The Holidays Act can sometimes be a bit overwhelming for employers, so we've put together this brief guide to the absolute basics of how holidays work according to the Holidays Act.
Accruing, consuming and valuing Annual Leave
For each whole year of service, 4 weeks is accrued (once per year, not per pay or in hours or by $value). The balance of these accruals is the employee's Entitlement.
When leave is used, it is paid according to the following rules as per the Holidays Act:
The employee will be paid the better of the average weekly earnings or the ordinary weekly pay each time they take a period of annual leave.
Average weekly earnings is calculated per week as 1/52 of the earnings over the previous 52 weeks, with certain earnings being excluded.
Ordinary weekly pay is the pay that the employee would normally have received in a week - typically the normal pay rate or salary, or any other regular payments. Where earnings are too irregular to determine ordinary weekly pay a four week average may be used.
Therefore, each week (or portion of a week) of annual leave taken is valued at the higher of:
contract rate (per contract settings, or if irregular then average for the last 4 weeks)
average for the last 52 weeks
agreed weekly value
Any portion of a week is similarly valued. For example, 2 hours @ ordinary pay rate is measured against the best rate above and that determines exactly how much leave has actually been consumed (in weeks), or 1 day would typically be 1/5th of the best value, and so on.
Any leave taken in advance (i.e. leave that has not yet become ‘entitled’ is entirely at the employer's discretion. The same rules for calculating the payment apply.
An employee may request a cash-up of up to 1 week of annual leave remaining in their Entitlement in each year of service.
Click here for a brief summary on MBIE’s website
Annual leave that accrued whilst on Parental Leave
Employees continue to receive 4 weeks annual leave on each anniversary that occurs between the leave start date and 12 months following return to work.
In the event that an employee does not return to work from Parental Leave, their last day of employment is considered to be the last day of work before going on parental leave. Any entitlements that occurred during the period of Parental Leave do not apply.
Payment rules for such entitlements are subject to the Parental Leave and Employment Protection Act 1987, not the Holidays Act, and are valued using the average weekly pay only (52-week average value). The best of ordinary weekly pay or average weekly earnings does not apply.
More info about Parental Leave is available here
Sick leave is gained at 10 days per year, with the first entitlement arising after 6 months service then every 12 months after that (incl. casual workers who meet the minimum hours test, more than 10 hours per week over 6 months - which, incidentally, means you should probably reassess casual contracts!).
When daily leave types, including sick, public holiday etc. are paid you must use relevant daily pay rules:
If you know how much the employee would have earned (e.g. 8 hours @ $27) then pay that amount (you must include any likely allowances, overtime, bonus/commission etc. paid regularly), otherwise
you must pay average daily pay (based on earnings for last 52 weeks / days paid - which you must ensure have been recorded correctly per pay)
There is no ‘best of’ calculation here: you simply pay the relevant daily pay unless you cannot determine it, in which case you use the average daily pay.
A "salary" agreement offers no protection from the provisions of the Holidays Act.
For example: 1 week of annual leave must still be paid at the greater of the weekly values (see above). It could be that the employee took a salary reduction, or earned extra in the previous 12 months, so the 52-week average would likely be higher than the current salary. Payment for that in turn would cause the averages to remain higher for the following 52 weeks… and so on until such time as the current contract value exceeds the average.
NOTE: It is NOT correct to record a salary pay as 1 unit @ salary value: Employers must comply with S4(b)(1) of the Employment Relations Act which requires correct recording of hours.
What do the various balances on my payslip mean?
Your legal entitlement
Annual leave accrues at a rate of 4 weeks, once per year, on your anniversary of service (i.e. one year after your start date).
The only relevant value, accurate in every case, is the balance remaining from your entitled leave (in weeks. This is your legal entitlement to leave.
You do not have any entitlement to take leave in advance without your employer's agreement, though if you have a compulsory annual closedown it is likely that your employer will pay you some or all of the time off in advance.
What about my estimated leave balance?
An estimate is not an entitlement - it's just an educated guess based on a variety of factors.
Anything other than your legal entitlement is subject to you understanding what the estimated balance means and how it was calculated.
Here is an example from a payslip:
[Leave Balances are as at the START of this pay period]
Annual leave accrued: 3.000 Weeks, next accrual of 4 Weeks is due 02-Dec-2023 [this is your legal entitlement at the start of this pay period]
Estimated annual leave to date 58.976 hours, Estimated annual leave value to date $1415.43 [THIS IS NOT AN ENTITLEMENT]
Estimated annual leave to date 5.696 weeks or 11.392 days [THIS IS NOT AN ENTITLEMENT]
NOTE: Taking leave in advance is solely at the discretion of your employer.
Leave balances are as at the start of this pay period
If you were to ask your employer what your leave balance is at any point in time they will tell you your current balance. Any leave you take will come off that balance. If they look up your balance it will tell them your current balance. So we show the leave balance as at the start of the pay period. If, when your pay period has been completed, you used or accrued some leave then your current balance and your next payslip will show the updated balance.
Annual leave accrued
This shows you your legal entitlement as at the start of the pay period and when your next accrual of 4 weeks will occur.
Estimated annual leave to date in hours
This is calculated as follows:
termination value / your nominal hourly rate = estimated hours
It is important to note that termination values are recalculated every time they are presented, and are subject to change every week. This is most especially true where you have an irregular hours contract, as Ordinary weekly earnings are deemed to be the average for the last 4 weeks, and compared against the 52-week average (the best of these is used). A regular employee uses their contract values for OWP vs AWE. Fluctuations in 4-week averages are common for staff working irregular hours and obviously have an effect on termination value calculations.
The "hours" are calculated by dividing the employee's contract hourly rate into the Termination value. This is not an entitlement and it's not really leave at all - it's just an indicator.
Estimated annual leave to date in weeks and days
This is calculated as follows:
balance of leave remaining from last anniversary (your legal entitlement) + a pro-rata portion of 4 weeks, calculated daily, since your last anniversary = estimated weeks
estimated weeks / your nominal days per week = estimated days