Calculate your correct annual leave balance

This article concerns annual leave for New Zealand.

The Holidays Act (website) prescribes how annual leave is to be accrued, valued and consumed.

 

The right way

Essentially, 4 weeks accrues at the end of each completed year of service, and each week is valued at the best of a variety of current and average weekly values at the time it is valued or consumed. The balance of these factors comprise your legal entitlement to annual leave.

When you terminate, you're entitled to be paid your unused annual leave (if any), plus 8% of all earnings since your last anniversary.

Simple right? Yes, if your payroll actually uses weeks as the basis for the calculations (a week is 7 days, or 168 hours of consecutive time).

Our Guide to NZ Leave Rules in a Nutshell (PDF) provides a much broader overview.

 

The wrong way

However, most NZ payroll systems don't base their systems on the requirements of the Holidays Act - instead they adopt methods similar to those used in Australia (% of earnings), or other methods that have been in common (but incorrect) use. For some unknown reason, these payroll developers decided to "convert" a week into equivalents such as hours or days. That's where the problems start, especially if your work pattern varies, you earn overtime or get extra payments for performance and commissions and piece-work. Throw in Parental Leave rules for good measure, and any non-compliant system quickly becomes an unmanageable mess. Maybe your payroll also doesn't provide for recording of days paid each pay period? In that case it can't even provide a correct average daily pay calculation...but I digress.

If your payroll uses such methods as annual hours, a percentage of hours as you go, annual days, or accumulates days each month or as you go, or accumulates 8% of earnings as a $value as you go etc. then it does not comply with the Holidays Act and is either under or overpaying your leave (generally under - our analysis often indicates underpayments of up to $300 per year, per employee).

If you are using SmoothPay (all desktop and online editions) then your leave will probably be correct if your employer is using the compliant leave methods provided (SmoothPay's policy is to not permit processing of payroll for non-compliant leave settings and such use is unsupported).

If you have moved to SmoothPay from a non-compliant payroll system (any that do not base annual leave on weeks or don't use correct valuation methods), then the balances will be, at best, a guess:

  • if the to-date balance is known (days, hours, dollars) then generally 8% is deducted for the year since last anniversary to produce a "balance remaining from last anniversary" (your "legal entitlement"), then that is divided by your typical weekly value (e.g. 40 hours, or 5 days, or $1000 etc.) to determine your balance in weeks
  • if the termination $value is available then an attempt is made to set a balance that produces a similar $amount

Unfortunately, that's only determining a balance based on what the employer's payroll system has recorded - and it's probably incorrect anyway because it hasn't been accrued using Holidays Act rules in the first place. It's all a compromise.

 

Determining your legal balance accurately

So, if you have been paid using such a system, how do you go about accurately determining your balance?

  1. For each 12 months of service, add 4 weeks (for each whole year before 1 April 2007 add 3 weeks)
  2. Then, for every payment for leave consumed, work out what it represents in WEEKS. There are two acceptable methods:
    • if the employee works regular hours, 5 days per week, then it's easy to determine the proportion of a week from the hours of leave paid.
    • if the employee works irregular hours then you need to know two things:
      • Average weekly earnings for the 4 weeks prior to that pay period
      • Average weekly earnings for the 52 weeks prior to that pay period (or from start date if less than 52 weeks ago)
      • then simply divide the amount paid into the the higher of the two averages - this is the proportion of a week that you have been paid for (the hours, days or other methods are completely irrelevant - they are not legal methods of recording and consuming annual leave - only the amount paid can be used to determine the proportion of a week of annual leave consumed).
  3. Take the total of weeks consumed calculated in Step 2 away from the total weeks accrued in Step 1. This is your legal annual leave balance.

SmoothPay does perform leave audit services for a fee (just so you know).

 

But! I want to know how much I'm entitled to right now! Up to date!

You do? OK, but understand this:

  • your only "entitlement" is to the legal balance accumulated above - your employer has no obligation to pay you in advance of that balance
  • Yes, you probably have a growing entitlement towards your next annual leave accrual, however it's not yours by right until you complete your year of service (or you terminate your employment)
  • If you were to leave you'd be entitled to any unused leave, plus 8% of your earnings since your last anniversary. This comprises two separate calculations:
    • Unused leave is valued at the best weekly value (see our "nutshell" guide) - this is classified as "unused annual leave" and is taxed at Extra Pay rates (not your normal tax code)
    • 8% of the value of your unused leave value plus earnings since last anniversary - this is classified as "termination pay" and is taxed at Extra Pay rates (not your normal tax code)

Now that's all clear, your employer may or may not be able to give you a clear indication of your various possible leave values:

  • Balance of leave remaining from your accrued leave (your legal entitlement) in weeks, and possibly what it's currently worth and how your best weekly rate was determined
  • Your termination value (commonly used to provide leave liability for your employer for accounting and management purposes)
  • You could then take the termination value and divide it by your hourly rate if you wanted a rough estimate of how many hours it represents (however it's pretty meaningless if you don't have a job)

 

Taking leave

If your employer allows you to take leave in advance of your entitlement then there are two things you need to be aware of:

  • Your payment must be at the best weekly value available at that time
    • even if you're on a "salary" (which has no legal definition or standing under the Act) you may be entitled to higher pay if your average is greater than your current "salary"
  • Your employer is carrying an extra 8% liability for the time they have agree to give you in advance, because if you leave before your next anniversary they have to pay 8% on the amount you were paid - fairness in an employment relationship goes both ways.

If your payroll provides for taking leave in units other than weeks, then it must accurately determine the proportion of a week being consumed based on the $value paid for the time off:

  • 4 hours might be deemed to be half a day, or 0.1 weeks, however that's not always the case if the employee works an irregular pattern (it's generally fine for 40 hour office people though, but not always)
  • the value paid (e.g. 4 hours @ $25 = $100) divided into the best weekly value determines the proportion of a week that has been paid for (consumed)

 

Finally

No matter how it's spun - if your payroll does not implement annual leave in weeks (not converted into hours or days, or worse, is based on those methods) then it cannot be shown to be compliant with the Holidays Act (because it would have to have weeks as the basis for all these calculations in order to prove the amounts paid and balances meet or exceed the minimum provisions of the Act).

 

Thanks for reading!

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