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Calculating Holiday Pay

Posted on: Dec 14, 2016

We’ve had a lot of questions lately about the calculation of annual holiday pay, whether to use ordinary weekly pay or average weekly earnings, and what should be included in the calculations.

If an employee takes an annual holiday after the employee’s entitlement to the holiday has arisen, the employer must calculate the employee’s annual holiday pay in accordance with subsection (2).

Annual holiday pay must be paid at a rate that is based on the greater of—

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

Ordinary Weekly Pay

Ordinary weekly pay means the amount of pay that the employee receives under his or her employment agreement for an ordinary working week.

Ordinary weekly pay includes:

  • regular allowances (eg shift allowance)
  • productivity or incentive-based payments (including commission) if those payments are a regular part of the employee’s pay
  • payments for overtime if those payments are a regular part of the employee’s pay, and
  • the cash value of any board or lodgings provided by the employer to the employee.

Ordinary weekly pay excludes:

  • productivity or incentive-based payments that are not a regular part of the employee’s pay
  • payments for overtime that are not a regular part of the employee’s pay
  • any one-off or exceptional payments
  • any discretionary payments (see definition below) that the employer is not bound, under the terms of the employee’s employment agreement, to pay the employee
  • any payment of any employer contribution to a superannuation scheme for the benefit of the employee.

If it’s not possible to determine the ordinary weekly pay by following the guidelines above, then the employer can use a four-week look back formula as provided for under s 8(2) of the Holidays Act, but only as a last resort.  Alternatively, the employer and employee may agree a special rate to use, provided it is greater than the rates determined above.

Sounds simple enough right? Wrong!!!

What is considered a ‘regular’ payment?

Obviously, wages or salary and allowances like a shift allowance that occur with every pay will be regular payments.  However, could an incentive payment that is paid monthly, quarterly, or even annually be considered a ‘regular’ payment?  Possibly.

As a guide, anything that is paid regularly within a four week or monthly cycle is most likely going to be included, but for longer periods a judgement call will need to be made on a case-by-case basis.  If, for example, an incentive payment is made only occasionally, but is based off a target that is measured regularly (say weekly or monthly), then that may need to be included.  Whereas, an incentive payment that is based off a single annual target may not need to be included.  If there’s any doubt, it would pay to get some advice to ensure you’re meeting your obligations under the Act.

Average Weekly Earnings

Once calculated, ordinary weekly pay needs to be compared with average weekly earnings, and then the greater of the two is that rate that is payable to the employee.

Average weekly earnings means 1/52 of an employee’s gross earnings (see below), or if the employee has worked for less than 12 months, then it will be the employee’s gross earnings divided by the number of whole or part weeks that the employee has worked for the employer.

What is included in (or excluded from) gross earnings?

Gross earnings means all payments that the employer is required to pay to the employee under the employee’s employment agreement.  With the exception of the cash value of board and lodgings, an employee’s gross earnings is made up only of payments – and it doesn’t matter if those payments are regular or not.

Gross earnings will include:

  • salary or wages
  • allowances (except non-taxable payments to reimburse the employee for any actual costs incurred by the employee related to his or her employment)
  • payment for an annual holiday, a public holiday, an alternative holiday, sick leave, or bereavement leave taken by the employee during the period
  • productivity or incentive-based payments (including commission)
  • payments for overtime
  • the cash value of any board or lodgings provided by the employer
  • first week of compensation payable by the employer for ACC
  • payments for piece work

Gross earnings excludes any payments that the employer is not bound, by the terms of the employee’s employment agreement, to pay the employee, for example—

  • any discretionary payments*
  • any weekly ACC compensation payments (paid by ACC)
  • any payment for absence from work while the employee is on volunteers leave.

Also excluded from gross earnings are payments:

  • to reimburse the employee for any actual costs incurred by the employee related to his or her employment (eg mileage)
  • of a reasonably assessed amount to reimburse the employee for any costs incurred by the employee related to his or her employment (eg a boot allowance – when the employee is required to wear safety boots and they are not provided by the employer)
  • of any employer contribution to a superannuation scheme for the benefit of the employee
  • made in accordance with s 28B (cashed-up holidays).

What is a discretionary payment?

Under the Holidays Act, a discretionary payment is defined as:
  • a payment that the employer is not bound, by the employee’s employment agreement, to pay the employee; but
  • does not include a payment that the employer is bound, by the employee’s employment agreement, to pay the employee, even though—
    • the amount to be paid is not specified in that employment agreement and the employer may determine the amount to be paid; or
    • the employer is required under that employment agreement to make the payment only if certain conditions are met.
Truly discretionary payments must not be taken into account when calculating gross earnings (s 14(b)(i)) and ordinary weekly pay (s 8(1)(c)(iv)). A discretionary payment is a payment that an employer may choose to pay an employee, but is not bound to pay under the employee’s employment agreement. A discretionary payment does not include a payment that the employer is bound to pay but where the amount to be paid is unspecified and variable.
For example:
  1.  An employer may have agreed to pay an employee a yearly bonus, provided certain conditions are met. The amount to be paid may vary from year to year or may not be payable in certain years. Any payment under such an agreement should be included in calculations of gross earnings or ordinary weekly pay and not treated as a discretionary payment.
  2. A Christmas bonus paid at the initiative of the employer when there is no provision for such payment in the employment agreement, should not be included in gross earnings or ordinary weekly pay.

Let us do the hard work for you!

The Holidays Act is difficult to apply and due to it being drafted many years ago, it doesn’t fit well with most modern-day working arrangements.  Don’t spend all day trying to figure it out, only to find that you end up getting it wrong… Give us a call and we will guide you in the right direction.

 

Disclaimer

This article, and any information contained on our website is necessarily brief and general in nature, and should not be substituted for professional advice. You should always seek professional advice before taking any action in relation to the matters addressed.

Disclaimer

This article, and any information contained on our website is necessarily brief and general in nature, and should not be substituted for professional advice. You should always seek professional advice before taking any action in relation to the matters addressed.

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