Leave is probably the most talked-about area of payroll, and it's where I spend most of my time helping clients.
On the surface, you'd expect it to be straightforward. But as you will probably now be aware, anything payroll-related is never clear if you employ staff!
In this article, I explore what annual holiday leave is, the different stages of annual holiday leave, and how to understand leave balances in your payroll software.
What is annual holiday leave?
Annual holiday leave allows employees to take time off work while being paid.
Under the Holidays Act, all employees (except some employees in limited circumstances) have the right to four weeks annual holiday leave a year; this is referred to as entitled leave.
Calculating this leave can be simple for those employees who have a regular working pattern, but more challenging for those who don't.
If you have employees with varied work patterns, I strongly suggest engaging a payroll specialist to ensure your system is keeping you compliant. Some payroll systems are not set up to handle these employment situations.
Note: In limited circumstances such as casual or fixed-term, employees may be paid holiday pay at the rate of not less than 8% of their gross earnings with their regular pay, instead of being provided with four weeks annual holidays each year.
How does accrued leave work?
Leave accrues each pay based on what the employee has worked. At the end of each 12-month period, the total accrued leave is transferred to the employee's four-week minimum entitlement. The accrued balance then resets to 0 to start the next 12 months' accrual.
There is nothing in the Holidays Act that defines how leave should be accrued. Payroll systems accrue to show the leave liability and for employees who wish to request leave in advance.
One common way systems accrue annual holidays is in hours each pay. For example, John works 40-hour weeks, which means he will be entitled to 160 hours (4 x 40) annual holiday leave after every 12 months of employment.
See the following to work out how much he would accrue each week:
[ 4 weeks of entitlement] 160 hours
[number of weeks in a year] 52
3.08 hours each week
Tip: The above calculation does not work if the employee has a varied work pattern. If employee hours change during the 12 month period it is important to understand how your software transfers accrued to entitled leave.
Note: When an employee resigns, the Holidays Act requires the accrued leave to be paid at 8% of the employee’s gross earnings since the employee last became entitled to annual holidays.
What is advanced leave?
Many employees ask to take annual holiday leave in their first 12 months of employment. It is a common practice in New Zealand for employers to allow employees to take annual holiday leave before becoming entitled to their four weeks.
When annual holidays are taken in advance of the 4-week entitlement, the entitlement is reduced by the number of hours/days taken.
For six months of his employment, John has worked 40-hour weeks and will be entitled to 160 (4x40) hours annual holiday leave when he completes 12 months
John has accrued 80 hours for his six months and is approved for 1-week annual holiday leave.
On completing his 12 months, John will receive only 120 hours (160-40=120) as he has already taken one week (40 hours) in advance.
Understanding leave balances in your payroll system
It can be hard enough to get your head around entitled, accrued, and advanced leave. Adding another layer of complexity is understanding how these balances are reflected in your payroll system. Not to mention the other terms that are used, such as annual leave, holiday pay, Holiday Pay entitlement, etc.
Where leave can get tricky is when the employee has worked for longer than 12 months. For example, John received his four-week annual holiday entitlement after working 12 months, and now after 18 months of employment, he has also accrued half of his subsequent entitlement.
Entitled Annual Holiday Leave = 4 weeks
Accrued Leave = 2 weeks
These two separate balances easily distinguish entitled from accrued leave. Some systems, however, show leave balances with entitled and accrued together i.e. Annual Holiday Leave = 6 weeks.
If your system displays the two together I would suggest talking to your software provider to see if there is any setting to show them separately. This can cause confusion for employees trying to understand their leave balance.
I hope this has helped demystify annual holiday leave, and you can now understand how leave is managed in your system. Or better still, you can confidently answer your employees' leave questions.
If you still have questions or need help understanding how your system manages leave, book a free discovery call so we can discuss how I can help you.