Calculation of Annual Leave during COVID-19


A number of employers have lawfully required their employees to use their annual leave during the COVID-19 Alert Level 4 lockdown. Now is the time for employers to check, and if necessary, correct any incorrect payments that may have made.


If your employees lawfully agreed to a temporary reduction in wages during the lockdown period, that reduction does not automatically reduce annual leave payments. Employers must still comply with s21(2) of the Holidays Act 2003 and pay the greater of the employee's ordinary weekly pay, as at the start of the holiday, OR the employee's average weekly earnings for the 12-months immediately before the end of the last pay period before the annual holiday.


If your staff have been able to work from home during the lockdown, then you should not have been requiring them to take their leave and continue working.


If you have the agreement of your employees for a temporary reduction in wages or hours of work, this does not reduce your leave liability. Annual leave will have accrued at the rate the employee was being paid/working prior to COVID-19. In our view, any annual leave balance that an employee holds is therefore a liability on the company books, and the wage subsidy should not be used to offset the cost of that liability.


So, what does that mean if staff have used or been required to use their annual leave?


We have developed a simple calculation to use to determine what the employer pays their staff and what, if any, annual leave is used for any top-up.


The amount employers pay will vary depending on the employee's pay rate.


To determine how many hours the wage subsidy covers (assuming a 40hr/week employee):

  • Step 1: Wage Subsidy / Hourly Rate = Wage Subsidy Hours

  • Step 2: Employees Hours per week – Wage Subsidy Hours = Hours paid by Employer (Annual leave hours)


To put this into a practical example: Timmy works 40 hours per week and is paid the minimum wage of $18.90.

  • Step 1: $585.80 / $18.90 = 30.99 hours

  • Step 2: 40 – 30.99 = 9.01 Hours paid by Employer (Annual leave hours)


Compare this Molly who also works 40 hours per week and is paid $30/hour.

  • Step 1: $585.80 / $30 = 19.53 hours

  • Step 2: 40 – 19.53 = 20.47 Hours paid by Employer (Annual leave hours)


Clearly, the more an employee earns, the fewer hours are covered by the Wage Subsidy, and therefore the greater the cost to the employer in wages. This formula will also work for those employees who work less than 19 hours per week.


For example, Bill works 10 hours a week and is paid $20 per hour. Because Bill only earns $200 gross per week, his wages are fully paid by the Wage Subsidy and $150 of the subsidy is available to pay other affected staff. Bill therefore does not have to nor should be required to use any of his annual leave. However if Bill earned $40 per hour, the following would apply:

  • Step 1: $350 / $40 = 8.75 hours

  • Step 2: 10 – 8.75 = 1.25 Hours paid by Employer (Annual leave hours)


Remember, the annual leave hours are then paid at the greater of "ordinary weekly earnings" or "average weekly earnings". If you have negotiated a reduction in pay for the lockdown, then you should be using the average weekly earnings for the 12 months prior to the last pay period before the holiday period. This will mean that the reduced rate of pay will have minimal impact on the rate of pay for the holiday portion.


We strongly recommend you audit your payroll records for any annual leave paid out during COVID-19 to ensure that the payment complies with s21 of the Holidays Act 2003.


Remember, when it comes to building and maintaining staff loyalty, particularly during challenging times such as what we are in now, it is not what you say that matters but what you do. A little kindness now will go a long way to ensuring staff loyalty going forward.


Photo courtesy of Ray Reyes on Unsplash.com


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Lower Hutt, New Zealand