Everyone
Annual holiday pay
All employees are entitled to 4 weeks annual holidays (annual leave) after 12 months of continuous employment.
What an employer must do
Working out what an employee gets paid for taking a day off as an annual holiday will depend in part, on what they have earned in the previous 12 months. When employees take annual holidays, their employer must pay them for the leave before they go on leave, unless they have agreed in writing to be paid in your normal pay cycle. Check to see if this is included in the Employment agreements contain the terms and conditions of employment. Every employee must have a written employment agreement outlining the terms and conditions of employment. ‘Employment agreement’ has a broader meaning that includes all other documents and other agreements forming part of the contractual agreement between the employee and employer.
Ordinary Weekly Pay
Ordinary Weekly Pay (OWP) is the amount an employee receives under the employment agreement for an ordinary working week, including:
- regular best, such as a shift allowance
- regular productivity or incentive-based payments (including commission or piece rates)
- the cash value of board or lodgings
- regular overtime.
Intermittent or one-off payments as well as discretionary payments and employer contributions to superannuation schemes are not included in ordinary weekly pay.
This means OWP 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. For example, if in each pay period, the employee receives commission payments for sales made during the pay period, then these payments would be included in OWP. For many people, ordinary weekly pay is clear because they are paid the same amount for each week they work.
If it is unclear whether a payment is regular or not, consider the following:
- The employee should not be disadvantaged because they took annual holidays rather than worked during that time.
- Consider the frequency of the payment, if the employee usually receives the payment, then this is likely to be ‘regular’ (even if they do not always receive it).
- If the employee works different but predictable shifts, then the ordinary pay (and the payments that are included) should relate to the week they are taking annual holidays.
Ordinary Weekly Pay formula
When it is not possible to work out ordinary weekly pay in terms of the amount the employee normally receives for an ordinary working week then ordinary weekly pay must be calculated with the ordinary weekly pay formula as follows:
a − b
4
- go to the end of the last pay period, then from that date, go back 4 weeks (or if the pay period is longer than 4 weeks, go back the number of weeks in the pay period), and
- take the gross earnings for that period (a), and
- deduct from the gross earnings any one-off or irregular payments (or other payments) that the employer is not bound to pay (b), and
- divide the answer by 4.
Situations where it might not be possible to calculate ordinary weekly pay and the employer may need to use the formula include if the:
- employee’s hours each week vary more than by a minor amount
- employee’s overtime payments are regular, but the amount varies unpredictably
- employee earns commission or incentive bonuses each pay period, but the amount varies unpredictably or cannot be attributed to a specific week.
In some situations, the employer may need to spend some extra time thinking through and discussing with the employee how the regular payments will be included in ordinary weekly pay.
Vikram gets paid a commission of $500 (on top of his wages) for every sale he makes over $5,000. He usually makes 2 of these sales each week. Vikram’s employer Erika pays him his commission in a lump sum each month in his normal pay cycle. His commission payments are paid monthly but they do relate to the commission he earns on a weekly basis so Erika realises that they should be considered regular payments and should be included in his ordinary weekly pay for the calculation of annual holidays.
Erika knows that she should use the ordinary weekly pay formula to work out Vikram’s ordinary weekly pay because the amount he earns each week varies. Erika discusses her approach with Vikram so that he understands how the ordinary weekly pay calculation is being worked out. The OWP calculation must still be compared to Vikram’s average weekly earnings and the greater amount will be paid to Vikram as the rate for his annual holidays.
Ordinary Weekly Pay in employment agreements
Some employment agreements have a special rate or formula for ordinary weekly pay, this should be compared to the actual ordinary weekly pay and the greater amount must be used (and compared to average weekly pay to calculate payment for entitled annual holidays).
Average Weekly Earnings
Average weekly earnings are worked out by calculating the employee’s gross earnings over the 12 months before to the end of the last payroll period before the annual holiday is taken and dividing that figure by 52.
Other payments not included are those:
- any weekly compensation payable under the Accident Compensation Act 2001 that the employer is not bound to make
- made when an employee is on voluntary military service
- for cashed-up holidays that are part of the employee’s minimum entitlement.
Ordinary Weekly Pay vs Average Weekly Earnings [PDF, 994 KB]
Calculating holiday pay
For an employee who takes all or part of their annual holiday entitlement, the annual holidays are paid at the rate of at least the greater amount of:
- Ordinary Weekly Pay (OWP) as at the beginning of the annual holiday, or
- the employee’s Average Weekly Earnings (AWE) for the 12 months immediately before the end of the last pay period before the annual holiday.
So, annual holidays are paid at the rate of the greater of ordinary weekly pay and average weekly earnings.
Both these calculations need to be done every time the employee takes annual holidays. They apply to all employees taking entitled annual holidays.
If an employee takes a period of annual holidays that covers more than one pay period, even if the employee has agreed to be paid for the annual holidays as part of their normal pay cycle, the calculation for the entire time on annual holidays is still done at the start of the annual holiday, rather than being done each pay period.
However, if the holiday pay is recalculated during the holiday (as some payroll systems do) and the amount received is greater than would have been received if the calculation was just performed at the start of the annual holiday, this is still compliant. If it is less, it is not.
