Calculating Annual Leave Rate

Outline

• The legal reason for higher leave pay (Ordinary vs. Average Weekly Earnings).
• Example 1: How bonuses can affect the leave rate.
• Example 2: How to calculate leave rates for employees with variable hours.
• Special Case: The different calculation rules after returning from parental leave.

A question that is frequently asked is why employees are paid a higher amount when they take annual leave. As per Section 21 of the Holidays Act, employees must be paid at a rate that is the greater of ordinary weekly pay or average weekly earnings.

Source: https://www.legislation.govt.nz/act/public/2003/0129/latest/DLM236883.html

Let’s take a look at what this means.

Example 1

Jane is an office admin and works 40 hours per week at $30 per hour.

Jane’s ordinary weekly pay is $30 X 40 = $1,200

If Jane receives no other regular payments such as shift allowances, commissions, regular overtime etc, then her average weekly earnings is also $1,200 per week. However, Jane receives a quarterly bonus of $1,000 and as a result, her average weekly earnings is increased.

($1,200 X52) + ($1,000X4) = $66,400 per year.

$66,400 / 52 weeks = $1276.923 per week.

So Jane’s average weekly earnings is higher than her ordinary weekly pay which means when she takes a week of annual leave, she will be paid $1,276.923.

If Jane works 5 days a week and decides to only take one day of annual leave then she will be paid $255.38 for the day.

Example 2

Joe is a builder and works varying hours every week. He is also paid $30 per hour.

As Joe does not have set hours every week, we need to take an average weekly of his last four weeks. This is referred to as the ‘Ordinary weekly pay formula’.

Week 1	$1,200
Week 2	$1,350
Week 3	$1,500
Week 4	$1,650
Total	$5,700
Average per week	$1,425

Joe’s four week average is then compared to his 52 week average and we must pay the higher of the two rates. If Joe only takes one day of annual leave, we need to divide the higher rate by the number of days he would normally work in a week and pay him that daily rate.

Taking annual leave after parental leave

Jenny also works 40 hours per week at $30 per hour. She has been on parental leave for 6 months and needs to take a week of annual leave shortly after returning to work.

Ordinary weekly pay = 40 X $30 = $1,200.

Average weekly earnings = ($1,200 X 26) / 52 = $600.

As per Section 42 of the Parental Leave and Employment Protection Act, Jenny’s employer only needs to pay using the average weekly earnings calculation in the 12 months after Jenny returns to work. So in this case, Jenny will only be paid $600 for her week of annual leave. Note: the more Jenny works, the more her average weekly earnings will increase. 

Source: https://www.legislation.govt.nz/act/public/1987/0129/latest/DLM120699.html

Please note, if Jenny has entitled annual leave before she goes on parental leave, this is still calculated at the higher of ordinary weekly pay vs average weekly earnings. Jenny’s employer can also opt to pay Jenny higher should they wish to.

For more information on the effect of parental leave on annual leave rate, please refer to the Employment NZ website: https://www.employment.govt.nz/leave-and-holidays/parental-leave/taking-parental-leave/what-happens-while-on-parental-leave-and-your-return