When terminating an employee in the pay run all unused annual holidays, annual holidays payment - parental leave, alternative leave and holiday pay 8% will automatically be paid out. The only exception here would be:
- if the leave category setting was manually changed and "Exclude from termination payout" was selected; or
- the employee had no entitlement/leave balance for any one of those leave types (for eg employees with pay-as-you-go provisions).
An employee must also be paid 8% of their gross earnings since their last entitlement date for annual holidays (or their start date if they have been employed for less than 12 months). This article will explain how the 8% Termination Holiday Pay component has been calculated and what has been included in determining the final figure.
Please note that any reference to gross earnings in this article refers to any earnings paid to the employee using:
- pay categories where the "Exclude From Average Earnings" settings is NOT ticked; or
- system based pay categories that are NOT excluded from average earnings.
To learn more about pay category settings, click here.
Annual holidays termination calculation context panel
Once an employee who is entitled to annual holidays is terminated, the following earnings line will appear under the "Other Earnings" section of their pay:
This payment relates to the 8% gross earnings component only. Any unused holiday pay or annual holidays - parental leave rules (if the employee does not have annual holidays relating to parental leave then the row will not display) entitlement will appear in a separate earnings line under the "Hourly Earnings" section of the employee's pay.
When clicking on the "?" icon in the earnings line, a context panel will appear detailing all the components that make up the final amount detailed in the pay run. We will now run through each item:
Termination Date: this is the date manually entered in the 'Terminate Employee' dialog that appears after you click on Actions > Terminate Employee.
Last annual holiday entitlement date: by default, this is the date the employee last had their leave anniversary. For employees with less than 12 months service it will show as 'n/a' because they will not have reached their anniversary date/leave entitlement date before terminating, therefore no entitlement date is required.
Annual Holidays Entitlement: this is the number of annual holiday hours the employee is entitled to. This annual holiday entitlement is not related parental leave .
Annual holidays - parental leave rules: Where the employee has annual holidays relating to parental leave, a separate line item 'Annual holidays payment - Parental leave' will display. These entitlements are paid at AWE rate only. If the employee does not have annual holidays relating to parental leave then the row will not display.
Employee Standard Weekly Hours: the number of hours worked by the employee as specified in the employee's Pay Run Defaults screen. If the employee's hours are specified as '0' we will use a default value that is calculated using the employee's hours per day value x 5 days.
Notional Annual Holiday Extension Period: on termination of employment, the employee’s end date is notionally extended by any unused annual holiday entitlement, and any public holidays falling during that period must be dealt with as if the employee was still employed. This is what we have termed as the Notional Annual Holiday Extension Period. This period is calculated by dividing the Annual Holidays Entitlement by the Employee Standard Weekly Hours.
Notional Annual Holiday Entitlement Date: this date is determined by adding the Notional Annual Holiday Extension Period to the employee's Termination Date.
Using the above screenshot as an example.
Jean Paul works 5 days a week, Monday to Friday. At their termination date of 13 December 2019 (which in this example falls on a Friday) they have 2.20 weeks (11 days) remaining of annual holiday entitlement. If these 11 days are added on to their termination date this takes them to 30 December. Two public holidays fall within this period, (25 and 26 December), so these must be treated and paid as public holidays.
The 2 days’ annual holidays which would have covered the 25 and 26 December are then added on to the end of the period. This extended period includes the public holidays 1 and 2 January. These public holidays are also treated and paid as public holidays.
1 and 2 January are now treated as public holidays, this means two annual holiday days are not being used. These two annual holiday days are then added on to the end of the period, creating a new extended period ending on 3 January 2020.
Annual Holidays Payment: any annual holidays that the employee is entitled to but has not taken (or been paid out) must be paid out on termination of employment. This payment is the $ value of the employee's Annual Holidays Entitlement, calculated using the AWE/OWP formula. If an employee had taken leave in advance via a pay run in this platform and as a result has a negative leave balance, the amount displayed here will be the negative value of the leave that was paid in advance. N.B. If the employee has a negative leave balance in their opening balance or via a leave adjustment, the system will calculate the negative leave $ amount based on the employee's OWP calculation method.
Public Holidays Payment: this payment is determined by adding the employee's unused annual holidays to the end of the employment date and there is a public holiday that falls on the employee's working day as if they were still employed. This payment is calculated using the RDP/ADP formula. For the system to correctly calculate this, ensure the regional anniversary day is configured for each location.
