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Payroll Q & A

The short answer is, it might not be.  What is important however, is to check that the arrangement firstly meets the tests for a Contractor relationship rather than an Employee relationship.  Treating a contractor as you would an employee can be one indication that it isn’t truly a contractor arrangement, and paying them through your payroll system might be considered as an indication the person could be in an employment relationship rather than a contractor relationship.  However, sometimes there might be some types of payments for a contractor that administratively are easier for the business to pay through the payroll system.  In that case, as well as ensuring the relationship is correctly a contractor one, check if your system has an option to record that this person is a Contractor instead of an Employee, and always keep good records related to the arrangement with them.  If you need assistance with a written contractor agreement or you have questions about your method of payment to a contractor, don’t hesitate to contact us.

If employment is ending before the employee has completed a full year of service, then they would be paid an annual holiday payment of 8% of their gross earnings less any amount the employee has been paid for annual holidays taken in advance or has been paid for annual holidays on a pay-as-you-go basis.

If the employee’s employment ends after the completion of one or more years’ service, and therefore they have annual holiday entitlement, there are two calculations to do to work out the annual holiday payments for the employee’s final pay.  The employee is paid for any remaining annual holidays that they are entitled to. These are paid at the rate of the greater of ordinary weekly pay or average weekly earnings, as if the holidays were being taken at the end of the employment.  The employee also gets an annual holiday payment of 8% of their gross earnings (including other payments made in the final pay) /from the date the employee last became entitled to annual holidays (i.e. their last anniversary date for annual holidays).  Again, if the employee has taken annual holidays in advance or has been paid for annual holidays on a pay-as-you-go basis, the amount paid is deducted from gross earnings. Also be aware that if the outstanding leave entitlement at the time of termination spans across a Public holiday, then you are also obliged to pay the employee for that stat day in their final pay.

This is the amount an employee receives under his or her employment agreement for an ordinary working week.  Note that it includes payments such as regular allowances, regular productivity or incentive-based payments (including commission or piece rates), the cash value of board or lodgings and regular overtime.  Intermittent or one-off payments as well as discretionary payments and employer contributions to superannuation schemes are not included in ordinary weekly pay.

If you are unclear whether a payment is regular or not, MBIE advises that you should consider the following:

  • The employee shouldn’t be disadvantaged because they took annual holidays rather than worked during that time.
  • Consider the frequency of the payment, if the employee usually receives the payment then this is likely to be ‘regular’ (even if they don’t always receive it).
  • If the employee works different but predictable shifts, then the ordinary pay (and the payments which are included) should relate to the week they are taking annual holidays.

If an employee’s terms and conditions of work, and specifically, their hours and/or days of work change (after due process), then annual holiday payments are calculated using the same approach and calculation, which may then be impacted by the change of hours i.e. annual holidays are still paid as defined by the Holidays Act, which in section 21 states:

“If an employee takes an annual holiday after the employee’s entitlement to the holiday has arisen, the employer must calculate the employee’s annual holiday pay in accordance with subsection (2).

(2) Annual holiday pay must be—

(a) for the agreed portion of the annual holidays entitlement; and

(b) at a rate that is based on the greater of—

(i)  the employee’s ordinary weekly pay as at the beginning of the annual holiday; or

(ii) the employee’s average weekly earnings for the 12 months immediately before the end of the last pay period before the annual holiday.”

Let us know any other questions you have that we might include in future Q&A articles by emailing them to [email protected]

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