Financial & Accounting Advice

Paying employees for leave

Working out what you need to remember when you are paying employees leave can be complicated — but with the right systems and processes in place, it doesn’t have to be difficult.

Paid leave — your employees’ entitlements

All employees are entitled to paid days off for:

  • annual leave
  • public holidays
  • sick leave
  • bereavement leave.

You can decide whether or not to pay them for things like:

  • study leave (if it’s related to their job)
  • parental leave (on top of what’s provided by the government).

Payment for annual leave

Annual leave is calculated differently to all other types of leave. When an employee is on annual leave, you must pay them:

  • their ordinary weekly pay at the time of the leave, or
  • their average weekly earnings over the 12 months before the holiday is taken.

You must pay them whichever amount is higher.

See also ‘Calculating Leave Payments‘ – Employment New Zealand

Payment for sick leave, bereavement leave and public holidays

For all leave other than annual leave, you must pay your employees either:

  • their relevant daily pay — the amount they would have earned if they’d worked that day, including
    • productivity or incentive payments, including commission or piece rates
    • overtime payments, and
    • the cash value of board and lodgings provided, or
  • their average daily pay — this is their gross earnings over the last 52 weeks, divided by the number of whole or part days they either worked or were on paid leave in that period.

You should always try to use the relevant daily pay, unless there’s a reason it’s too hard to work out.

Employment New Zealand has a calculator to help you work out whether you need to pay relevant daily pay or average daily pay.

Paying casuals an extra 8% instead of providing leave

Casual employees can choose to receive an extra 8% pay rather than holiday leave or sick leave. If they take that option, calculate PAYE on that amount as usual. Make sure that the value of the 8% is at least equal to the value of holiday pay, if they took it.

See also ‘Annual leave for casual staff‘ – Employment New Zealand

Getting it right

Calculating holiday pay correctly is straightforward when you’ve got the right systems in place. A good system needs:

  • accurate, up-to-date time and wage records
  • the correct calculations, using the right data.

Use the MBIE calculator to work out what an employee’s average daily pay should be.

If you feel unsure

If you feel unsure about what you’re doing, it’s worth getting guidance from a payroll specialist who can help you set up a good system.

Public holidays are the most tricky — make sure you understand how they work and what your employees are entitled to.

Common mistakes

To get holiday pay calculations right, don’t fall into these common traps:

  • not keeping your personnel files updated and using incorrect data to calculate leave payments
  • on public holidays, rostering off staff who would normally work, and not paying them (you have to pay any employee who would normally work on a public holiday)
  • setting employees up as ‘casual staff’ even if their hours aren’t casual, so that you can pay them 8% extra in each pay instead of giving them annual leave
  • not fully understanding the ‘ Mondayising’ of public holidays, and paying employees incorrectly.

In general, if you’re keeping your time and wage records up to date and entering the right data, your calculations should be correct. If your employees work standard hours, their leave payments should be standard, too. If they work irregular hours, their leave payments should fluctuate.

The above article originally appeared on the Business.Govt.NZ website; an excellent resource for all New Zealand business owners.

Source: Jamie Tulloch,  E3 Accountants