As part of the Holidays Amendment 2010, there is a provision to allow an employee to have up to 1 week of current annual holiday entitlement paid out.
The main points are:
- An employee has the right to request their employer to pay out a portion of the employee's entitlement to annual holidays
- A request must be in writing and may be made on 1 or more separate occasions until maximum of 1 week of employee's annual entitlement is paid out in each entitlement year.
The paid out annual holiday must come from the entitlement year defined as:
- A period of 12 months continuous employment beginning on the anniversary of the employee's employment; and
- Includes a period of 12 months continuous employment.
When cashing out annual holidays, it is based on current entitlement for the current entitlement year i.e. available annual holidays entitlements for the current entitlement year. It cannot be taken out of previous years annual entitlement or future entitlements/accural amounts.
Example employee's anniversary date is 1 September (1/9), 4 weeks annual holidays kicks in on 1/9/19, annual holidays cash out of up to 1 week can be requested using the 1/9/19 entitlement. The previous year entitlement in 1/9/18 cannot be used, the future years yet to accrue in 1/9/20 cannot be used.
The below are the steps on how to cash out annual holidays using annual holidays entitlement (ie. annual holidays available balance).
How to cash out annual holidays using annual holiday entitlement
Cashed up annual holiday is a lump sum payment and is treated as an 'extra pay" with PAYE tax deducted accordingly.
Create a new pay run, find the employee that wants to cash out their leave - click on their name to expand the pay run record.
Apply the leave to the employee's leave balance to deduct the number of days/ hours/ week for the annual holidays cash out. To do this click on "Actions > Adjust Leave"
This will create a "Leave Adjustments" line. You will then need to fill out the relevant fields, (see image below). You will need to select leave category Annual Holidays, and in the unit type of Days/Hours/Week field (depending on your selecting unit type set for your annual holiday leave type) you will need to enter in a minus figure to correspond to the amount being "Cashed Out", (see in the image below we are cashing out 1 week) and make sure you untick the Apply Earnings Rules box. Then save.
Once the Leave Adjustment has been created we now need to insert an earnings line to pay the employee. Using the "Actions" button again, select "Add Lump Sum Payment", (see image below).
This will create an earnings line that you will need to fill in according to the amount of leave that is being "cashed out". You will see that an "Other Earnings" line has been created. You will then need to select the "Extra Pay (Discretionary Payment - excl AWE)" pay category.
Then, the corresponding units (in this example, 1 week of annual holiday is cashed out, employee works 40 hours a week, so 40 units has been entered in the units field) and the rate - remember the rate will need to be the greater of the average weekly earnings (AWE) or ordinary weekly pay (OWP) of either the OWP agreed rate or OWP 4 weekly formula (as set in the employee's pay rate screen). Then press save.
If you check the employee's leave balance, the annual holidays balance is deducted by the corresponding leave hours/days/week amount taken as part of the annual holiday cash out.
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