It’s no secret that many businesses struggle with understanding the Holidays Act.
Despite the fact it’s been around for years, we still hear about businesses getting it wrong.
And it’s no wonder, with the New Zealand Holidays Act ranking as one of the most complex in the world. (Global Payroll Complexity Index 2021) In particular, ‘gross earnings’ is one area I find many clients overlook.
But it’s an important calculation to get right because, as the core calculation in the Holidays Act, getting it wrong will affect further calculations and may result in an incorrect result for your employees.
In this article, we explore what gross earnings are and how to calculate them correctly for your employees.
What should and shouldn’t be included in ‘gross earnings’?
‘Gross earnings’ refers to all payments the employer is required to pay the employee under the employment agreement and is the base for several calculations that are required in the Holidays Act.
These include:
● ordinary weekly pay for determining payment for annual holidays (when the ordinary weekly pay formula is used)
● average weekly earnings for determining payment for annual holidays
● average daily pay (when this is used instead of relevant daily pay) for calculating payment for public holidays, sick and bereavement leave, and alternative holidays.
● payment for annual holidays if the employee meets the criteria for being paid on an 8% pay-as-you-go basis.
● the 8% of gross earnings component in an employee’s final pay.
It’s essential you understand what should be included in gross earnings, but really, it’s probably easier to look at what’s excluded:
● reimbursements
● any weekly compensation payable under the Accident Compensation Act 2001 that the employer doesn’t have to make
● payment for annual holidays that have been paid out instead of taken (i.e. up to one week per entitlement year)
● any payments that the employer is not bound to pay the employee as per their employment agreement ( these payments will be truly discretionary and relatively rare)
● redundancy payments.
What to look out for when calculating gross earnings
In addition to the inclusions and exclusions listed above, there are two specific other situations to be aware of when calculating your employees’ gross earnings.
The first is that if your employment agreement states that a payment is included in gross earnings, it must be included, even if that type of payment is not usually included.
The second is that if it’s unclear whether a payment should be included in gross earnings, it’s recommended that you err on the side of caution and include the payment or obtain legal advice before deciding to exclude the payment.
For example, whether employee share benefits are included in gross earnings will depend on their specific nature.
Above all, it’s important to understand how your payroll system manages gross earnings, and that this matches both the Holidays Act and your specific employment situation.
How to use gross earnings to calculate an employee’s final pay
One final area where calculating gross earnings can be tricky is when you’re calculating an employee’s final pay.
This involves calculating gross earnings from the employee’s last leave anniversary to their final pay.
If their last leave anniversary date falls in a previous pay period, some systems cannot calculate this correctly, which may result in an underpayment for the employee.
Want payroll peace of mind?
Understanding how to calculate your employees’ gross earnings correctly is essential to ensure your obligations as an employer are being met.
If you’re not sure or still have questions, book a free 15-minute payroll audit for peace of mind that your payroll system is keeping you compliant.
