In this post, I highlight an area that I often see which is not being applied correctly when recalculating leave provided under the Holidays Act 2003. It identifies underpayments that need to be paid to an employee and overpayments to be recovered (if possible, following a separate process).  For the purpose of this post, I will use an example based on an underpayment, but this situation will also impact on any overpayment made as well.

When an employee’s pay record needs to be reassessed to ensure they have been paid correctly for leave provided under the Holidays Act, it can mean that the outcome of this remediation (over 6 years) is that they have been under- or overpaid for leave.

If the employee has been underpaid, then that means the gross earnings for the pay period that the leave was taken is not correct and the underpayment added will increase the gross earnings for that period.  This in turn means the gross from this updated period will now be part of the gross for other calculations for leave going forward such as:

Annual leave entitlement:

  • Average weekly earnings (AWE), last pay period back 52 weeks / 52 weeks.
  • OWP Section 8(2), when the employee’s week cannot be determined under Section 8(1), then and only then, the employee’s week can be determined using a 4-week average, last pay period back 4 weeks (payments that are a regular part) / 4.

BAPS leave:

  • Average daily pay (ADP), when the day cannot be determined using RDP, then and only then, ADP can be used, last pay period back 52 weeks / number of days worked, and paid leave taken in that period.

Changing the gross earnings has a ripple effect across the calculations going forward. Because underpayments are included in gross, they will affect the rate of any future underpayment and the employee’s gross earnings overall.

I always get asked the question, “Where does it state this in the Act?” and, of course, as we are talking about the Holidays Act there is no reference. Here though is a statement from an MBIE Enforceable Undertaking document which was made to an employer:

  • It is important to note that all of these entitlements must be calculated sequentially by date as each entitlement affects the gross earnings of the next one calculated.

Now, the above is about ensuring that when leave is taken in a past period, if it is underpaid the gross will be changed and leave paid correctly for that period.  This does not mean you have to go back and change the gross earnings reported to IRD in past periods. Once all of the underpayments have been identified, this should be paid in a lump sum and taxed as an extra pay.

In conclusion, you must factor in any change to gross earnings from underpayments in past periods to be included in gross earnings going forward from that point.  This is only when using the various calculations provided under the Holidays Act that require an average to be used.

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