Author: David Jenkins, NZPPA CEO

Like my previous article on additional leave on top of what is provided under the Holidays Act, many employers also offer additional leave and payments to their employees while on parental leave.  This is about the business culture that wants to support an employee facing one of life’s most critical and challenging times.  However, it still needs to be workable and manageable in payroll so that what the business wants to do can actually be achieved for the employee.

In this article, I will cover some of the common extras (benefits) employers provide to their staff while on parental leave (in payroll terms).  These extras have nothing to do with the Holidays Act or the Parental Leave and Employment Protection Act (PLA); they are all agreed terms.  I will discuss how these extra benefits should be structured, some things that need to be understood (by the employer and employee) and the issues that may impact payroll.

First, I will briefly cover what leave is provided under the PLA.  The Act provides five unpaid leave entitlements along with a paid work option:

  • Special (10 days unpaid while the employee is still working)
  • Partners (one or two weeks unpaid, depending on what their partner is taking under the PLA)
  • Primary carers (26 weeks unpaid by the employer but funded by the government) can leave the workplace six weeks before the baby’s birth)
  • Extended (up to 52 weeks unpaid)
  • Negotiated carers (up to 26 weeks unpaid)
  • Keeping in touch days (up to 64 hours paid by the employee while on parental leave)

Just like annual leave, some employers provide a range of additional leave and payments to employees on parental leave.  For this article, I will cover four of the most common extra benefits (that we come across at NZPPA).  The following additional payments and leave are provided to employees to enhance parental leave:

  • Topping up
  • Providing additional parental leave
  • Paying annual leave earned while off on parental leave
  • Providing a top-up bonus on return to work

Topping up

So, this is an additional agreed payment made to the employee.  It is usually paid in conjunction with the government’s 26-week paid scheme.  As stated, it is generally paid as a top-up of the difference between the government payment and the employee’s ordinary pay rate.  The key to any top-up is to keep it simple.  Do not create some sort of complex calculation to determine the top-up, and don’t link it to any of the calculations provided under the Holidays Act.

Government-paid parental leave payments are treated as salary and wages and are taxable as part of the employee’s income.  If the employer makes a top-up, the employee must change to a secondary tax code (depending on which payment is the main payment of the two).  Payroll cannot advise the employee on this as we are not financial advisors.  However, providing a link to an applicable IRD web page would help the employee decide (either way) before getting a tax bill.

If the employer makes a top-up payment, it is part of the employee’s gross earnings, impacting KiwiSaver and the leave provided under the Holidays Act.  This flow-on effect should be considered in terms of the overall cost to the business of doing this.

What happens if the employee does not return and is paid a top-up payment?

I always get this question from payroll practitioners dealing with a termination payment for an employee who receives a top-up but then decides not to return.  There are a range of things that should have been considered and limited options otherwise, including the following:

  • Will the business just write this extra agreed payment off (as part of supporting the employee)?
  • If the business tries to recover the payment, is there any money in the employee’s final pay to cover the top-up payment that has been paid? If not, how will the business get the money back?
  • Any option to recover the top-up from the employee is under the Wages Protection Act, where the employee must consent to the deduction. If they have given consent, they have every right to redraw it, so the top-up could not be deducted from any final pay.

So, the critical thing to consider before it happens is the business’s position if the employee does not return from parental leave after a top-up payment is made.  It may not be a published policy (why tell employees they can pretend they are coming back from parental leave to get the top-up payment), but it is guidance for payroll on what to do if this situation occurs.

Providing additional parental leave

That was a trick heading because if you give extra leave, it has nothing to do with the PLA, as it is provided as an agreed term.  For example, I have had this question several times to the NZPPA PayTech AdviceLine:

  • We have an employee who has been off on parental leave (extended leave) for the full 52 weeks and has asked for an additional parental leave year, which we have agreed to do. Is this second year counted as continuous employment like the first, and will they get another four weeks?

Firstly, a second year is not parental leave and has nothing to do with the PLA, so none of the PLA rules apply.  It is an agreed term, so as part of the agreement, a decision needs to be made on whether it will be counted as continuous employment.  If it is, it will mean that after two years, when the employee returns to the workplace, they will have four weeks of annual holiday by law and another four weeks provided by agreement.

So for payroll:

  • If the employee is given additional time on top of what is provided under the PLA, what will that time be counted as (continuous or a break in service)? It should be clearly written so there is no confusion for the business, payroll, or the employee.
  • If the additional leave is continuous, do they also get an additional agreed entitlement (another four weeks of leave)? What rules will apply to this?  (How will it be calculated, when will it be taken, etc.).
  • Don’t put it under any leave provided by the PLA; code it differently.
  • If the employee does not come back, what happens? We agreed on it at the same time the leave was approved, so again, it is known, so we do not have to figure it out nearly two years later when the employee tells the business they are not coming back.
  • If the employee had accrual or even entitlement earned before parental leave or while on the first year of PLA, then the employee decides not to return after the additional extra time agreed. In that case, payroll will need to do a termination pay to cover this leave, and it does not mean the first day of parental leave becomes the termination date (section 46 of the PLA) because the employee is resigning after the PLA coverage period by law and is now an agreed period.  So, all the entitlement and accrual under the Holidays Act will need to be correctly calculated based on the resignation date and any other leave provided by the agreement paid out based on what was agreed.

Pay annual leave earned while off on parental leave

Under Section 42 of the PLA, if the employee, while on parental leave, earns another annual holiday entitlement (four weeks) on returning to work, this leave can only use average weekly earnings (AWE) and not the greater of AWE and ordinary weekly pay (OWP).  However, some employers allow the employee to use the greater of AWE and OWP for this leave entitlement earned while on parental leave, giving value to their annual holiday entitlement straight away.  This should be seen as a mixture of law and an agreed term (the four weeks of annual holiday entitlement provided is law, and allowing OWP to be used is an agreed term).

For example:

If the employee took a week of this entitlement earned while on 52 weeks of parental leave (extended) soon after returning to work, AWE would be low as it is based on the gross earnings from the last pay period back 12 months.  However, allowing OWP to be used would be based on the agreed week for the employee from their employment agreement, and that is where the employee would get value when the leave is taken.

One door needs to be closed if you plan to allow OWP to be used on the employee’s return to work.  If the employee returns and then decides to resign, there needs to be an extra clause that states OWP cannot be used for this entitlement being paid out on termination, or the employer will end up paying out leave entitlement and 8% (why pay out leave for an employee not staying when you don’t have to?).  Of course, if the employer is happy to pay the additional cost, that’s up to the business.

Provide a top-up bonus on return to work

I prefer this payment over the top-up payment discussed previously while the employee is off on parental leave (just from a payroll viewpoint, not from the perspective of supporting the employee).  So this is about when the employee goes off on their parental leave, and on their return, they have to stay for a qualifying period to get a return-to-work parental bonus.

For example:

The employer creates a return-to-work bonus based on the employee returning to the workplace and staying for six months to qualify for a $5000 bonus (taxed as extra pay).

There is a benefit for both the employer and the employee.  The employer gets the employee back to work, and the employee receives a bonus after the qualifying period.  This is a straightforward payroll process.

Remember that the bonus will be part of the employee’s gross earnings, impacting KiwiSaver and some of the leave calculations under the Holidays Act.  The key is to keep the bonus payment simple; don’t base it on some sort of calculation.

In conclusion, providing additional payments and leave to an employee to enhance parental leave is an agreed term.  It is up to the business to provide it, so make it work for the business, payroll and the employee.  The focus should be keeping it simple (end to end) so it is easy to administer, clear to all and provides benefits to the employee and a return on investment to the business.  For payroll, being involved in developing any of these types of extra benefits for employees is essential.  If payroll is not involved, issues can undermine the aim of why it was provided in the first instance.

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