So, for my first post of 2021, I want to clarify a few points, which from my experience, are not understood or applied correctly in payroll when additional annual holidays are provided by agreement to an employee.

When the Holidays Act was first implemented (1 April 2004), it provided three weeks of annual holidays (entitlement) and 6% (accrual). On 1 April 2007, this changed to four weeks of annual holidays (entitlement) and 8% (accrual).  The four-week annual holiday entitlement and 8% gross earnings are the current law.

Some employers may agree to provide an additional week or weeks of annual leave to an employee. And that additional leave is an agreed term.  The rules of the Holidays Act do not apply to this additional leave, so what that means for payroll is as follows:

  • You don’t have to treat this the same as the minimum entitlement (four-weeks annual holiday) provided after 12 months of continuous employment. As it is an agreed term, it is based on what was agreed.  I would also suggest you code this differently in payroll, so it is separate from the minimum entitlement (not all in the same bucket). If challenged, you can show leave by law (minimum entitlement) and leave by agreement (additional leave).
  • I would suggest you pay it at the employees’ ordinary rate (you don’t have to use the Holidays Act nightmare calculations that fluctuate depending on earnings or work patterns).  The employee is still getting the benefit of additional time off while being paid.
  • It is part of gross earnings for leave as it has been provided as an agreed term.
  • You can put agreed rules around this additional leave such as use it or lose it, and the employee has to perform to get the extra week. The additional week cannot be cashed out while working or on termination. 
  • On termination, the value of any additional annual leave is based on what was agreed (and if agreed to be paid on termination).
  • The additional agreed annual holidays do not change the 8% payable on termination to 10% (a common mistake). The additional week is an agreed term, and the 8% is defined by law. Also, be careful of some payroll systems that seem to do this automatically, you decide not the payroll system!
  • Providing additional annual leave that is allowed to be paid out on termination (agreed) does not extend from the termination date forward capturing any public holidays as the minimum annual holiday entitlement does. 
  • The additional leave if agreed to be paid out, is part of the 8% on termination.
  • If agreed to be paid out, I would suggest this is shown on a final payslip as a separate line, so the employee clearly sees that it has been paid and at what rate and that it has also been included in the 8% on termination.

Now a couple of other things. If you (the employer) want to pay leave based on the Holidays Act’s calculations or even pay 10% instead of 8%, as this is provided as additional leave, you can do what you want as it is better than the Act.  I see it stated by payroll that the reason for paying 10% is because it is easier to manage in payroll.  I totally disagree. If the business wants to provide this to the employee, then it is a business decision, and payroll acts on that instruction. Payroll should not create an additional cost that the business has not agreed to as that is not our role. 

What I have stated for an additional agreed annual holiday can also be applied to any other leave types provided under the Holidays Act. Just not the difference being 8% and 10% as there is no dollar accrual, only entitlement provided for the other types of leave under the Act.

So to conclude, do not think of additional agreed annual holidays as the same as the minimum entitlement. Look at what has been agreed and how that needs to be applied in payroll.  And of course, if the employer wants to do better, they can do so to the employee’s benefit.

NZPPA supporting NZ payroll since 2007

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