Everyone
Calculating holiday and leave pay
How to calculate gross earnings, relevant daily pay and average daily pay for holiday and leave payments.
Employees are entitled to paid annual holidays, public holidays, alternative holidays, sick leave, bereavement leave and family violence leave if they meet certain criteria.
Read about employee entitlements and the criteria here:
Gross earnings
Most holiday and leave pay calculations use ‘gross earnings’.
Sometimes people use the terms ‘gross pay’ and ‘gross earnings’ interchangeably to mean the total amount an Any person, whatever their age, who is employed by an employer to do any work for hire or reward under a ‘contract of service’ (commonly called an ‘employment agreement’). Money an employer takes out of an employee’s pay. An employer can only make deductions from an employee’s pay if these deductions are required by law, or are reasonable and agreed to in writing by the employee.
However, when calculating payments for holidays and leave under the Holidays Act 2003, gross earnings has a specific meaning. It means all payments that the An individual or organisation that hires 1 or more employees and contracts them to work in exchange for wages or salary under a ‘contract of service’ (commonly called an ‘employment agreement’). 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.
When gross earnings are used in holiday and leave calculations
Gross earnings are used to calculate the following payments.
- ‘
Ordinary weekly pay ’ when using the ordinary weekly pay formula to work out annual holiday pay.The amount an employee is normally paid weekly.
- ‘Average weekly earnings’ to work out annual holiday pay.
- ‘
Average daily pay ’ to calculate payment for public andThe daily average of the employee’s total gross earnings over the past 52 weeks.
alternative holidays ,A paid day off to take at another time. Employees get an alternative holiday when they work on a public holiday that is an otherwise working day.
sick ,Paid time away from work that eligible employees can take to care for themselves, their partners or children, or other dependants.
bereavement andPaid time away from work that gives an eligible employee time to grieve and to take care of matters if someone close to them dies. It can be taken at any time and for any purpose relating to the bereavement.
family violence leave (when this can be used instead of relevant daily pay).Paid time away from work that eligible employees can take if they, or a child who lives with them, are affected by family violence.
- Payment for
annual holidays if the employee meets the criteria for being paid 8% pay-as-you-go.Paid time away from work for rest and recreation.
- The annual holiday pay component of an employee’s
final pay .The last pay an employee receives from their employer. This includes their final salary or wages, all holiday pay they are entitled to, and any other payments owing.
What gross earnings include
Gross earnings include, but are not limited to:
- salary and wages
allowances (but not reimbursing allowances)Extra payments paid to an employee to cover employment-related expenses, for example, a reimbursement, something specific related to the job (like a night-shift allowance), or in recognition of extra skills that they bring to the job.
- all
overtime Any hours an employee works over and above their normal weekly hours.
- piece rates
- productivity or performance payments, for example, most commissions, bonuses and incentives
- payment for annual holidays, public holidays and alternative holidays
- payment for sick, bereavement and family violence leave
- the cash value of board and lodgings supplied
- the first week of compensation payable by the employer under section 98 of the Accident Compensation Act 2001
- any other payments that are required to be made under the terms of the employment agreement.
Section 98 of the Accident Compensation Act 2001 - New Zealand Legislation(external link)
If all the components of gross earnings are not included in the relevant calculations for holidays and leave, it’s likely the employee will be underpaid, and the employer will not comply with the Holidays Act 2003.
What gross earnings do not include
Gross earnings do not include:
- reimbursements
- any weekly compensation payable under the Accident Compensation Act 2001 that the employer does not have to make
- payment for leave from work when an employee is on volunteer leave for military service
- payment for annual holidays that have been cashed-up (up to 1 week each entitlement year)
- true discretionary payments.
The law does not say if redundancy payments are included in gross earnings. Our view is that redundancy would generally be received as compensation and not earnings. However, if an employer wants to minimise the risk of not complying with the Holidays Act 2003, they could include redundancy payments in gross earnings. We recommend they seek legal advice on this issue.
Discretionary payments and gross earnings
‘Discretionary payments’ have a special meaning under the Holidays Act 2003. If an employer must make a payment to the employee under their employment agreement, letter of offer, commission scheme, bonus scheme rules, a workplace policy and so on, then:
- it is not a discretionary payment, and
- it must be included in
gross earnings .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.
This is the case even if the amount of the payment is discretionary, including if it’s $0.
True discretionary payments are rare. If an employer is unsure, they should seek advice or err on the side of caution and include the payment.