When an employee leaves their job after being on ACC compensation, this can affect their final holiday pay, which is based on their gross income.
The ‘first week compensation’ payable by you is included in their gross earnings. ACC compensation payments, however, are not earnings, so are not included.
Since annual holidays are calculated at the higher rate of an employee’s average weekly earnings for the 12 months before termination, and their ordinary weekly pay, if the employee has been unpaid for over a year, the average weekly pay will equal zero. You must therefore use the ordinary weekly pay, which is the amount the employee would receive for an ordinary working week.
Many employees will still have an ordinary weekly pay – normally specified in the employment agreement – even after being off work on ACC for a lengthy period. If not, the pattern of work and payment from when the employee was last working will determine what an ordinary weekly pay should be for them. For example, an employee who worked 40 hours a week at an hourly rate of $30 per hour would have an ordinary weekly pay of $1200, despite being off work on ACC for over a year.
If it is genuinely not possible to determine an employee’s ordinary weekly pay (for example, due to variable and unpredictable hours of work), the 4-week average formula should be applied to calculate their ordinary weekly pay. Because this formula involves an average of the earnings in the four weeks prior to termination, for an employee who is off work for more than four weeks, this would equal zero. For these employees, although they will have an entitlement to their unused annual holidays, it will have no monetary value.
Paying employees with no holiday entitlements
There may be times when an employee has no entitlement to annual holidays, but employers need to calculate annual holiday payments. This can happen in 3 situations:
- The employer agrees that the employee can take annual holidays in advance. For annual holidays taken in advance, the employee gets paid the greater of:
- their ordinary weekly pay at the beginning of the annual holiday, or
- their average weekly earnings:
- for the 12 months just before the end of the last pay period before the annual holiday, or
- for the total time they have worked for the employer (if the employee has worked for the employer for less than 12 months) ending at the last pay period before the annual holiday. In this situation, the employee’s average weekly earnings are calculated by taking their gross earnings for the total time they have worked for their employer and dividing this by the number of whole or part weeks they have worked for the employer, (rather than dividing it by 52).
- The employer has a regular annual closedown of their workplace, and the employee is either in the first 12 months of their employment or has taken all their annual holidays in advance.
- The employee’s employment ends, and the employer must calculate holiday pay for the time worked since the employee’s last anniversary date.
Payment scenarios
Sione works 4 days per week; his hours vary between 6 and 9 per day at $25 an hour. If Sione works at night, he gets time and a half for all hours after 6pm. These regular payments for working past 6pm must be included in the calculations of payment for annual holidays. In this case, Sione takes one week’s annual holidays.
Ordinary weekly pay - Sione’s pay varies each week because the amount of hours and nighttime work he does changes (although he regularly works at night, any night work is offered to the whole team on a first in first served basis). It is appropriate to use the ordinary weekly pay formula to calculate ordinary weekly pay because his employer does not know how much night work, he would have done that week (and so it is not possible to determine ordinary weekly pay without using the formula).
Sione’s gross earnings for the last four weeks immediately before the holiday is taken (excluding irregular or one-off payments) is $3,687.50, divided by 4 = $921.88. This is Sione’s calculated ordinary weekly pay.
Average weekly earnings - Sione’s gross earnings for the last 12 months immediately before the end of the last pay period before the holiday is taken is $48,750, which divided by 52 = $937.50. Sione’s average weekly earnings ($937.50) is greater than his ordinary weekly pay ($921.88) and so his average weekly earnings should be paid for the week Sione is on annual holidays.
Sally is paid commission of 1% of the gross profit on all sales she makes. This was included in her letter of offer when she started her employment. The number of sales Sally makes vary each day. Sally is paid fortnightly, but she receives her commission in a lump sum monthly for total sales made during the previous month. Sally’s commission payments must be included in her average weekly earnings for calculation of her annual holiday payment.
Heena works for $24 per hour, 4 days per week; she does 6 to 9 hours per day depending on how busy her workplace is. She decides to take 1 week’s annual holiday to go to Fiji. The payroll system incorrectly sets Heena’s pay for all holidays and leave entitlements at 6 hours per day at $24 per hour (6 x $24 = $144), so for 4 days it calculates her pay as $144 x 4 days = $576 for a week’s annual holidays.
The right calculation for Heena’s pay for a week’s annual holidays should have been the greater of her ordinary weekly pay and average weekly earnings.
Ordinary weekly pay – Heena’s pay varies each week depending on how many hours she works, so it is appropriate to use the ordinary weekly pay formula to calculate ordinary weekly pay. Heena’s gross earnings for the last four weeks immediately before the holiday is taken (excluding irregular or one-off payments) is $3,360, divided by 4 = $840
Average weekly earnings – Heena’s gross earnings for the last 12 months immediately before the end of the last pay period before the holiday is taken is $34,320 divided by 52 = $660.
Heena’s ordinary weekly pay is greater than her average weekly earnings so Heena should have been paid this for her annual holidays ($840). Heena should talk to her employer and if they don’t agree, she should contact us for help.