Everyone
Annual holiday pay
Employees are entitled to paid annual holidays (annual leave) after 12 months of continuous employment. Find out how to calculate annual holiday pay using ordinary weekly pay or average weekly earnings.
What employees are entitled to
All employees become entitled to 4 weeks of paid annual holidays after 12 months of continuous employment. For more information about annual holiday entitlement, visit:
In some cases, employers can agree with an employee to pay 8% of their gross earnings instead of getting 4 weeks of paid annual holidays. This is called ‘pay-as-you-go’ holiday pay. For more information, visit:
Calculating annual holiday pay
When an employee takes all or part of their annual holiday entitlement, their annual holiday pay is at least the greater of:
- their
ordinary weekly pay (OWP) as at the beginning of the annual holiday, orThe amount an employee is normally paid weekly.
- their
average weekly earnings (AWE) for the 12 months immediately before the end of the last pay period before the annual holiday is taken.1/52 of an employee’s gross earnings for the 12 months up to the end of the last pay period before they take annual holidays (or however many weeks they’ve worked if it’s under a year).
To calculate AWE, and sometimes OWP, employers need to use ‘ All payments that an employer is required to pay an employee under the employee’s employment agreement for the period during which the earnings are being assessed. Gross earnings are used to calculate pay for holidays and leave.
For these calculations, gross earnings means all payments that the employer is required to pay the employee under their A written document setting out the terms and conditions of employment agreed by the employer and employee (also known as a ‘contract of service’). It can include other contractual documents and agreements made by the employer and employee. Every employee must have a written employment agreement.
Ordinary weekly pay
Ordinary weekly pay (OWP) is the amount an employee receives under their employment agreement for an ordinary working week, including payments that are a regular part of the employee’s pay and relate to the work they do each week.
OWP includes:
- regular salary or wages
- regular allowances, like a shift allowance
- regular productivity or incentive-based payments (including commission or piece rates)
- the cash value of board or lodgings
- regular overtime.
Irregular or one-off payments (like bonuses), discretionary payments, and employer contributions to superannuation schemes are not included in OWP. For information about discretionary payments, visit:
Calculating holiday and leave pay
How to work out OWP
For many people, OWP is clear because they are paid the same amount for each week they work.
For others, working out what payments are regular is a judgement call. For example:
- if an employee receives commission payments each payday for sales they made in that pay period, then those payments would be included in OWP
- if an employee only works overtime occasionally (for example, once every 3 months), then the overtime would not be included in OWP.
If it’s unclear whether a payment is regular or not, consider the following.
- The employee should not be disadvantaged because they took annual holidays instead of going to work.
- The frequency of the payment — if the employee usually receives the payment, then it’s likely to be regular, even if they do not always receive it.
- If the employee works different but predictable shifts, then their OWP should relate to the week they are taking annual holidays.
- It’s the payment which needs to be regular, not the size of the payment. For example, if an employee usually does overtime on a Monday but the amount of overtime varies, it’s still a regular payment.
If an employer is unsure, they should seek advice, or — to reduce their risk — err on the side of caution and include the payment.
Employers should talk to their employees about which regular payments have been included in OWP and which have not, especially if there could be disagreement or confusion.
What is a regular payment for OWP? [PDF, 229 KB]
If an employer has identified a payment as regular but the amount varies, they may need to use the ordinary weekly pay formula to calculate OWP.
Ordinary weekly pay formula
If it’s not possible to work out OWP, employers must calculate it using the OWP formula:
a − b
4
- Go to the end of the last pay period before the employee is taking annual holidays.
- From that date go back 4 weeks (if the pay period is longer than 4 weeks, go back the number of weeks in the pay period).
- Take the gross earnings for that period (a).
- Deduct any one-off, irregular, or other payments that the employer is not bound to pay (b).
- Divide the answer by 4.
Examples of situations where employers may need to use the OWP formula:
- the employee’s hours each week vary by more than a minor amount
- the employee’s overtime payments are regular, but the amount varies unpredictably
- the employee earns commission or incentive bonuses each pay period, but the amount varies unpredictably or cannot be attributed to a specific week.
Vikram gets paid commission of $500 (on top of his wages) for every sale he makes over $5,000. The number of sales he makes varies between 1 and 8 each week. Vikram’s employer Erika pays his commission in a lump sum each month in his normal pay cycle. Because his monthly lump sum relates to the commission he earns on a weekly basis, Erika realises that it should be considered a regular payment and should be included in his OWP when calculating his annual holiday pay.
Erika knows that she should use the OWP formula to work out Vikram’s OWP because the amount he earns each week varies. Erika discusses her approach with Vikram so that he understands how the OWP calculation is being done. Erika must still compare the OWP calculation to Vikram’s average weekly earnings and pay him the greater amount for his annual holidays.
If there is an ordinary weekly pay calculation in the employment agreement
Employment agreements can state a special rate or formula for The amount an employee is normally paid weekly.
Average weekly earnings
Average weekly earnings (AWE) are the weekly average of an employee’s gross earnings over the 12 months before they take annual holidays.
To calculate AWE:
- take the employee’s
gross earnings over the 12 months leading up to the last pay period before theAll payments that an employer is required to pay an employee under the employee’s employment agreement for the period during which the earnings are being assessed. Gross earnings are used to calculate pay for holidays and leave.
annual holiday Paid time away from work for rest and recreation.
- divide that figure by 52.
If the employee has been employed for less than 12 months, their AWE is the weekly average of their gross earnings for the time they have been employed. Count the number of whole or part-weeks they’ve been employed and divide their gross earnings by that number to get their AWE.