A discretionary payment is not discretionary just because an employment agreement says that it is. It’s unlikely to be a discretionary payment if:
- the terms of a payment scheme are intended to be binding on the employer and employee
- an employer is bound by the employment agreement to make a payment to the employee, even if the amount is discretionary and could be $0
- the payment is dependent on the employee and/or organisation meeting, for example, any type of targets, quotas, performance criteria or indicators
- payments are made on a regular and consistent basis, for example, annually if criteria are met
- employees have a reasonable expectation of payment based on past practice, to the extent that the payment forms part of the employment agreement.
- An employee’s remuneration statement includes a bonus amount at 100%. The bonus is covered by rules which state that payment and amount of the bonus depends on company and employee performance.
- An employee’s employment agreement has an amount for on-target earnings for commission. The actual amount of commission earned by the employee will depend on how many sales they make.
- Each year the company decides who will be participating in the bonus scheme. Letters are sent out to employees who will be participating telling them that they are eligible to participate this year. The letters state that the amount they receive depends on their performance and could be $0.
- A company gives all employees a Christmas bonus each year. This helps them recruit and keep good staff, and employees are told about it by their employer when they start work with the company.
- A business has had a good year and the owner decides to give everyone a one-off bonus to reward their hard work. They do not do this regularly.
- A company gives all employees a Christmas bonus from time-to-time.
- A company decides that one employee has had an outstanding year and will be given an ex-gratia lump sum payment of 10% of their wages for the last 12 months.
Keeping-in-touch days and gross earnings
Employees can do up to 64 hours of paid work as ‘keeping-in-touch’ days (KIT days) while they’re on parental leave without it being considered a return to work.
Covering parental leave and employees returning to work
If an employee returns to work after Time an employee who is having a baby or becoming the primary carer of a child under the age of 6 can take off work to care for their child. There are 4 main types of parental leave: primary carer leave, partner’s leave, extended leave, and negotiated carer leave.
If an employee does not return to work after parental leave, any earnings from KIT days are not included in their gross earnings when calculating final pay. This is because their last day of employment was the day they went on parental leave.
Holiday and leave pay calculations
‘Relevant daily pay’ (RDP) or ‘average daily pay’ (ADP) are 2 different calculations used to determine what an employee is paid for:
- sick leave
- bereavement leave
- family violence leave
- a public holiday or alternative holiday.
Pay for annual holidays is calculated differently.
How to calculate relevant daily pay
Relevant daily pay (RDP) is what the employee would have earned if they’d worked on the day.
This means their wages or salary for the time they would have worked, plus any of the following that are relevant:
- regular daily
allowances which are likely to be taxable, for example, an on-call allowanceExtra payments paid to an employee to cover employment-related expenses, for example, a reimbursement, something specific related to the job (like a night-shift allowance), or in recognition of extra skills that they bring to the job.
- productivity or incentive payments like commission and piece rates if the employee would have received them if they’d worked on the day
- overtime payments if the employee would have received them if they’d worked on the day
- the cash value of board or lodgings if the employer has provided this.
RDP does not include:
- employer-contribution payments into an employment superannuation fund
- reimbursements payable to the employee for the day, which are likely to be non-taxable.
To determine RDP, employers can follow the steps below. However, this is not a set formula, and employers should take a pragmatic approach and use their judgement to work out RDP, taking into account the employee’s work pattern and circumstances.
- Identify which day the employee is taking leave.
- Work out their salary or wages for the time they would have worked on that day.
- Add any extra payments they would have earned if they’d worked, for example, overtime.
Employment agreements can state a special rate for RDP, but it must be no less than the actual RDP amount.
What is relevant daily pay? [PDF, 241 KB]
How to calculate average daily pay
Average daily pay (ADP) is the daily average of the employee’s gross earnings over the past 52 weeks.
To calculate ADP:
- take the employee’s gross earnings for the 52 calendar weeks leading up to the end of the last pay period before the calculation is done (or number of weeks the employee has been employed if less than 52 weeks)
- count the number of whole or part-days the employee either worked or was on paid leave or holidays during those 52 weeks (or less if they’ve been employed for less than 52 weeks)
- divide the gross earnings by the number of whole or part-days you counted.
When an employer can pay ADP instead of RDP
Employers must use RDP unless:
- it’s not possible or practicable to work out RDP, or
- an employee's daily pay varies in the pay period in question.
In these 2 situations, employers may use ADP. For example, if an employee’s daily pay varies in the pay period, but the variation is so regular and predictable that it’s also straightforward to determine RDP, the employer can choose either RDP or ADP. Depending on the circumstances, one method may be more appropriate than the other.
Relevant daily pay (RDP) vs average daily pay (ADP) [PDF, 416 KB]
If an employer and employee cannot agree on the amount of the employee’s RDP or ADP, they can contact us for help.
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: