Author: David Jenkins, NZPPA CEO
|We are getting a lot of questions about this – as there still seems to be a lot of misunderstanding between a leave rate and an hourly rate.
I get asked this question all the time: if an employee takes leave and the rate for leave is less than their hourly rate, do we top them up to their hourly rate? And the answer from me would be NO!
In this short post, I want to explain the difference (and there is a difference) between an hourly rate and a leave rate (that comes out of the calculations undertaken from the Holidays Act).
So, what is the difference?
Easy, and this can apply to a waged or salaried employee when you break down their wage or salary into an hourly, daily, or even weekly rate (I will use the hourly rate in this post). An employee’s hourly rate can be agreed as a set rate or as an agreed annual, monthly or weekly amount and then broken down to an hourly rate based on the agreed hours of work. The key to all of this is that it is an agreed rate. Except if you are dealing with the minimum wage, which creates a minimum hourly rate, and the employee cannot be paid any less.
So, an hourly rate is an agreed or determined rate based on what has been included in the employee’s employment agreement.
A leave rate is based on the leave situation being calculated under the Holidays Act. So, for annual holidays or FBAPS leave, there are also different calculations to determine the annual holiday leave rate (the higher of AWE and OWP – there are three different ways this can be done). And for FBAPS (RDP is the default, and if the day cannot be determined, then ADP). So, based on the leave situation and the calculation that needs to be used, a leave rate is created as an outcome.
Because the leave rate is based on a period of gross earnings that may have payments made to the employee that are included or excluded from that gross earnings period, along with other factors such as unpaid leave, ACC, etc., it can provide a leave rate that is lower than what the employee receives when working their regular hours. This is where the question at the start of this post comes from because the lower rate is seen as incorrect, but no, it is correct as it is a leave rate and not the hourly rate.
I have mentioned the agreed rate many times. By agreement, the employer could have decided that the employee would not be paid less than their hourly rate when they take leave (but why do this?). However, as an employer, you can always do better than the law requires.
Finally, I will mention that most of the time, the leave rate will be the same or higher than the hourly rate. This is because an employee may work the same hours every week and get paid the same, or the employee works overtime and receives other payments that inflate the gross and the leave rate.
So, in conclusion, start to think about the employee’s hourly rate and the leave rate created from the Holidays Act calculations as two different rates that do not require topping up if the leave rate is lower than the employee’s hourly rate. It’s probably a good idea to get your head around this and be able to explain it if needed to an employee. Employees will often ask questions when they go on leave and cannot understand why they are getting less than they normally do when working.
NZPPA supporting NZ payroll since 2007!