Alternative Holiday Payment: if an employee has alternative holidays earned from working on a public holiday that have not been taken or paid out, they are to be paid out at the end of employment. This payment is calculated based on the number of Alternative Holiday hours available to the employee x their hourly rate. If an employee had taken leave in advance and as a result has a negative leave balance, the amount displayed here will be the negative value of the leave paid in advance. If an employee had taken leave in advance via a pay run in this platform and as a result has a negative leave balance, the amount displayed here will be the negative value of the leave that was paid in advance. N.B. If the employee has a negative leave balance in their opening balance or via a leave adjustment, the system will calculate the negative leave $ amount based on the employee's RDP/ADP calculation method.
Historic Gross Earnings: information on the purpose of historic gross earnings can be found here. In summary, if a business has transferred over from a previous payroll system to this payroll system we acknowledge historic gross earnings for the purpose of calculating gross earnings after the employee's Annual Holiday Entitlement Date. The earnings displayed here will reflect the historic gross earnings from the employee's Annual Holiday Entitlement Date if the employee has been employed for more than 12 months. If the employee has been employed for less than 12 months, it will display as the employee's start date. In some cases where the date falls in between a pay period, the system will pro rata the historic gross earnings. More information on how pro rata earnings are determined can be found here.
If there are no historic gross earnings imported into the system for the employee, this field will not appear in the context panel.
Gross Earnings: the gross earnings recorded here are any earnings paid through this payroll system from the date specified up to the employee's final pay (ie inclusive of the termination pay). The 'from' date that appears here varies based on certain scenarios:
- if the employee has been employed for less than 12 months and has only been paid via this payroll system, the date will be recorded as their start date;
- if the employee has been employed for more than 12 months and has only been paid via this payroll system, the date will be recorded as the day after the employee's Annual Holiday Entitlement Date. Additionally, the earnings displayed here will reflect the earnings paid to the employee from this date i.e. the day after the employee's Annual Holiday Entitlement Date. In some cases where the date falls in between a pay period, the system will pro rata the gross earnings. More information on how pro rata earnings are determined can be found here.
- if the employee has previously been paid via another payroll system and has historic gross earnings imported into the system, the date recorded will be the start date of the first pay run processed for the employee in this payroll system.
If you want to reconcile the annual earnings displayed in the context panel, generate a Pay Categories report as follows:
- the date range should be from the date mentioned in the context panel, ie 18/3/19 and to the date paid of the last finalised pay run processed for the employee;
- filter the 'Employee' dropdown so that only the employee in question is selected;
- export the report to Excel;
- filter out any pay categories that are configured to be excluded from AWE (you can confirm which pay categories are excluded by running the pay category report);
- total the unfiltered earnings in the report;
- add up the gross earnings in the termination pay - make sure you exclude
- any AWE excluded earnings
- any earnings associated to termination related pay categories such as "Termination Holiday Pay (8%)", "Termination Public Holidays Entitlement", "Termination Annual Holidays Entitlement" and "Termination Alternative Holidays Entitlement";
- add up the amounts from steps 6 and 7 - this amount should equal the gross earnings amount displayed in the context panel.
If there is a difference between the gross earnings figure displayed in the context panel and the amount calculated using the Pay Categories report, the reason could relate to the system pro rating the earnings - NB. this pro rating uses standard work week days, ie. Mon-Fri, only.
Total Gross Earnings: this is the sum of the following earnings:
- Annual Holidays Payment. If this is a negative amount due to leave being taken in advance, the amount will be ignored when totalling gross earnings;
- Public Holidays Payment;
- Alternative Holiday Payment. If this is a negative amount due to leave being taken in advance, the amount will be ignored when totalling gross earnings;
- Historic Gross Earnings; and
- Gross Earnings.
Final Annual Holidays 8% Payment: this is 8% of the Total Gross Earnings figure. If there is a negative amount for Annual Holidays Payment and/or Alternative Holiday Payment (due to the fact leave taken in advance is being reversed), this amount will be deducted in the pay run and will be displayed as separate earnings lines.
Overriding the Final Annual Holidays 8% Payment
There may be instances where the final amount calculated in the pay run needs to be adjusted in circumstances where there is data missing from the payroll system. If this does occur, the user can override the amount and enter their own calculated amount. To perform this action, select the "Override" checkbox, enter the amount and then click on "Save".
If you have any questions or feedback please let us know via support@nzpayroll.co.nz.