How Annual Leave and Holiday Pay Work

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During the first year of employment an employee has no Annual Leave Due. Most employers still allow their employees to take some annual leave during this period, but the leave is essentially taken in advance. If the employee leaves before they have been employed for a year they are paid out Holiday Pay in their final pay, which is typically 8% of their earnings. The value of any leave they have taken in advance would then get deducted from their final pay.

As the year progresses and the employee earns more the Holiday Pay balance increases and at the same time annual leave is being accrued. 

When the employee reaches their employment anniversary they become entitled to annual leave :

  • The Annual Leave Accrued balance becomes Annual Leave Due.
  • The Annual Leave Taken during the year is deducted from the Annual Leave Due.
  • The Holiday Pay, Annual Leave Accrued and Annual Leave Taken balances are set to zero.

The process then starts again with Holiday Pay accumulating and Annual Leave Accrued increasing until their next leave anniversary.

At any time an employee is owed two separate amounts - Holiday Pay and Annual Leave Due. If the employee leaves during the second year they will be paid out the Holiday Pay for that part year, and any Annual Leave Due. There is a good example of this on the MBIE website.

Holiday Pay is typically 8% of gross earnings and is shown as a dollar amount. Annual Leave Due is shown in hours and its value is based on the employee's average pay rate.

Annual Leave Accrued is an indication of what the employee will become entitled to when they reach their next employment anniversary date. For an employee on 8% holiday pay it will accrue at 4/52 of the hours worked or the normal hours per week, if this has been entered on the Employee Leave tab. Annual Leave Accrued is equivalent to the Holiday Pay but won't necessarily be the same value because 4/52 is not the same as 8% and the value of hours accrued can increase over time if the employee's pay rate increases or their average rate increases due to overtime paid at a higher hourly rate.

Use the Leave History Report to show the effect of each pay on an employee's leave balances.

If you are showing annual leave on payslips we recommend you show Annual Leave Available. This is the Annual Leave Due plus Annual Leave Accrued.  This is essentially the number of hours leave the employee could take before incurring a debt to the employer.

The fields on the leave tab represent the following:

  • Holiday Pay Accrued - typically 8% of the employee's earnings since their employment start or last leave anniversary. This will be added to a final pay.
  • Annual Leave Due - the annual leave balance as at the last leave anniversary
  • Annual Leave Taken - annual leave taken since the last leave anniversary
  • Current Annual Leave Due - annual leave due less annual leave taken. This is the leave balance that will be paid out in a final pay, along with holiday pay.
  • Annual Leave Accrued - annual leave accumulated since the last leave anniversary that will be added on to the annual leave due when the leave anniversary is next reached.
  • Annual Leave Available - annual leave due plus annual leave accrued, representing the hours available for the employee to take.

Note - Annual Leave is included in gross earnings and so when paid to an employee it will increase their Holiday Pay balance. This may seem like you're paying for holidays twice but if you consider that when an employee takes annual leave they are still employed and so continue to accrue annual leave, it makes sense.

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