For information about how to calculate gross earnings, visit:
Calculating holiday and leave pay
Ordinary weekly pay vs average weekly earnings [PDF, 994 KB]
Our Holidays Act 2003 guides provide information about leave and holidays entitlements and pay.
Our shorter guide is for employees and employers to help them understand minimum employment entitlements:
Leave and holidays: A guide to employees’ legal entitlements [PDF, 2.1 MB]
Our longer guide gives detailed, practical guidance for payroll providers and professionals:
When to calculate and pay annual holidays
Employers must calculate The amount an employee is normally paid weekly. 1/52 of an employee’s gross earnings for the 12 months up to the end of the last pay period before they take annual holidays (or however many weeks they’ve worked if it’s under a year).
The employer must pay the employee for the holiday before they take it unless they have agreed in writing to be paid in their normal pay cycle. Employers and employees should check the A written document setting out the terms and conditions of employment agreed by the employer and employee (also known as a ‘contract of service’). It can include other contractual documents and agreements made by the employer and employee. Every employee must have a written employment agreement.
If an employee takes a period of Paid time away from work for rest and recreation.
Some payroll systems recalculate holiday pay during the holiday. If this happens and the employee receives more than if the calculation had been done once at the start of the annual holiday, this complies with the law. If the employee receives less than they would have if the calculation had been done once at the start of the annual holidays, it is not compliant with the law.
Holiday pay for employees with no holiday entitlement
Employers may need to calculate annual holiday pay for an employee who does not have any holiday entitlement in 3 situations.
- The employer agrees that the employee can take annual holidays in advance. For annual holidays taken in advance, the employee is paid the greater of:
- their OWP at the beginning of the annual holiday, or
- their AWE for the 12 months leading up to the end of the last pay period before the annual holiday. If the employee has worked for the employer for less than 12 months, their AWE is their gross earnings for the total time they have worked for their employer (leading up to the last pay period before the annual holiday) divided by the number of whole or part-weeks they have worked.
- 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 regular closure of a workplace for a holiday period or seasonal break, requiring its employees to take annual holidays or unpaid time off.
- The employee’s employment ends before their next anniversary. In this situation, the employer must calculate holiday pay for the time the employee worked since their last anniversary date.
When an employee leaves their job after being on ACC
When an employee leaves their job after being on ACC compensation, this can affect their final holiday pay, which is based on their All payments that an employer is required to pay an employee under the employee’s employment agreement for the period during which the earnings are being assessed. Gross earnings are used to calculate pay for holidays and leave.
The ‘first week compensation’ payable by the employer is included in their gross earnings. ACC compensation payments are not included in gross earnings.
If an employee has been unpaid for over a year, their AWE will be $0. This means employers must use The amount an employee is normally paid weekly.
Many employees will still have an OWP – normally specified in the employment agreement – even if they’ve been off work on ACC for a long time. If they do not have an OWP, the pattern of work and payment from when they were last working will determine what their OWP should be. For example, an employee who worked 40 hours a week at an hourly rate of $30 per hour would have an OWP of $1,200, despite being off work on ACC for over a year.
If it is genuinely not possible to determine an employee’s OWP, employers must use the 4-week average formula. Because this formula gives an average of the earnings in the 4 weeks before termination, if the employee has been off work for more than 4 weeks, their OWP will be $0. For these employees, they are still entitled to their annual holidays, but they will not receive any payment.
Payment scenarios
Sione works 4 days each week. His hours vary between 6 and 9 every day at $25 an hour. If Sione works at night, he gets time-and-a-half for each hour he works after 6pm. These regular payments for working past 6pm must be included when calculating pay for annual holidays. Sione takes 1 week of annual holidays.
Ordinary weekly pay (OWP) - Sione’s pay changes each week because the number of hours and amount of night-time work he does varies (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 OWP formula to calculate Sione’s OWP because his employer does not know how much night-work he would have done that week.
Sione’s gross earnings for the 4 weeks immediately before he takes the holiday (excluding irregular or one-off payments) were $3,687.50.
Sione’s OWP is $3,687.50 divided by 4 = $921.88.
Average weekly earnings (AWE) - Sione’s gross earnings for the 12 months immediately before the end of the last pay period before he takes the holiday were $48,750.
Sione’s AWE is $48,750 divided by 52 = $937.50.
Sione’s AWE ($937.50) is greater than his OWP ($921.88). Sione’s employer must pay Sione’s AWE for the week he is on annual holidays.
Heena works for $26 per hour, 4 days each week. She works 6 to 9 hours each day depending on how busy her workplace is. She decides to take 1 week of annual holidays. The payroll system incorrectly sets Heena’s pay for all holidays and leave entitlements at 6 hours each day at $26 per hour (6 x $26 = $156). For 4 days (1 week of annual holidays) it calculates her pay as $156 x 4 days = $624.
The correct calculation for Heena’s pay for 1 week of annual holidays should have been the greater of her ordinary weekly pay or average weekly earnings.
Ordinary weekly pay (OWP) - Heena’s pay varies each week depending on how many hours she works, so it is appropriate to use the OWP formula to calculate her OWP. Heena’s gross earnings for the 4 weeks immediately before she took annual holidays (excluding irregular or one-off payments) were $3,360.
Heena’s OWP is $3,360 divided by 4 = $840.
Average weekly earnings (AWE) - Heena’s gross earnings for the 12 months immediately before the end of the last pay period before she took the holiday were $34,320.
Heena’s AWE is $34,320 divided by 52 = $660.
Heena’s OWP ($840) is greater than her AWE ($660). Heena’s employer should have paid her OWP for her annual holidays. Heena should talk to her employer and if they cannot agree, she can contact us for help.