Employers must use relevant daily pay or average daily pay to calculate bereavement leave, alternative holidays (lieu days), public holidays (unworked) and sick leave. If it’s not possible or practical to calculate an employee’s relevant daily pay, or the employee’s daily pay varies in the pay period in question, an employer may use average daily pay.
If an employer guesses instead of doing the calculations, it may lead to relevant daily pay being incorrectly determined. This is unlawful and could lead to the employer paying the employee any underpayment and, in addition, the employer receiving a large financial penalty.
Using relevant daily pay
Employers should always attempt to calculate an employee’s relevant daily pay first.
Relevant daily pay means paying an employee what they would have earned if they were at work on the day. This also:
- includes payments such as commission, bonuses if the employee would have received them on the day in question, and
- overtime, if the employee would have received them on the day in question, and
- the cash value of board or lodgings if this has been provided by the employer, but
- excludes any employer contribution payment in to an employee superannuation fund.
Employment agreements can contain a special rate of relevant daily pay for calculating payment for a public holiday, an alternative holiday, sick leave or bereavement leave, but only if the rate is equal to, or greater than, the rate that would otherwise be calculated using the method above.
For most people, relevant daily pay should be easy to figure out.
For some workers, it may be hard to work out their relevant daily pay. In these cases, use average daily pay instead.
Using average daily pay
Average daily pay may be used if it’s not possible or practical to work out relevant daily pay, or because their daily pay varies in the pay period in question and there is no special rate agreed to in the employment agreement.
Average daily pay is a daily average of the employee’s gross earnings over the past 52 weeks. This is calculated by:
- adding up the employee’s gross earnings for the period, and
- dividing this by the number of whole or part days the employee either worked or was on paid leave or holiday during that period.
To help with this decision, you can use the pay calculator. It will take about 5 minutes to work through.
If an employer and employee can’t agree on the amount of the employee’s relevant daily pay or average daily pay, contact us for a Labour Inspector who may work out the amount.
Karim works four days per week and his hours vary between six and nine per day. He is off sick for a day, so is entitled to sick leave for that day. Karim’s varying type of employment means that his employer cannot work out his relevant daily pay. Therefore, average daily pay should be used for all of his bereavement leave, alternative holidays, public holidays and sick leave entitlements.
The formula for Karim’s average daily pay is:
- total gross earnings for 52 weeks = $34,320
- whole or part days paid (includes paid holidays or leave) = 208 days
- average daily pay = $34,320 divided by 208 days = $165.
Understanding discretionary payments is important because they are not included in the assessment of an employee’s gross earnings.
Discretionary payments are payments that an employer doesn’t have to pay the employee under the employment agreement. For example, a bonus payment to the employee, where the employer can decide both whether or not to make the payment and the amount of the payment.
If the employment agreement says that the employer has to pay the employee something, even if the exact amount they have to pay is discretionary, then it’s not a discretionary payment.
Allowances are not discretionary payments and they are part of gross earnings.
Regular (taxable) allowances, bonuses, commission and overtime
Employers must include all regular taxable payments in the calculations of payments for leave. If the regular taxable allowances, productivity, incentive-based payments or commission are not included in the payment for leave, the employee will likely be underpaid for their leave taken.
To assess whether or not you’re paying your employees correctly for their holidays and leave, see the guide to assessing your payroll system.