating leave entitlements in New Zealand can end up being pretty complex, and a lot can go wrong.
We’ve found that adopting cloud payroll software to automate your annual leave calculations and compliance is a handy tool because it considers the necessary provisions of the NZ Holiday’s Act and automates holiday pay calculations for all employee scenarios.
If you’re still unsure how to calculate annual leave, feel free to contact us at Pay Cat to learn more about adopting cloud payroll software.
