How daily leave is calculated in the pay run using RDP/ADP

In accordance with the Holidays Act 2003, an employee taking time off work for daily based leave types (such as alternative holiday, sick, domestic violence, public holiday not worked and bereavement leave) must be paid at relevant daily pay (RDP) if the day falls on an otherwise working day for the employee. RDP basically means paying an employee what they would have earned if they were at work on the day.

In situations where:

  • an employee's work pattern varies significantly thereby making it impractical or impossible for the employer to work out an employee's RDP; or 
  • an employee's daily pay varies in the pay period in question,

then the average daily pay (ADP) method may be used. ADP is a daily average of the employee’s gross earnings over the past 52 weeks. This is worked out by:

  • adding up the employee’s gross earnings for the 52 week period, and
  • dividing this by the number of whole or part days the employee either worked or was on paid leave or holidays during that period. 

This article will explain the rate at which daily pay is determined when an employee takes this leave type and how it is processed in the pay run.

Important: 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.

 

Employee leave set up

Firstly, ensure that the employee's leave pay rates have been configured correctly, as this will be the calculation method which will be applied within the pay run for all daily based leave taken for the employee. For more details on the leave pay rates setting, refer to the article here

 

Business Settings

In Business Settings > Leave Categories the ADP calculation period needs to be set for monthly and half monthly pay schedules. If this setting is ticked, it will calculate actual working days for the 12 month period used for the gross earnings. If this setting is unticked, it will apply the 52 weeks of days for the divisor.

 

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 ADP 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 a daily based leave type is processed, the equivalent earnings line will show a "i" icon, to the right of the pay rate:

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Clicking on this icon will display a context panel which will show both the RDP and ADP calculations for the employee's daily based leave.

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The RDP/ADP calculation method selected within the employee's leave pay rates section will show in bold text and this will be the default pay rate applied for that leave type within the pay run for the employee.

The RDP/ADP calculation method not selected within the employee's leave pay rates section will also display, however, in grey text. If RDP is the rate selection method chosen in the employee's Pay Rates screen, we will still display the ADP calculations in the context panel. The reason for this is should the employee's work pattern change during the pay run period, thereby making it impractical to pay the employee at RDP, you can override the RDP hourly rate in the pay run earnings line with the ADP rate if required. 

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Relevant daily pay (RDP)

RDP means the amount of pay that the employee, employed on a regular working pattern, would have received had the employee worked on the day. The RDP rate is the employee's normal hourly pay rate as this is usually the amount the employee would expect to receive. An employment agreement may also specify a special rate of relevant daily pay. This can only be used if the rate is equal to, or greater than the actual relevant daily pay. If this is the case, then you can apply the special RDP rate by overriding the equivalent daily based leave earnings line pay rate within the pay run.

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Average daily pay (ADP)

ADP is a daily average of the employee’s gross earnings over the past 52 weeks. This means the employee’s gross earnings are divided by the number of whole or part days the employee worked including any paid leave or holiday during that period.

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Annual Earnings: This amount is derived from the employee's eligible gross earnings processed in the pay runs within this payroll system, up to a maximum of 52 weeks. In this example, the first pay run processed in the payroll system commenced from 11/04/2022. 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 11/04/2022 and to the date paid of the last 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;
  • total the unfiltered earnings - 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 weekly, fortnightly, half monthly or monthly pay run processed in the payroll system, the payroll history calculation will adjust to account for the 'remaining' weeks to make up the 52 weeks. In this example, the payroll history only accounts for historic gross earnings from 11/10/2021 because the employee only commenced employment at that point.

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 52 weeks 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 pay run earnings, the system may pro rata historic gross earnings as required as the gross earnings period may be in the middle of a pay period. Pro rata calculations are discussed further below.   

 

Total Days Worked: This is the total number of days (whole or part days) the employee has worked, including any paid leave and holidays taken during the period. This is calculated as follows:

  • if historic gross earnings are used to calculate ADP, the system will total the number of days entered in the import file for each relevant pay period;
  • if historic gross earnings are used to calculate ADP but there are no number of days entered in the import file, the system will calculate 5 weekdays worked per week;
  • if annual earnings (i.e. pay run earnings) are used to calculate ADP and the employee uses timesheets to submit all time worked, the system will total the days from the processed timesheets;
  • if annual earnings (i.e. pay run earnings) are used to calculate ADP and the employee has advanced work hours recorded in their Pay Run Defaults screen, it will calculate the number of days worked for the relevant period using the days of the week recorded in their file;
  • if annual earnings (i.e. pay run earnings) are used to calculate ADP and the employee does not use timesheets to submit time worked nor has recorded advanced work hours, the system will calculate 5 weekdays worked per week less any days of unpaid leave taken. 
  • if annual earnings (i.e. pay run earnings are used to calculate ADP and the employee has had a change in work pattern, the system will calculate the number of days applicable to each pay run based on the work pattern applying to that pay run i.e. the employee was on a basic work pattern of 5 days for 26 weeks of the applicable 52 week period then went onto an advanced work pattern of 3 days per week for 26 weeks of the applicable 52 week period so the system will calculate 5 days for 26 weeks and 3 days for 26 weeks.

Note that if an employee is set to a basic work pattern the system will assume the employee works 5 days per week from Monday to Friday. If the employee is less than 5 days per week or they don't work Monday to Friday an Advanced work pattern will need to be entered for the employee. To enter an advanced work pattern go to Pay Run Defaults in the Employee Details Screen then you can enter the hours worked on the applicable days. To learn more about Employee Advanced Standard Work Hours click Here

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Calculation: This is the sum of both the annual earnings and payroll history gross earnings. The divisor here will always be the total days worked.

Average Daily Earnings: The average daily amount is determined from the Calculation step above and is then divided by the employee's standard daily hours, as stated in the employee's Pay Run Defaults screen. In this example, the employee works a standard 8 hour day.

Note that if an employee is set to Average Daily Pay for their RDP/ADP calculation method and their ADP rate is lower than their RDP agreed rate, the system will automatically pay their RDP agreed rate as leave cannot be paid at a rate less than this.

Download Leave Rates

There is the option to download the calculations as an excel file. By doing so, the user can view the breakdown of all the gross earnings, categorised by period end date, that contribute to the Annual Earnings used in the calculations.

Click Download calculation to Excel to prompt the download to begin. 

 

Why does the system pro rata gross earnings?

In some instances when the ADP 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.

 

If you have any questions or feedback please let us know via support@nzpayroll.co.nz

 

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