Entitlements on an employee’s resignation or end of employment

The Holidays Act 2003 provides two ways to calculate payment for annual holidays on resignation or end of employment. These are:

• where the employment ends within 12 months (that is, before the employee is entitled to annual holidays), and
• where the employment ends after 12 months (that is, where an entitlement to take annual holidays has arisen for the first and any subsequent years' employment).

Gross earnings are important when calculating annual holiday entitlements. When calculating gross earnings the following payments 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
• commissions
• payment for annual holidays, public holidays and alternative holidays
• payment for sick and bereavement leave
• the cash value of board and lodgings supplied
• amounts compulsorily paid by the employer to the employee under ACC legislation (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, the following payments should be excluded from the calculation:

• reimbursement payments and discretionary or ex-gratia payments (for example, genuinely discretionary bonuses)
• payments made by ACC or when an employee is on voluntary military service
• any payment of any employer contribution to a superannuation scheme for the benefit of the employee.

Where an employee’s employment ends in the first 12 months of service, he or she is entitled to a payment for annual holidays of 8% of gross earnings during the employment. This entitlement is reduced by any payment for annual holidays taken in advance during the employment or by any payment for annual holidays on a pay-as-you-go basis. Please refer to the fact sheet titled When pay-as-you-go provisions can be used (http://www.ers.govt.nz/holidays_act_2003/pay_as_you_go.html) for more information on pay-as you-go holiday pay arrangements.

Example 1: Calculation of final pay where an employee’s employment ends in the first 12 months of service

Fiona was employed 1 October 2008 at $20 per hour for a 40 hour week. She continued to work to this pattern until her resignation on 1 March 2009.

She took one weeks annual leave beginning on 1 January 2009. This leave was in advance of her entitlement to annual holidays on 1 October 2009. It was paid at the rate of $800 which is her ordinary weekly pay.

Her annual holiday pay on resignation comprised:

• 8% of her total gross earnings for the period since she commenced work (0.08 x $17,600), less
• any payment for annual holidays taken in advance ($800)

Her final pay = $1408 - $800= $608.

The “gross earnings” calculation includes payment for her weeks annual leave.

Where an employee’s employment ends after becoming entitled to annual holidays: The first amount to be calculated is the greater of ordinary weekly pay or average weekly earnings for the annual holidays that the employee is entitled to under the Act as if the holidays were being taken at the end of the employment.

• Ordinary weekly pay represents everything an employee is normally paid weekly under the employment agreement.
• If the employee's rate of ordinary weekly pay at the time is not clear, the calculation in the factsheet titled “Annual holidays – calculating “ordinary weekly pay” and “average weekly earnings” (http://www.ers.govt.nz/holidays_act_2003/calculate_pay.htm) should be used to establish the correct figure.
• The 12 months prior to the end of employment are used to establish average weekly earnings.
• Average weekly earnings” are determined by calculating gross earnings over the 12 months prior to the end of employment and dividing that figure by 52.

The second amount to be added is for the period since the employee last became entitled to leave and is calculated at 8% of gross earnings since the entitlement arose.

• Gross earnings includes payment for annual holidays taken since the employee last became entitled to leave
• The payment for any annual holidays taken in advance is deducted from this amount, as is any amount paid on a pay-as-you-go basis.

Example 2: Calculation of final payment for annual holidays

Hiria was employed on 1 May 2007 at $15 per hour for a 40-hour week. She worked an extra half day (four hours) of overtime every two weeks, for which she was paid double time ($120 each fortnight).

Hiria became entitled to annual holidays on 1 May 2008. She took one weeks annual holidays beginning on 1 July 2008. It was paid at the rate of $660, since her average weekly earnings during the year before her holiday ($660) was greater than her ordinary weekly pay at the time she took her holiday ($600).

Hiria continued to work the same pattern of overtime until she resigned, with her last day being 1 January 2009.

Her annual-holiday pay on resignation comprised:

• three weeks' pay at the greater of her ordinary weekly pay or average weekly earnings ($660 x 3 = $1980), plus
• 8% of her gross earnings for the period since her anniversary date on 1 May 2008.

The “gross earnings” calculation includes her weekly pay, her three weeks' holiday pay and her overtime earnings.

Public holidays

On resignation or termination of employment, the employee's final date of work is notionally extended by any annual holiday entitlements not taken, and any public holidays falling during that period must be dealt with in accordance with the Holidays Act.

For example, if an employee is to finish work four days before a public holiday and annual holidays entitlement owed on termination of employment equals four days or more, the employee is entitled to a days payment at the relevant daily pay for the public holiday if it is a day on which she or he would normally have worked.

Public holidays falling during the notice period (i.e. while the employee is still working) are dealt with in terms of the general provisions of the Act.

Alternative holidays

If an employee has alternative holidays that accrued from working on a public holiday and that have not yet been taken or paid out, the days are paid on resignation at the same rate as the relevant daily pay for the last day of the employee's work, regardless of the rate of pay at the time they accrued.

Accrued alternative holidays do not extend the period of employment for the calculation of annual holiday pay.

Example 3: Calculation of final payment on termination of employment

Jason resigns and finishes work on Friday 24 October 2008.

Jason has been paid up to the preceeding Tuesday, 21 October. He has three days' accrued alternative holidays and is entitled to four weeks paid annual holidays. He last became entitled to annual holidays on 25 February 2008.

His final payment is made up of:

• payment for his work since the last pay period – that is, three days' pay for Wednesday, Thursday and Friday
• payment for his three accrued alternative holidays at the relevant daily pay rate for working on Friday 24 October
• payment of four weeks annual holiday pay at the greater of average weekly earnings  or ordinary weekly pay – see factsheet titled “Annual holidays – calculating “ordinary weekly pay” and “average weekly earnings”. (http://www.ers.govt.nz/holidays_act_2003/calculate_pay.html)
• an additional day's payment for Labour Day (27 October) (at Jason’s relevant daily pay for that day), as it falls during the four weeks notional annual holiday added to the end of his employment, and would have otherwise been a working day for him.
• an additional 8% of his gross earnings since he last became entitled to annual holidays on 25 February 2008. These gross earnings include:
  • payment for the four weeks annual holidays paid out
  • payment for the alternative holidays
  • payment for the public holiday