How annual holidays is calculated in a pay run using OWP/AWE

Under the Holidays Act 2003, an employee taking annual holidays, after the employee’s entitlement to the holiday has arisen, you must pay the employee at a rate that is based on the greater of:

  1. The employee’s ordinary weekly pay as at the beginning of the annual holiday (OWP); or
  2. The employee’s average weekly earnings for the 12 months immediately before the end of the last pay period before the annual holiday (AWE).

The article will explain the rate at which we determine the holiday when an employee takes this leave type and you process it in a pay run. The article focuses on annual holidays, not on parental leave rules. If an employee is taking annual holidays with a focus on parental leave rules, only apply the AWE calculation with no comparison to OWP.

Employee leave set up

Firstly, make sure that you have configured the employee leave pay rates correctly for ordinary weekly pay (OWP) of OWP agreed rate or OWP four-weekly formula. It will be the default calculation method that we will apply within the pay run for annual holidays taken for the employee. 

Historic gross earnings

The historic gross earnings feature allows existing businesses who have transferred to our payroll platform to import up to 52 weeks of employee gross earnings. You will have processed these in another payroll platform,  broken down by pay period. The process is imperative to make sure AWE calculates correctly based on employees historical earnings. Historic gross earnings should be imported into the platform before processing any leave taken in a pay run for the first time.

Leave calculation context panel

In the pay run, when processing annual holidays, the equivalent earnings line will show a   to the right of the pay rate. Clicking the   will display a context panel which details how we determined the hourly rate for the employee's annual holidays. It is broken down into four sections:

  • Average Wage Earnings (AWE).
  • Ordinary Weekly Pay - 4 Weekly Formula.
  • Ordinary Weekly Pay - Agreed Rate.
  • PAYG 8%.

You will notice the different black and grey text we use in the context panel. We based this 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 ‌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 you have no selected the Exclude From Average Earnings tick box.
  • Platform-based pay categories that are not excluded from average earnings. 

Please note that if you set the leave category setting to Use the Pay Rate of the Employee's Primary Pay Category for Transferred Earnings Lines option, then we will use the employees primary pay category pay rate in the pay run, not the selected calculated rate in the context panel. If you unselect the Use the Pay Rate of the Employee's Primary Pay Category for Transferred Earnings Lines tick box, then the selected calculated rate in the context panel will appear in the pay run.

Average weekly earnings (AWE)

We calculate AWE using the employee’s gross earnings over the 12 months just before the end of the last pay run and just before they take their annual holiday, divided by 52. If, however, you have employed the employee for less than 52 weeks and you allow them to take holidays in advance. Then we will base the calculation on the number of weeks you have employed the employee, as opposed to the 52 weeks.

Annual Earnings

We derive the amount from the employee's gross earnings processed in the pay runs within this payroll platform, up to a maximum of 52 weeks. Take note that the earnings displayed in the context panel are exclusive of any earnings associated with pay categories that you excluded from the 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, i.e., 25/10/2021 and to the date paid of the last finalised pay run processed for the employee.
  • Filter the Employee dropdown so that you have only ‌the employee in question 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 platform pro rating the earnings. Refer below for further information on this topic.

Payroll History

We derive the amount from the historic gross earnings imported for the employee. For each pay run processed in the payroll platform, we will adjust the payroll history calculation to make up one year of earnings. The instances where this field will display as $0 are as follows:

  • You have not imported any historical earnings data for the employee.
  • The employee has at least one year of pay-run data processed in the payroll platform.
  • The employee's first pay run was processed in this payroll platform and so historic earnings data are not applicable in this scenario.  

As per annual earnings, the platform may pro rata historical gross earnings as 1 year may occur in the middle of a pay period. Pro rata calculations are discussed further below.   

Calculation

It is the sum of both the annual earnings and payroll history gross earnings. The divisor here will always be 52, unless you have employed the employee for less than 52 weeks. In this case, the divisor will be the number of pay run weeks processed in the payroll platform, starting from the first pay run processed for that employee.

Average weekly earnings

We determine the weekly amount from the Calculation step above and then divide it by the employee's standard weekly hours, as stated one the employee's Pay Run Defaults page. 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 five days x the value set in the Hours Per Day field on the employee's Pay Run Defaults page.

How is the AWE rate calculated when taking leave 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   on the right of the leave earnings line.

  1. $15,000.00, for example, is the total earnings in the pay run. 
  2. 25/10/2021, for example, is the pay period start date of the first pay run processed.
  3. $24,000, for example, is the actual earnings from the Historic Gross Earnings recorded for the employee. You can extract this information yourself from the Data Extracts page. However, we are only interested in the 12 months before the current pay period start date and also please note you may have pro-rated earnings. 
  4. 10/05/2021, for example, is the the date that the historical gross earnings are included from.
  5. $39,000 in them the total 52 week gross earnings.
  6. $750 is then the average weekly amount after dividing the 52-week gross earnings by 52 weeks
  7. Forty is then the standard weekly hours, set on her pay run defaults page.
  8. $18.75 is then the figure derived from derived by diving the figure in step six ‌by the figure in step seven.

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:

  • Going to the end of the last regular pay period before the annual holiday.
  • Going back four calendar weeks, or if the pay period is longer than four weeks, go back the length of the pay period; i.e., check their ordinary earnings;
  • Working out the total gross earnings for that period, i.e. the calculation method.
  • Divide the total by 4, i.e. work out their ordinary weekly pay.

You would then calculate the hourly rate by dividing the weekly amount by the employee's standard weekly hours, as stated in the employee's Pay Run Defaults page. 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 five days x the value set in the Standard Hours Per Day field on the Business Details page.

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. When you set an employee to OWP four weekly, if the OWP Agreed Rate is higher than the OWP four weekly rate and the AWE rate, then them platform will override ‌the OWP Agreed rate as we cannot pay leave at a rate less than this.

If an employment agreement has a specific rate for ordinary weekly pay. And it is an amount other than the employee's primary pay rate. Then you must compare this rate ‌and the greater of the two amounts you must use 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. 

PAYG 8%

We have included the employee Pay As You Go (PAYG) 8% amount in this context panel simply for informational purposes only, hence why it is showing in grey text. The amount is relevant where you employee an employee irregularly and so they do not have an entitlement to annual holidays. Instead of this entitlement, you would pay the employee 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.

Annual Leave starting rate for leave that spans over pay periods

We start calculating annual holiday payment rates for annual holidays at the start of the employee’s holiday. You need to pay the greater of the employee’s ordinary weekly pay or average weekly earnings. You will carry the pay rate over the entire period of the leave regardless of if the approved leave request crosses over into other pay periods.

Previously, when leave spanned over multiple pay periods, each time leave was included in a new payrun, the averages were recalculated. We have now changed this behaviour to use the rate calculated at the start of the leave period for all pay runs, the leave spans over.

Download Leave Rates

There is the option to download the calculations as an excel file. By doing so, you 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 the Download Calculation to Excel button to prompt the download to begin. 

Why does the platform 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 irregular hours workers, we have an average hours report to help calculate leave earnings.

Was this article helpful?
1 out of 1 found this helpful

Comments

0 comments

Article is closed for comments.