The short answer is YES.

Now, this is not about the bad employer exploiting the downtrodden, overworked employee, this is just a consequence that can happen because of the averages used or that could be used under the Holidays Act.  

Before I get a lot of comments about social conscience and the living wage, I just want to discuss in this post how and why this could happen in payroll.  I get asked by payroll practitioners on a regular basis about topping up the leave rate when it is less than the minimum wage or the ordinary rate of pay from the calculations done for determining the value for leave under the Holidays Act. There is a belief that the employee must be paid not less than the minimum wage or their ordinary rate of pay.  This is not the case and in this post I wanted to cover some of the situations where the leave rate could be lower than the minimum wage or ordinary rate of pay and still be compliant with the law. Payroll needs to know these situations and be able to explain why this has happened.

Firstly, as an employer you can always pay more.  I know of some employers that will top up the rate to the ordinary rate of pay or minimum wage if this situation occurs.  However, the key here is that the employer wanted to do this rather than just thinking you have to do it.

So how could this happen?

To set the scene, we are talking about an employee that only gets minimum wage and is paid correctly under the current rate.  They have never been paid less than the rate set and they do get paid for all hours actually worked, so the employer has done everything correct by law.

Now in this situation the employee is taking annual holidays so they are not actually working, but the time taken is counted as continuous employment under the Holidays Act. Annual holiday minimum entitlement is determined by the greater of average weekly earnings (AWE) and ordinary weekly pay (OWP).  It is not paid just at the ordinary rate of pay.

Average weekly earnings (AWE)

Calculating AWE under the Holidays Act is based on the agreed week for the employee.  If you have an employee that works variable hours, the week may be defined when they take leave because each time they take annual holidays the week could be different. However, this is one of the issues as AWE is an average.  So, if the employee has a changing week, it can result in a situation where the week may have been worked out based on low hours in the past, but just before leave has been taken there has been an increase. The increase in the agreed week means the week divisor works to the disadvantage of the employee.  Here is an example:


  • Last 52 weeks gross: $29,559.00
  • Divided by 52 weeks: $568.44
  • Current agreed week is 42 hours, so hourly rate is: $13.53
  • Difference with current $17.70 minimum wage rate: $4.17


Ordinary weekly pay (OWP)

OWP is not an average in the first instance – Section 8 (1) is about what the agreed week is for the employee.  If the week cannot be defined then and only then can a 4-week average provided for in Section 8(2) of the Holidays Act be used. (This should always be seen as the alternative calculation when attempts to determine the week have failed.)  

For instance as mentioned above, the employee works variable hours every week; therefore, every week is different in terms of the hours worked.  Because the employee’s week is variable, the week cannot be determined under Section 8(1) so the 4-week average is used. Here is an example:


  • Last 4 weeks (42 + 42 + 18 + 22) hours: 124
  • Minimum wage $17.70 x 124: $2,194.80
  • Divided by 4 to get the week: $548.70
  • Hourly rate: $13.06
  • Difference with current $17.70 minimum wage rate: $4.64

The result of the two calculations is a leave rate of $13.53 for AWE and an even lower rate of $13.06 for OWP.  

So as you can see, because the employee’s hours have varied it has impacted on their week and has meant that the rate has been affected.  This is compliant with the Holidays Act and Minimum Wage Act. The Minimum Wage Act is about paying the minimum wage for hours worked and the Holidays Act states the use of the averages above depending on the situation.  There is nothing in either Act that states leave must be paid (topped up) to the employee’s ordinary rate of pay or minimum wage.  

Paying out a week of annual holiday entitlement

Under the Holidays Act after 12 months (once the employee has qualified to get 4 weeks of annual holiday entitlement), the employee has the right to request to have paid out up to one week of annual leave minimum entitlement. However, it is up to the employer whether or not to approve this.  Now, this is another situation where the paid-out week could be paid less than the minimum wage rate because the calculation to determine the cashed-out week is set out in Section 21 of the Holidays Act and is the greater of AWE and OWP. Also, the paid-out week is taxed as an extra pay and so could be taxed at a higher rate.

I would like to make one further point on paying out annual leave and that is if you cannot determine the week, then don’t allow this as you can only pay out a maximum of one week.  If the week cannot be determined, how do you know if you have paid out more than one week?

Finally, if an employer wants to top up in any of the above situations, I would make sure that it is clearly stated as a benefit provided by the employer to the employee. If you don’t, they may have an expectation that they just get it.  Make it clear what you are doing is extra or better than the legislation requires, so employees know their employer is doing something for them.

In conclusion, payroll needs to question when they see payments made to an employee that are less than the minimum wage or the employee’s ordinary rate of pay to confirm it is for a valid reason (as stated above).  It is up to the business to decide if they want to do better for the employee when these situations occur, it is not for payroll to decide.

NZPPA supporting NZ payroll since 2007!

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