The Holidays Act (the Act) promotes a healthy balance of work and life for employees in New Zealand. This includes providing employees with 4 weeks of annual holidays per annum. The Act sets out methods for determining how holiday should be paid, this being the pay that an employee receives when they take annual leave or annual holidays.
The amount of holiday pay an employee receives should be calculated each time the employee goes on holiday as the rate of pay might change between payment periods.
How to calculate holiday pay
Unless the employee is being paid their holiday pay on a ‘pay-as-you-go’ basis, payment of annual holidays is the greater of either:
- The employee’s ordinary weekly pay (OWP) at the start of the annual holiday.
- The employee’s average weekly earnings (AWE).
Whether an employee takes all or part of their annual holidays, the method used to calculate holiday pay remains the same.
If an employee decides to cash out their annual leave entitlements, it is known as an annual leave cash up. The employer must pay the employee the amount they would have received if they had taken the leave, including any relevant bonuses or allowances.
- Average weekly earnings (AWE) are determined by calculating gross earnings over the 12 months prior to the end of the last payroll period before the annual holiday is taken and dividing that figure by 52.
- Ordinary weekly pay (OWP) is the amount of pay that an employee receives for an ordinary working week under their employment agreement. This includes payments such as commissions, overtime, and allowances.
Calculating holiday pay at the end of employment
Whether an employee resigns, retires, completes a fixed term, is made redundant or is dismissed – they are entitled to their final wages and unused annual leave entitlements.
The Act provides two ways to calculate payment for annual holiday entitlements at the end of employment:
- Where the employment ends within 12 months (before the employee is entitled to annual holidays) - the employee is entitled to a payment for annual holidays of 8% of gross earnings during the employment, less any payment for annual holidays taken in advance or any payment for annual holidays on a pay-as-you-go-basis.
Where the employment ends after the 12 months (that is, where an entitlement to take annual holidays has arisen for the first and any subsequent year’s employment):
- the first amount to be calculated is the greater of ordinary weekly pay, relevant daily pay or average weekly earnings for the annual holidays to which the employee is entitled as if the holidays were being taken at the end of the employment.
- the second amount to be calculated is annual holiday pay for the period since the employee last became entitled to holidays, which is calculated at 8% of gross earnings since the entitlement last arose.
In some circumstances, an employee may be entitled to receive public holiday pay in New Zealand for a period after the employment has ended.
For advice on how to calculate holiday pay and for more information on the Holidays Act 2003, contact Peninsula.
