Calculating and paying holiday pay should be treated carefully. If your employees don’t have fluctuations in the hours they work, the calculations are likely to be straightforward. However, any fluctuations in the amount of wages paid each week - from differing hours or extra payments - can make holiday pay a lot more difficult. Here are some tips to help you get it right.

Calculating Holiday Pay

Holiday pay is pay for an employee's annual leave and pay for statutory holidays. Payment for annual leave must be made before the annual leave is taken, unless it is agreed in the employment agreement that it can be paid in the pay period it relates to.

 If you have a payroll system or outsourced payroll function, you should check: 

• It applies New Zealand legislation (particularly the Holidays Act 2003) and not foreign provisions
• The system accurately records all hours worked per day and payments paid to the employee
• The system calculates all leave types correctly.

If you don't have a payroll system or a payroll provider, you must manually input the data into a spreadsheet or written record, as part of your wage and time record obligations.

Formulas to Help You

Annual Leave

Holiday pay must be paid at the greater of:

• ‘ordinary weekly pay’ (the amount an employee receives under their employment agreement for an ordinary working week), or
• ‘average weekly earnings’(an employee’s average weekly earnings for the 12 months immediately before the end of the last pay period).

If it isn’t possible to determine an employee’s ordinary weekly pay, the Holidays Act 2003 provides a formula to use.  Examples of paying annual leave and the formula
 

Pay as You Go

In limited cases, you can pay your employee’s holiday pay as part of their regular pay. The holiday pay must not be less than 8% of the employee’s gross earnings and be an identifiable component of your employee’s pay. You may include holiday pay in the regular pay of employees who:

• are employed on a fixed-term employment agreement for less than 12 months, or
• casual employees whose work is so intermittent or irregular that it isn’t practical for the employer to provide four weeks annual holidays.

Holiday Pay on Termination

Employees who have annual leave entitlements at the time of termination will be paid those amounts, plus 8% on the total gross earnings from the employees last anniversary date to the date of termination (annual leave and alternative holiday entitlements are included in the gross earnings before the 8% calculation is made).

Employees whose employment ends within 12 months of starting, will be entitled to 8% holiday pay on their total gross earnings, less any amounts already paid for annual leave taken in advance or paid.
To work out how much tax to deduct from holiday pay  use Inland Revenue’s Calculate tax on holiday pay calculator.
 

Cashing up Annual Leave

Each year, your employees can ‘cash-up’ a maximum of one week of their annual leave if you both agree The employee must submit the request to you in writing, the cashed up annual leave must be an entitlement and not accrued leave, employees can request to cash-up less than a week, and more than one request can be made until a maximum of one week of annual leave is paid.

Once you have agreed to cash-up a portion of your employee's annual leave, you need to provide the payment as soon as possible, which will usually be the next pay day. The value of the payment must be at least the same as if the employee had taken the holidays.
 

Payroll Tips for Cashed-up Leave

• Cashed-up annual leave should be treated as an extra pay or unexpected bonus, it is not to be included in gross earnings for the purposes of calculating Average Weekly Earnings, Ordinary Weekly Pay or Average Daily Pay.
• Because it’s treated as an extra pay, pay as you earn (PAYE) should be calculated using the rates for lump sum payments.
• If your employee usually has Student Loan or KiwiSaver deductions made from their pay, deduct these from the cashed-up annual leave as well.
• Your employee’s Child Support liabilities and Working for Families Tax Credits entitlement may also need to be adjusted if their family income has changed.

Employers can’t encourage or pressure employees into cashing up leave. Likewise, cashing up can’t be raised in wage or salary negotiations or be a condition of employment. Requests to cash-up can’t be included in employment agreements, but an employment agreement can outline the process for making a request.