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The Holidays Act 2003 came into effect on 1 April 2004, which affected the method of calculating holiday pay NZ wide.
Calculating “ordinary weekly pay” and “average weekly earnings”
Both “ordinary weekly pay” and “average weekly earnings” need to be calculated and the greater figure used for the employee's annual holiday pay.
“Ordinary weekly pay”
“Ordinary weekly pay” represents everything an employee is normally paid weekly, including:
- regular allowances, such as a shift allowance
- regular productivity or incentive-based payments (including commission or piece rates)
- the cash value of board or lodgings
- regular overtime
Intermittent or one-off discretionary payments are not included in ordinary weekly pay.
For many people, ordinary weekly pay is quite clear because they are paid the same amount each week.
Where ordinary weekly pay is unclear for any reason, the Act provides an averaging formula for working it out. Ordinary weekly pay is established by:
- Going to the end of the last pay period
- From that date go back
- 4 weeks
- If the pay period is longer than 4 weeks, the length of the pay period
- Take the gross earnings for that period
- Deduct from the gross earnings any payments that are irregular or that are discretionary
- Divide the answer by four
Sometimes an employment agreement will include a specified ordinary weekly pay. If this is the case, the figure in the employment agreement should be compared with the actual ordinary weekly pay (as calculated under 1 or 2 above) and the greater of the two should be used as "ordinary weekly pay".
"Average weekly earnings"
"Average weekly earnings" are determined by calculating gross earnings over the 12 months prior to the end of last payroll period before the annual holiday is taken and dividing that figure by 52. The following payments make up gross earnings and should be included in the calculation:
- Salary and wages
- Allowances (not reimbursing allowances)
- All overtime payments
- Piece work payments
- At risk, productivity or performance payments
- Payment for annual holidays and public holidays
- Payment for sick and bereavement leave
- The cash value of board and lodgings supplied
- Amounts compulsorily paid by the employer under ACC (i.e. the first week of compensation)
- Any other payments that are required to be made under the terms of the employment agreement
Unless the employment agreement says otherwise, reimbursement payments and discretionary or ex-gratia payments (for example, genuinely discretionary bonuses) are not included in these calculations; nor are payments made by ACC or when an employee is on voluntary military service.