The purpose of this article is to explain how Payroll classic will calculate annual holidays in relation to the following scenario: Employee is on parental leave; and the employee becomes entitled to annual holidays during parental leave, or within 12 months from when they return to work.
Only the average weekly earnings (AWE) rate is to apply, with no comparison to the ordinary weekly pay (OWP) rate. Please keep in mind that it only impacts annual holiday calculations. There are no changes to the existing calculations for daily-based leave, such as bereavement, alternative holiday, domestic, public holiday, sick leave.
Businesses created after 19th May 2021
There is a new platform default pay category called Parental leave, and within this pay category, we have added a new Parental Leave setting. The new parental leave setting is how Payroll classic determines if it needs to apply the parental leave rules to annual holiday entitlements, which started during parental leave or within 12 months of returning to work from parental leave.
- Log into Payroll classic
- Select Payroll settings.
- Navigate to Pay Categories.
- Select the category you want to apply the setting to.
- Select the Parental Leave tick box.
- Click Save.
Businesses created before 19th May 2021
If you created your business before 19th May 2021, you can manually update your existing parental leave-related pay category.
- Log into Payroll classic.
- Select Payroll settings.
- Navigate to Pay Categories.
- Locate your leave-related pay category.
- Select the Parental Leave Settings tick box.
- Click Save.
Helpful Hint
If you have selected the Parental Leave Settings tick box within a pay category, when you reach the annual holiday entitlement, within a pay run, the platform will apply the parental leave rules. I.e, only the average weekly earnings (AWE) rate will apply, with no comparison to the ordinary weekly pay (OWP) rate) where applicable.
If you would prefer to add/rename your own pay category for parental leave purposes, you do not have to use the platform default one, but the important thing to remember is that you must select the Parental Leave Settings tick box.
Businesses created after 19th May 2021
When an employee is on parental leave, use the Parental leave pay category.
1. Update Employee Pay Settings
To stop the employee’s regular pay from generating while they are on leave:
- Navigate to the employee's Pay Run Defaults screen.
- Untick "Pay these earnings by default in a pay run" for their standard salary or hourly rate.
- This prevents regular wages from pulling through while allowing the rate to remain on file for when they return.
- If an employee is on timesheets, you can skip to step 2.
2. Set Up Parental Leave Pay Category
In the Pay Rates screen of the employee file:
- Locate the Parental Leave pay category.
- Important: Ensure you select the specific Parental Leave category that has the "Parental Leave" checkbox ticked in the system settings. This ensures the leave is paid Average Weekly Earnings calculations.
- Enter the employee's normal hours into this category.
- Leave the rate blank.
- Tick the box to make it "Appear in the pay run".
3. Documentation
- Add a Note: Go to the employee’s file and add a note specifying the parental leave start and end dates.
- This provides a clear audit trail for compliance.
Why this matters: Under the NZ Holidays Act, if an employee is on parental leave, their "Average Weekly Earnings" for annual holidays may be impacted. Using the correct system-flagged pay category ensures the software calculates their future holiday pay entitlements correctly.
The annual holiday parental leave rules occur once and we will apply a block of annual holiday entitlement that kicks in first. This refers to whether it applies during parental leave or within the 12 months of returning to work from parental leave.
Businesses created before 19th May 2021
There is a workaround for existing businesses who wish to apply the annual parental leave rules to employees who are on parental leave or have been 12 months since returning to work from parental leave:
- Log into Payroll classic.
- Go to Payroll settings.
- Update your existing parental leave-related pay category by selecting the Parental Leave Settings tick box.
- Click Save.
- Navigate to Pay runs.
- Unlock the relevant pay run/s where the existing parental leave-related pay category was applied for the employees.
- Click the Actions button.
- Click the Recalculate button.
- Finalise the pay run.
Helpful Hint
You will need to complete the above steps for all pay runs where you applied the existing parental leave-related pay category to the relevant employees. It will then retrospectively apply the parental leave rules to the relevant block of annual holiday entitlement.
To check whether the parental leave rules have been applied to the relevant block of annual holiday entitlement, generate a leave balance report as at today's date. There should be a separate line item called Annual Holidays (Parental leave rules apply) leave type for the employee. If you wish to create a new parental leave pay category for future use, you can do so, just make sure that the select the Parental Leave Settings tick box for the annual holiday parental leave rules to apply.
Where the employee's anniversary date falls during parental leave or within 12 months of returning to work, we will pay the four weeks of annual holiday entitlement at average weekly earnings (AWE) rate only, with no comparison to the ordinary weekly pay (OWP) rate.
Where the employee has both a normal (i.e., parental leave rules not applying) block of unused annual holidays and a parental leave block of annual holidays, then the two calculations will show within the pay run.
Starting with the annual leave taken under parental leave rules, we will apply the parental leave rules to the annual holiday leave taken, and we will only select the AWE calculation rate in the context panel. Furthermore, we will apply this to the rate selection within the pay run for the relevant annual holidays taken earnings line. It means the employee may get a reduced rate for leave that could be less than their normal rate of pay.
For the normal parental leave rules not applying to blocks of unused annual holidays, we will show the existing comparison/greater of calculation AWE/OWP, with the greater amount as the rate selection. We will deduct the annual holidays taken in the order of the oldest to newest annual holidays block of entitlement.
Employers may choose not to apply the AWE-only rule and continue to pay their employees the normal greater of AWE/OWP rate. You can do this manually by overriding the annual holiday leave-taken earnings line rate with the OWP rate.
The following is a list of all reports that will reflect 'Annual holidays parental leave':
Leave balance report
- Log into Payroll classic.
- Select Reports.
- Click on Leave Balance report.
- Set your filters.
- Click Run Report.
- In the summary view for this report, there is a separate line for the leave balance. Within the expanded view, annual holidays where the parental leave rules have applied will display as a separate line item, and this is based on AWE rate calculation only.
Leave liability report
- Log into Payroll classic.
- Select Reports.
- Click on Leave Balance report.
- Set your filters.
- Click Run Report.
- Similar to the Leave balance report, the Leave liability report will show the annual holidays where parental leave rules have applied, displayed as a separate line item, and this is based on AWE rate calculations only.