Calculating Annual Leave Payments

Employees are entitled to at least 4 weeks of paid annual leave after each 12 months of continuous employment for their employer. There are two methods to calculate the rate at which an employee gets paid for annual leave. The correct rate is at least the greater amount of:

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

Both of these calculations need to be done each time an employee takes annual leave to determine which method produces the higher total. If an employee takes a period of annual holidays that covers more than one pay period, the calculation for the entire time on annual holidays is still done at the start of the annual holiday.

Ordinary Weekly Pay

Ordinary weekly pay is the amount an employee receives under his or her Employment Agreement for an ordinary working week, including:

• salary or wages;
• regular allowances;
• regular productivity or incentive-based payments; and
• regular overtime.

 

Intermittent, one-off, and discretionary payments, as well as employer contributions to superannuation schemes are not included in this calculation.

This means the ordinary weekly pay includes everything an employee is normally paid 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.

Average Weekly Earnings

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. Gross earnings includes all payments that the employer is bound to make under the Employment Agreement or legislation.

The following payments make up gross earnings and should be included in the calculation:

• salary and wages;
• allowances;
• all overtime;
• commission;
• payment for annual holidays and public holidays;
• payment for bereavement leave and sick leave; and
• any other payments that are required to be made under the terms of the Employment Agreement.

Reimbursement payments, ex gratia payments, and discretionary payments are not included in the gross earnings calculations. 

Summary

Therefore an employee’s annual leave payments may be more than the rate of salary or wage contained in their Employment Agreement. An employer must take into account other payments such as allowances, commission, or overtime when determining an employee’s annual leave payments.


Alan Knowsley
Employment Lawyer Wellington