In accordance with the Holidays Act 2003 an employee taking annual holidays, after the employee’s entitlement to the holiday has arisen, must be paid at a rate that is based on the greater of:
- the employee’s ordinary weekly pay as at the beginning of the annual holiday (OWP); or
- the employee’s average weekly earnings for the 12 months immediately before the end of the last pay period before the annual holiday (AWE).
This article will explain the rate at which holiday pay is determined when an employee takes this leave type and it's processed in the pay run.
NB: This article is in reference to annual holidays not relating to parental leave rules. If an employee is taking annual holidays relating to parental leave rules, only applying the AWE calculation with no comparison to OWP. See this article for more information.
Employee leave set up
Firstly, ensure that the employee's leave pay rates have been configured correctly for ordinary weekly pay (OWP) of OWP agreed rate or OWP 4 weekly formula, as this will be the default calculation method that will be applied within the pay run for annual holidays taken for the employee. For more details on the leave pay rates setting, refer to the article here.
Historic gross earnings
The historic gross earnings function allows existing businesses who have transferred to this payroll system to import up to 52 weeks of employee gross earnings (processed from another payroll system) broken down by pay period. This process is imperative in order to ensure AWE is calculated correctly based on employee historic earnings. Historic gross earnings should be imported into the system before processing any leave taken in a pay run for the first time.
Leave calculation context panel
In the pay run, when Annual Holidays is processed, the equivalent earnings line will show a "i" icon, to the right of the pay rate:
Clicking on this icon will display a context panel which details how the hourly rate for the employee's annual holidays has been determined. It is broken down into 4 sections:
- Average Wage Earnings (AWE);
- Ordinary Weekly Pay - 4 Weekly Formula;
- Ordinary Weekly Pay - Agreed Rate; and
- PAYG 8%.
You will notice the different colour text (black and grey) in the context panel. This is based on the selection within the employee's leave pay rate for the OWP calculation method. The selected calculation method for OWP will display in black text, whilst the other methods will display in grey text. The reason being for this is, should the employee's work pattern change during the pay run period, you can override the equivalent earnings line pay rate to the non-selected OWP rate if required.
We will explain the methods behind each calculation. 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.
N.B. Please note that if the leave category setting is set to 'use the pay rate of the employee's primary pay category for transferred earnings lines' the employees primary pay category pay rate will be used in the pay run, NOT the selected calculated rate in the context panel. If the 'use the pay rate of the employee's primary pay category for transferred earnings lines' box is unticked then the selected calculated rate in the context panel will appear in the pay run.
Average Weekly Earnings (AWE)
AWE is calculated 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 52. If, however, the employee has been employed for less than 52 weeks and is allowed to take holidays in advance, the calculation will be based on the number of weeks the employee has been employed, as opposed to the 52 weeks.
For the purposes of understanding the calculations also take note that this payment relates to a weekly pay run that runs from 09/05/2022 to 15/05/2022. Additionally, the first weekly pay run processed in this system was for the period 25/10/2021 to 08/05/2022 and the employee has historical gross earnings included in the calculation from 10/05/2021.
Annual Earnings: This amount is derived from the employee's gross earnings processed in the pay runs within this payroll system, up to a maximum of 52 weeks. In this example as the first pay run processed in the payroll system commenced from 25/10/2021, the annual earnings amount will only cover earnings for those weekly pay runs.
Take note that the earnings displayed in the context panel are exclusive of any earnings associated with pay categories that are excluded from average weekly earnings. 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 25/10/2021 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 have a Y in the "excluded from AWE" column;
- total the unfiltered earnings in the report - this amount should equal the annual earnings amount displayed in the context panel.
If there is a difference between the annual 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. Refer below for further information on this.
Payroll History: This amount is derived from the historic gross earnings imported for the employee. For each pay run processed in the payroll system, the payroll history calculation will adjust to make up 1 year of earnings. In this example, the payroll history only accounts for part of the historic gross earnings from 10/05/2021 because the payroll system now has earnings data from 25/10/2021.
The instances where this field will display as $0 are as follows:
- no historic earnings data has been imported for the employee; or
- the employee has at least 1 year of pay run data processed in the payroll system; or
- the employee's first pay run was processed in this payroll system and so historic earnings data are not applicable in this scenario.
