One of the main issues with the Holidays Act is whether decisions on payments made to an employee have been included or excluded in the correct period of gross earnings related to the day or week that is then used in the Act’s various leave calculations. It is the lack of understanding on how these payments made to the employee are applied to calculations required under the Act, which is causing the majority of the underpayments I see when auditing payroll systems for NZPPA.
When you look at the 6-year liability period and the number of potential employees affected, as well as the difference between what was paid and what should have been paid, then the true scale of the problem becomes obvious.
In this post I want to discuss why different payments need to be clearly defined in regard to a day or week and the gross earnings period it should be applied to.
To start with let’s quickly review the calculations found under the Act (these are summaries so please refer to the Act for full explanations):
- Average Weekly Earnings (AWE): 52 weeks / 52
- Ordinary Weekly Pay (OWP) Section 8(1): agreed rate for the week
- Ordinary Weekly Pay (OWP) Section 8(2): 4-week average when the week cannot be defined under Section 8(1)
- 8% of gross before and after 12 months when the employee terminates
- Ordinary Weekly Pay (OWP) Section 8(3): Fixed rate used by agreement but is seldom used
- Relevant daily pay (RDP): What the employee would have been paid on the day
- Average Daily Pay (ADP): If RDP cannot be determined then a 52-week average can be used divided by days.
If you have not heard of the term BAPS before it is the acronym for bereavement, alternative, public and sick leave.
So, let’s look at a range of different payments and why they are considered to be part of a day or week or not and what period of gross earnings and calculation under the Holidays Act they belong to.
- Annual bonus paid annually
As the title suggests, an annual bonus is a payment made once a year annually. Now for this example please take it that this bonus is an agreed payment included in the employee’s employment agreement, so it would be part of the employee’s gross earnings for leave.
So, is the annual bonus part of a day or week?
- Well, no as it is not pay that is received every day or every week.
Does the annual bonus need to be included in any period of gross earnings for any of the calculations under the Act?
- As it is a taxable agreed annual payment for annual holidays it would be part of AWE but not OWP because it is not part of the agreed week or the 4-week average.
- For BAPS leave if the day cannot be defined, ADP must be used and this includes the bonus in the 52-week gross. RDP does not include the bonus as you don’t get an annual bonus every day!
Please note: the wording in the employment agreement needs to be checked to ensure it does not state that the bonus is part of a day or week. If it does it may mean the bonus payment has to be broken down. I have only seen this once.
- Weekly taxable car allowance
As the title suggests this is a payment that relates to a week but not a day as it is paid weekly.
- So, it would be part of the AWE for annual holidays as it is part of the 52-week gross earnings and it is part of the week for OWP Section 8 (1 and 2).
- As stated, it is not a payment paid on the day so it would not be part of RDP, but if the day could not be determined it would be part of ADP as that is a 52-week gross earnings period.
- Shift allowance paid per shift day worked
As the title suggests, this payment is about the day as for every shift day worked the employee receives a shift allowance.
- So, it would be part of AWE and OWP as it is part of the week.
- For BAPS if RDP can be determined it would be part of the day and if the day cannot be defined it would also be part of ADP.
So, in conclusion it can be seen in the three examples used above that each payment made to an employee needs to be looked at in terms of what type of payment it is and how it relates to a day, week and period of gross earnings. You have to also look at how the payment is referred to in the employee’s employment agreement and what the history of the payment has been as that may define how it is to be applied going forward. It is important you spend time on understanding where payments made to an employee sit with the Holidays Act. Think of it as the foundation that everything else sits on, get this wrong and everything sitting on top is also wrong. Get it right and you have a good foundation to base everything else on.
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