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Annual leave pay - how to make sure your staff get paid correctly

Annual leave pay

It’s clear leave is the number one area that trips up many businesses, as we hear more and more reports of non-compliance with the Holidays Act 2003.

You may be aware of the Holidays Act Taskforce that the government established to address the high degree of ambiguity that has made the Holidays Act challenging to understand. 

So, why is paying Annual Holidays so difficult to get right? And why are so many businesses getting it wrong? 

In this article, we look at some of the key areas of confusion when it comes to paying leave, and some simple things you can do to ensure your business gets it right.

Why is paying Annual Holidays so hard to get right?

Most businesses understand how important it is to pay their staff what they are entitled to. And more than that, in my experience, they want to pay them correctly.

However, many employers struggle to understand the Holidays Act, and/or find it difficult to know how to apply it to their business.

The other contributing factor that can result in businesses not paying their employees’ Annual Holidays correctly is the common myth that if you use payroll software, you don’t need to understand the rules because the software will do it for you. 

Believing in this myth means you can be at a real risk of non-compliance with your leave payments and may have to pay fines from the Labour Inspectorate if they come knocking.

How to calculate your employees’ Annual Holiday pay correctly

So, to avoid this happening, how do you make sure your employees are correctly paid for their Annual Holidays? 

When calculating your employee’s annual holiday pay, they must be paid at whichever rate is higher of ordinary weekly pay or average weekly earnings. 

Ordinary weekly pay is everything an employee is normally paid weekly under the employment agreement, including:

- regular allowances, such as shift allowances
- regular productivity or incentive-based payments (including commission or piece rates)
- the cash value of board or lodgings
- regular overtime.

For many people, ordinary weekly pay is straightforward because it is the same amount each week.

If it isn’t possible to work out what an ordinary weekly pay would be because the employee’s work pattern varies week by week, you can calculate their last 4-week average as follows:

1.    Go to the end of the last regular pay period before the holiday. 
2.    From that date, go back: 

●    4 calendar weeks, or;
●    if the pay period is longer than 4 weeks, go back the length of the pay period 

3.    Work out the gross earnings for that period.
4.    Deduct from the gross earnings any irregular payments.
5.    Divide the answer by 4.

Average weekly earnings is the employee’s gross earnings over the 12 months just before the end of the last payroll period before the annual holiday is taken, divided by 52.

Gross earnings don’t include (unless the employment agreement says otherwise)

●       reimbursement payments
●       truly discretionary or ex gratia payments
●       payments for cashed-up holidays
●       payments made by ACC.