As per annual earnings, the system may pro rata historic gross earnings as '1 year' may occur in the middle of a pay period. Pro rata calculations are discussed further below.
Calculation: This is the sum of both the annual earnings and payroll history gross earnings. The divisor here will always be 52, unless the employee has been employed for less than 52 weeks. In this case, the divisor will be the number of pay run weeks processed in the payroll system, commencing from the first pay run processed for that employee.
Average Weekly Earnings: The weekly amount is determined from the Calculation step above and is then divided by the employee's standard weekly hours, as stated in the employee's Pay Run Defaults screen. In this example, the employee works 40 hours per week. If the employee's standard hours per week are set at '0', then the general formula used to determine the employee's standard weekly hours is 5 days x the value set in the "hours per day" field in the employee's Pay Run Defaults screen.
How is the AWE rate calculated when leave is taken in a pay run?
Here is a breakdown of the context panel that is available within a pay run when leave is taken.
Select the i icon on the right of the leave earnings line shown here:
- $15,000.00: total earnings in pay runs processed in KeyPay
- 25/10/2021: the pay period start date of the first pay run processed in Keypay.
- $24,000: actual earnings from Historic Gross Earnings recorded for the employee - you can extract this information yourself from the Data Extracts page - NB. given we are only interested in the 12 months prior to the current pay period start date. Note earnings may be pro-rated.
- 10/05/2021: the date that the historical gross earnings are included from.
- $39,000: the total 52 week gross earnings.
- $750: the average weekly amount after dividing the 52 week gross earnings by 52 weeks
- 40: The standard weekly hours (set on her pay run defaults page)
- $18.75: the figure derived from 6 / 7
Ordinary Weekly Pay (OWP) - 4 Weekly Formula
Determining the ordinary weekly pay for some employees is easy because they are paid the same amount each week. However there may be circumstances where this is not the case for all employees. As such, we use the 4 week method formula for determining OWP, which involves:
- go to the end of the last regular pay period before the annual holiday;
- go back four calendar weeks (or if the pay period is longer than four weeks, go back the length of the pay period), ie Ordinary Earnings;
- work out the total gross earnings for that period, ie Calculation;
- divide the total by 4, ie Ordinary Weekly Pay.
Hourly Rate is then calculated by dividing the weekly amount by the employe's standard weekly hours, as stated in the employee's Pay Run Defaults screen. In this example, the employee works a standard 38 hours per week. If the employee's standard hours per week are set at '0', then the general formula used to determine the employee's standard weekly hours is 5 days x the value set in the "Standard Hours Per Day" field in the Business Details screen.
Ordinary Weekly Pay (OWP) - Agreed Rate
The OWP agreed rate is the employee's normal hourly pay rate as this is usually the amount the employee would expect to receive had they not taken leave and worked instead.
Note: When an employee is set to OWP 4 weekly, if the OWP Agreed Rate is higher than the OWP 4 weekly rate and the AWE rate the system will override with the OWP Agreed rate as leave cannot be paid at a rate less than this.
If an employment agreement has a specific rate for ordinary weekly pay that is an amount other than the employee's primary pay rate, this rate must be compared and the greater of the two amounts must be used as the ordinary weekly pay rate. Then you can apply the special OWP agreed rate by overriding the equivalent earnings line rate within the pay run.
We have included the employee's Pay As You Go (PAYG) 8% amount in this context panel simply for informational purposes only (hence why it is showing in grey text). This amount is relevant where an employee is employed irregularly and so is not entitled to annual holidays. In lieu of this entitlement, the employee is paid 8% of their gross earnings per pay run.
The Gross Earnings amount displayed in the context panel relates to the employee's gross earnings for that pay run.
Why does the system pro rata gross earnings?
In some instances when the AWE calculation requires 52 weeks of earnings, the 52nd week might not start from the pay period start date. As such, we need to calculate the portion of that pay period that only pertains to the 52-week earnings and ignore the remaining data in that pay period.
For detailed information on how the system calculates pro rata earnings in this instance and based on specific scenarios, refer to this support article.
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