Advice

Holiday Pay

Annual holidays and payment rates.

Calculating annual holiday entitlements and payment rates can be difficult when your employees hours and days of work vary, this information will explain the entitlements and payment calculations to use in these situations. An efficient payroll system is very valuable when it comes to ensuring annual holidays are calculated correctly and remove the need for manual calculations.

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If you are having difficulty with a particular scenario please contact our Advice Service to discuss in more depth on 0800 472 472 (1800 128 086 from Australia).


Annual Holiday entitlement

All your employees are entitled to a minimum four weeks’ paid holidays per year. Employees become entitled to annual holidays after 12 months of continuous employment and then after every following 12 months of employment.

You are required to determine an employee’s entitlement to annual holidays based on what genuinely constitutes a week for each employee. In some cases, it will be clear what a week is, as this will be specified in the employment agreement or your employee will work a fairly regular number of days/hours each week.

Where your employees hours and days vary, then what a genuine working week is for that employee can only be determined at the time the annual holidays are taken. You and your employee should first try to work out whether there is a pattern to the employee’s work that could be used as the basis for defining what a working week is for the employee. If this is not possible, one option is to define a week as an average number of days/hours determined over a suitable number of weeks prior to the holidays being taken.


Payment for annual holidays

Payment for annual holidays is generally at the rate of the greater of:

  • the ordinary weekly pay at the start of the holiday or
  • the employee’s average weekly earnings for the 12-month period just before the end of the pay period before the annual holiday is taken.

Ordinary weekly pay

Ordinary weekly pay is everything an employee is normally paid weekly under the employment agreement. For many employees, ordinary weekly pay is clear because they are paid the same amount each week. If it isn’t possible to work out ordinary weekly pay, use the following formula:

  • go to the end of the last regular pay period before the holiday
  • from that date, go back: – four calendar weeks, or; – if the pay period is longer than four weeks, go back the length of the pay period
  • work out the gross earnings for that period
  • deduct from the gross earnings any payments that are irregular or the employer doesn’t have to pay, and
  • divide the answer by 4.

Average weekly earnings

Average weekly earnings is the employee’s gross earnings over the 12 months just before the end of the last payroll period before the annual holiday is taken, divided by 52.

Work out both the ordinary weekly pay and the average weekly pay at the commencement of every annual holiday, the higher of the two is the payment rate to be used.


Working out annual holidays in an employee’s final pay

At the end of an employee’s employment, there are two ways to calculate payment for annual holidays.


Employment ends before they have completed their first 12 months of service

Your employee is entitled to a payment for annual holidays of 8% of gross earnings during the employment. The dollar value of this entitlement is reduced by any payment for annual holidays taken in advance during the employment or by any payment for annual holidays on a pay-as-you-go basis.


Employment ends after becoming entitled to annual holidays

There are two amounts to be calculated, which are added together to get the total annual holiday payment to be made.

  • The first amount to be calculated is the greater of ordinary weekly pay or average weekly earnings for the annual holidays the employee has become entitled to, as if the holidays were being taken at the end of the employment. The 12 months prior to leaving are used to establish average weekly earnings.
  • The second amount to be calculated is annual holiday pay for the period since the employee last became entitled to holidays. This is calculated at 8% of the employee’s gross earnings since their last entitlement. Remove any annual leave already taken.

Example: Calculation of final payment for annual holidays

Stacey has been employed for one year and six months. She leaves employment on 12 May, and the last date she became entitled to annual holidays was 12 November. Stacey has already used one week of annual holidays, so has three weeks remaining at the end of her employment. In relation to annual holidays, Stacey is entitled to payment for: 

  • the three weeks of annual holiday remaining from her four week entitlement from November at the rate of the greater of average weekly earnings or ordinary weekly pay, plus
  • 8% of gross earnings for the six month period between 12 November and 12 May. Gross earnings for the 8% calculation includes the holiday pay calculated above for Stacey’s three weeks of unused holidays.



Published in the 10th August 2020 edition of Talking Shop.



And as always, if you have any specific issues in this area or any other, our Advice Service is here to help and can be contacted by email or phone 0800 472 472 (1800 128 086 from Australia).


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