In New Zealand there are several different types of calculations used to work out how much to pay an employee taking Annual Leave, Sick Leave, and other types of leave as well as being paid for Public Holidays. This blog is about how Xero Payroll does it and may not apply to other payroll systems. There are a couple of steps to take:
1. Determine what type of leave is being taken.
2. Determine which type of calculation is being used to establish the payout amount
3. Make the calculation, either through Xero Payroll or manually if required.
4. Determine how to enter the calculation into the Xero payroll system.
Its important to be aware that Xero Payroll tracks leave and earnings in Hours, which is a different representation from the legislation which is in Hours, Days or Weeks.
Bear in mind that the hours in Xero Payroll are only a representation of Days or Weeks – based on the information in the employees Employment Tab. As an example, for an employee with standard hours of 5 days x 8 hours in their employment tab, 8 hours would represent 1 day’s Sick Leave, or 0.2 Weeks Annual Leave. I recommend always converting the hours in Xero Payroll in your mind to days or weeks.
When calculating payouts, you will likely be paying out for a number of weeks or days. However, these weeks or days will be entered into Xero Payroll as hours, based on the standard hours in the employment tab.
So if you are paying out based on Average Earnings (can be for both Annual Leave and other types of leave) the leave will be entered into Xero Payroll using 40 hours for a week, or 8 hours for a day (using the above example). This means the Hourly Rate may change.
An employee has standard hours of 8 hours a day x 5 days a week which would earn them $1000 a week from 40 hours at $25 an hour. But on average they work 43.5 hours a week ($1087.50 average weekly earnings). When they take Annual Leave for a week the amount to be paid out will be entered into Xero Payroll as 40 hours at $27.19 an hour to total $1087.50. The hourly rate is lifted.
Below is a generalised summary of how to make the calculations. I’ve simplified this to explain the terminology and the basics of when each method is used. There are exceptions, and sometimes multiple other factors to consider to determine which method to use, and I have not addressed any of those complexities in this blog.
Employment.govt.nz has excellent information on this topic.
There is an initial summary page with information on the difference between paying Annual Leave, and other types of Leave and Public Holidays.
Payment for Annual Leave is made at the higher of OWP and AWE
This page on Employment.govt.nz explains what OWP and AWE are in detail, how to calculate them and what income is included in the calculations.
These types of Leave, and payment for public holidays are paid differently to Annual Leave. They are paid using either Relevant Daily Pay (RDP), or Average Daily Pay (ADP). Employment.govt.nz has a full explanation.
A simple way to understand the general principle is that RDP will be used if it can be worked out. If it’s not practical to work out what the employee would have worked on the day, then ADP can be used instead. There are a number of other considerations in determining which method to use.
This link has the detail about what is included in RDP, and when to use RDP v ADP: https://www.employment.govt.nz/leave-and-holidays/calculating-payments-for-leave-and-holidays/relevant-and-average-daily-pay/