Article:

BDO Know How April 2016: Negotiating the Hoidays Act 2003

27 April 2016

The Holidays Act has received a lot of press lately, with many high-profile New Zealand organisations struggling to calculate employees annual leave payments correctly. 

Some have bemoaned the complexity of the law, calling for a complete do-over. In the meantime the Act remains the law and organisations must comply. 
Conceptually the Act is simple. When an employee takes annual leave you must perform two calculations, one to calculate ordinary weekly pay and the other to calculate average weekly earnings. You are required to pay whichever is higher.
Calculating Ordinary Weekly Pay (OWP)
OWP represents everything an employee normally earns in a week. This is where the Act works well, as it is easy to calculate ordinary weekly pay for a salaried employee who works the same hours every week. 
Where it is unclear, the Act provides a framework to calculate OWP. This involves going back to the last pay period and dividing the employee’s gross earnings for that period (less any irregular payments) by the number of weeks in the pay period. 
However if an employees’ employment contract includes a specified ordinary weekly pay and this is higher than as calculated above, this should be used as the OWP instead.
Calculating Average Weekly Earnings (AWE)
AWE represents everything an employee has earned on average over the year. To calculate AWE take the 12 months prior to the end of the last payroll period and divide by 52.
Gross Earnings
For both OWP and AWE, an employee’s gross earnings should include salary and wages, allowances, commissions, overtime, payments for holidays and leave of any type. One-off and discretionary payments, such as genuinely discretionary bonuses, are not included in the gross earnings calculation. 
Logic Checking
For salaried employees who work the same hours every week with no deviation, you can expect their OWP to match their AWE, provided there has been no change to their pay rate in the last 12 months.
If a salaried employee has worked any paid overtime in the last 12 months, (but not within the last payroll period) you can expect their OWP to be less than their AWE. 
If an employee has recently had a pay rise you can expect OWP (which is based the most recent payroll period) to be greater than AWE. 
The Act requires an OWP calculation to account for what is initially agreed in an employee’s employment contract. If an employee is working less than the hours originally agreed, their OWP may be greater than their AWE. The reverse will be true if an employee is working more than originally agreed. 
Bookkeeping
All this underpins the importance of good record keeping, especially when calculating AWE. Ask yourself, if an employee asked for payroll records for the past 12 months, could your payroll system provide this information efficiently? Paper trails are all very well, but the information needs to be readily forthcoming. 
For assistance with payroll and your requirements as an employer, please contact your local BDO office.