Leave Without Pay - Annual Holidays – Your Payroll New Zealand

When taking leave without pay (LWOP) there are two options as to how an employee’s annual holidays is managed thereafter, as agreed between the employer and employee.

Contained in this article are the following topics:

Leave without pay system default categories
Employee settings
Pay run / Annual holidays calculations
Leave calculations context panel
Reports

If an employee takes a continuous period of annual holidays without pay for more than one week (not including daily based pay e.g. unpaid sick or unpaid bereavement leave):

their anniversary date for entitlement to annual holidays moves out by the amount of unpaid leave taken (not including the first week). This means the employee becomes entitled to their annual holidays later each year from then on; OR
the employer can agree with the employee that their anniversary date for annual holidays entitlement won’t change. If they agree to this, the employer must also reduce the divisor for calculating average weekly earnings for annual holidays by the number of weeks or part weeks greater than one week that the employee was on leave without pay.

If the employee takes eg two periods of LWOP, each being one week in duration, this does not have any impact on the anniversary date. The period of LWOP greater than one week must be in one continuous period.

NB: Unpaid annual holidays only occurs if the employee takes more than 1 week of LWOP annual holidays. It does not apply if the employee takes LWOP annual holidays of 1 week or less.

Leave without pay system default categories

There are 2 system default leave categories to cater for employees taking leave without pay. These are:

Leave without pay - annual holidays;
Leave without pay - excluding annual holidays

Leave without pay - annual holidays

The system default settings for 'Leave without pay - annual holidays is:

Leave balance: Not tracked
Unit type: Weeks
Payment setup: Don't pay for the leave taken

Leave without pay - (excluding annual holidays)

The system default settings for 'Leave without pay - (excluding annual holidays) is:

Leave balance: Not tracked
Unit type: Hours
Payment setup: Don't pay for the leave taken

These leave categories also flow through to the leave allowance templates and are linked to the relevant work types.

NB: These leave categories will appear in leave allowance templates, however they are set to disabled. Existing businesses (i.e. those businesses created before 1/9/2021) will need to check the settings and make applicable changes such as disabling the old 'Leave without pay' leave category and enable the new 'Leave without pay' leave categories.

Employee settings

Within the Employee file > Leave allowance screen there is a field called ‘Unpaid annual holidays’. The default setting is 'Move anniversary date', and the default date is the employee's start date:

This gives you the ability to select the unpaid annual holiday options of:

Move anniversary date: the system will automatically calculate the employee’s annual holidays entitlement/anniversary date out by the number of weeks or part weeks greater than one week that the employee was on 'Leave without pay - annual holidays'.
Reduce AWE divisor: the system will automatically calculate and reduce the AWE divisor by the number of weeks or part weeks greater than one week that the employee was on 'Leave without pay - annual holidays'.

NB: If you select the unpaid annual holidays option at the employee level, this will override the unpaid annual holiday selection at the business level for that employee.

Pay run / Annual holidays calculations

Where LWOP - annual holidays is taken, the unpaid annual holidays option of 'Reduce AWE divisor

In the next relevant pay run where the employee takes annual holidays, the system will automatically calculate and reduce the AWE divisor by the number of weeks, or part weeks greater than one week that the employee was on 'Leave without pay - annual holidays'.

For example, AWE is normally calculated using the divisor of 52 weeks. Where employee A takes 3 consecutive weeks LWOP annual holidays, and it is agreed between the employer and employee that the annual holidays entitlement date can remain as per the employees start date, the AWE divisor must be reduced by 2 weeks using 50 weeks instead of the 52 weeks. This is because the 3 weeks of LWOP is taken, excluding the week 1 LWOP rule, leaving 2 weeks remaining with a divisor of 52 weeks minus the 2 weeks. This leaves 50 weeks as the divisor to calculate AWE.

Again, if the employee takes a further 2 weeks unpaid leave within the same anniversary period, the next divisor calculation will be at 49 weeks (50 weeks previous AWE divisor, with the further 2 weeks leave (excluding the 1 week), then 49 weeks will be the new AWE divisor).

NB: This reduced divisor calculation applies for that relevant anniversary leave year. Once the employee reaches their next anniversary date then the normal AWE of 52 weeks calculation will apply.

The AWE calculation in the context panel will display the reduced divisor i.e. using the employee’s gross earnings over the 12 months just before the end of the last pay run before the annual holiday is taken, divided by <reduced divisor>:

Existing businesses (i.e. those businesses created before 1/9/2021) - where an existing employee has taken LWOP annual holidays and reduce AWE divisor is to be applied:

1) ensure the unpaid annual holidays employee setting is 'Reduce AWE divisor'. Save.

2) process an adhoc pay run with the 'Leave without pay - annual holidays' leave category for the number of weeks taken. Finalise pay run.

3) the next time the employee takes annual holidays, the AWE divisor will be reduced by the number of weeks or part weeks greater than one week that the employee was on 'Leave without pay - annual holidays'.

Where LWOP - annual holidays is taken, the unpaid annual holidays option of 'Move anniversary date

The system will automatically calculate the employee’s annual holidays entitlement/anniversary date out by the number of weeks or part weeks greater than one week that the employee was on 'Leave without pay - annual holidays'.

