Guide
Ordinary weekly pay vs average weekly earnings in New Zealand
Updated
Two measures, one rule: whichever is larger is what your annual holidays must be paid at. Getting the inputs right matters more than the arithmetic.
The rule in one sentence
Employment New Zealand states that annual holiday pay is at least the greater of ordinary weekly pay as at the beginning of the annual holiday, or average weekly earnings for the 12 months immediately before the end of the last pay period before the annual holiday is taken (Employment NZ: annual holiday pay).
What is in ordinary weekly pay
- Included
- Regular salary or wages, regular allowances such as a shift allowance, regular productivity or incentive-based payments including commission or piece rates, the cash value of board or lodgings, and regular overtime.
- Excluded
- Irregular or one-off payments such as bonuses, discretionary payments, and employer contributions to superannuation schemes.
Employment New Zealand's test for whether something is regular is worth quoting in an argument with a payroll team: it is the payment that needs to be regular, not the size of the payment. If an employee usually does overtime on a Monday but the amount varies, it is still a regular payment. Their guidance also says the employee should not be disadvantaged because they took annual holidays instead of going to work, and that employers unsure of a payment should err on the side of including it.
The four week formula
Where ordinary weekly pay cannot be worked out, Employment New Zealand says employers must use the formula (a minus b) divided by 4.
- Go to the end of the last pay period before the employee takes annual holidays.
- From that date go back 4 weeks, or the number of weeks in the pay period if it is longer than 4 weeks.
- Take the gross earnings for that period. This is a.
- Deduct any one-off, irregular, or other payments the employer is not bound to pay. This is b.
- Divide the answer by 4, then compare the result with average weekly earnings and pay the greater.
Employment New Zealand gives three situations where the formula is needed: hours vary by more than a minor amount each week, overtime is regular but the amount varies unpredictably, or commission and incentive bonuses are earned each pay period but the amount varies unpredictably or cannot be attributed to a specific week.
How average weekly earnings are calculated
Take gross earnings for the 12 months leading up to the last pay period before the annual holiday and divide by 52. Where the employee has been employed for less than 12 months, count the number of whole or part weeks they have been employed and divide gross earnings by that number instead.
| Situation | Usually higher | Why |
|---|---|---|
| Steady salary, no overtime, no bonuses | The two are close | Average weekly earnings converge on the salary, so the choice rarely changes the answer. |
| A year with heavy overtime or commission | Average weekly earnings | Gross earnings over 12 months carry the extra pay into the 52 week average. |
| A recent pay rise | Ordinary weekly pay | The new rate applies at the start of the holiday, while the 12 month average still contains the old rate. |
| A period of unpaid leave during the year | Ordinary weekly pay | Gross earnings fall but the divisor stays at 52 unless the divisor is adjusted by agreement. |
Employment New Zealand states that an employment agreement can set a special ordinary weekly pay rate or formula, but it must be no less than the employee's actual ordinary weekly pay.