Getting holiday pay right

On the surface, Holiday Pay is pretty easy to get right, but time and time again businesses are finding themselves falling foul of the Holidays Act. So, whether you’re a small business owner with several staff or a mid-sized enterprise with a large team, it’s important that you understand how to calculate holiday pay to avoid costly errors.

The purpose of the Holidays Act is to promote a balance between work and employees’ personal lives and provide employees with minimum entitlements to annual holidays, public holidays, sick leave and bereavement leave.

Why do businesses get it wrong? There are two ways holiday pay can be calculated:

  • Ordinary weekly pay - which is the amount of pay that an employee receives under their employment agreement for an ordinary working week. If it’s not possible to determine ordinary pay, you use the average of the last four weeks.
  • Average weekly earnings - which is the average of an employee’s last 52 weeks of earnings prior to the current pay run. If the employee has worked less than 52 weeks, then you take the average pay from the number of weeks they have worked.

Annual leave is calculated by comparing ordinary weekly pay and average weekly earnings and employers must pay whatever gives the employee more money.

It’s when businesses don’t use the correct calculation that they get it wrong. There are many reasons as to why businesses use the wrong calculation. These can range from employers not understanding the implications of getting payroll wrong, systems not being set up correctly, employment agreements that aren’t comprehensive, miscommunication between workplace teams to changing work patterns not being reflected in systems.

All payroll calculations need to be tailored to the individual business’ operating model. The complexity of working arrangements and different business models means a one size fits all approach isn’t possible.

With a good payroll system like MYOB Essentials Payroll, it’s easy to keep accurate records and manage your employee’s leave so you’re always compliant.

To learn more about the different types of leave employees are entitled to and for helpful information to guide you through every stage of the employment life-cycle, download our Employer Essentials Guide.

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Getting holiday pay right