Example 1

Oliver's start date is 1 February. In November the same year he asked if he could take leave without pay for two weeks (10 working days for Oliver) and an additional two days as he wasn’t entitled to any annual holidays yet. The employer agreed but explained that it would affect Oliver’s entitlement for annual holidays. Oliver said that was ok with him and he took the leave without pay. The employer moved Oliver’s anniversary for annual holidays entitlement out by one week and two days to 10 February (the first week of leave without pay doesn’t affect annual holidays entitlement). If the employee’s unpaid annual holidays setting is ‘Move anniversary date’, there is no change in the annual holidays AWE calculation, it remains the same using gross earnings over the 12 months, prior to the end of the last payroll period before the annual holiday is taken, divided by 52 weeks. In this scenario, the annual holidays entitlement of 4 weeks will kick in the relevant pay run period of which the new anniversary date falls within. This will also occur every 12 months thereafter unless of course the anniversary date keeps moving out due to LWOP.

Example 2

Employee Fievel Flush start date is 01/07/2020, which means their 4 week annual holidays entitlement would kick in, in the relevant pay run which 1st of July pay period falls within.

However this employee has taken leave without pay - annual holidays of 7 weeks. it is agreed between the employer and employee that their anniversary date for entitlement to annual holidays moves out by the amount of unpaid leave taken (not including the first week), being 6 weeks. This means the employee becomes entitled to their annual holidays later each year from then on which will be 12th of August (6 weeks from 1/07/2021).

Therefore, in the July pay run, the annual holidays has not kicked in as per the employee's start date/ original anniversary date of 1 July:

Instead, the employee's annual holidays entitlement has kicked in within August's pay run, as the anniversary date is now 12 August:

NB: There is no change to daily based leave (sick leave, DVL) calculations therefore ADP calculations remain the same. This only impacts annual holiday calculations.

Existing businesses (i.e. those businesses created before 1/9/2021) - where an existing employee has taken LWOP annual holidays and move anniversary date is to be applied:

1) go to the 'Unpaid annual holidays' employee setting, ensure the setting is 'Move anniversary date'.

2) manually change the move anniversary date.

1) ensure the unpaid annual holidays employee setting is 'Move anniversary date'. Save.

2) process an adhoc pay run with the 'Leave without pay - annual holidays' leave category for the number of weeks taken. Finalise pay run.

3) check the the 'Unpaid annual holidays' setting, the date should have moved out by the number of weeks or part weeks greater than one week that the employee was on 'Leave without pay - annual holidays'. The employee's annual holidays entitlement will then kick in from the specified anniversary date.

Leave calculations context panel

If you click on the 'i' next to the 'Annual Holidays Taken' earnings line, the leave calculations context panel will display:

The context panel will detail the following 'Reduced Divisor' information:

Unpaid annual holidays taken: The number of weeks of which the leave without pay- annual holidays was taken. Clicking on the number of weeks will take the user to the employee's leave balance screen. If you click on the 'Leave without pay - annual holidays' leave category it will list when this leave type was taken.
AWE divisor adjustment: The number of weeks used to reduce the AWE divisor.
Note: This reduced divisor calculation applies for that relevant anniversary leave year. Once the employee reaches their next anniversary date then the normal AWE of 52 weeks calculation will apply.
Reduced AWE divisor used: This is the reduced divisor for calculating average weekly earnings for annual holidays. The divisor is reduced by the number of weeks or part weeks greater than one week, that the employee was on leave without pay.

Using the above example, AWE is normally calculated using the divisor of 52 weeks. Employee Isaac Indigo's start date is 1/06/2020. Isaac takes 1 week LWOP annual holidays in pay run period ending 30/09/2021. As this LWOP is not greater than 1 week, the AWE divisor does not need to be reduced.

Isaac then takes a consecutive 3 weeks LWOP annual holidays in monthly pay run period ending 30/11/2021, as the LWOP annual holidays taken is greater than 1 week, it is agreed between the employer and employee that the annual holidays entitlement date can remain as per the employees start date, therefore the AWE divisor must be reduced by 2 weeks using 50 weeks instead of the 52 weeks. This is because the 3 weeks of LWOP annual holidays taken is greater than 1 week, excluding the week 1 LWOP rule, 2 week remains, divisor of 52 weeks minus the 2 weeks is 50 weeks as the divisor to calculate AWE going forward for any paid annual holidays taken:

If an employee takes more consecutive weeks of LWOP annual holidays which is greater than 1 week, then the AWE divisor will continue to be reduced. For example, continuing on from the above example for employee Isaac Indigo, Isaac takes another 2 weeks of LWOP annual holidays in monthly pay run ending 31/12/2021. Therefore the AWE divisor is to be reduced a further 1 week (i.e. 2 weeks LWOP, excluding the 1 week LWOP rule is 1 week), so a divisor of 49 weeks will be used to calculate AWE going forward for any paid annual holidays taken.

Reports

Leave balance report

When the setting is ‘Move anniversary date’:

the 4 weeks annual holiday entitlement will kick in on the new anniversary date.
the annual holidays leave value will continue using the normal, greater of AWE/OWP calculation as it currently does.

When the setting is ‘Reduce AWE divisor':

the annual holidays entitlement of 4 weeks will start from the employee’s original anniversary date/start date;
the annual holidays leave value will use the reduced AWE divisor calculation for the AWE component to determine the greater of AWE/OWP calculation.

Leave liability report