The Problem

Annual leave should be calculated in weeks not hours

The problem begins because nearly every employer calculated annual leave in hours and then allocated it in hours when workers took leave. If you look at your payslip annual leave is almost certainly recorded in hours.

When a worker asks for annual leave, however, it should be calculated in weeks, because annual leave is a weekly entitlement.

If employers allocate leave in hours without converting it to weeks then all sorts of problems emerge. This is especially true if they hire workers with irregular hours, as many industries now do.

In most cases, particularly in industries where workers have variable hours, employers calculate leave in hours because it is easier for them. There is no doubt that it is more difficult to convert variable hours into weeks, however, employers make the choice to employ workers on variable hours because it gives the employer more flexibility and increases profit. Employers are making the choice to employ workers this way for their own benefit, the consequence is that they need to spend more on better payroll systems to comply with the law.

The "Higher of" formula was ignored

Annual leave should also be paid at the higher of a worker's "average" weekly pay for the year or their "ordinary" weekly pay.

If a worker got promoted from being a part-time to a full-time worker just before their anniversary date for employment then all four weeks' leave should be assessed at the new "ordinary" full-time rate.

If a worker does a lot of overtime during the year then their average weekly pay is likely to be higher than their "ordinary" weekly pay and this number should be used for all annual leave taken.


If a worker's ordinary weekly pay is unclear because they work irregular hours, then a week's annual leave should be paid at the "higher of" the last four weeks pay or the average for the year.

If someone starts working at a company on 10 hours a week for six months and then increases to 30 hours a week for the last six months then their four weeks' annual leave should be calculated at the "higher of" rate of 30 hours a week rather than the 20 hours average for the year.

What companies usually did was pay only the accumulated hours at the ordinary rate. So workers lost either their leave entitlement of the real value of their leave.

In this example, if a worker took four weeks' leave the company would only pay 80 hours for it rather than the 120 hours of value it should have had. The workers lost 40 hours in value.

Unlawful Cashup

Sometimes bosses (and some workers) use annual leave to top up their wages when there is not much work in a particular week. This disadvantaged workers in two ways. By deducting hours of leave without revaluing it at the higher rate the worker wasn't getting the full value of their leave.

They would also be using up a higher proportion of their annual leave balance. In the example above, a worker had an annual leave balance of 80 hours recorded (but worth 120 hours). If half that leave was used half of it up in bits and pieces during the year, the worker would have ended with two weeks annual leave to take. Even if those two weeks were paid at the correct rate of 30 hours pay, the worker will still have lost 20 hours in value. If an employer has done this, the worker is still entitled to have their full amount of leave value reinstated.

This also leads to errors when “cashing up” a week's leave. The “week's leave” must be the legally correct amount. If more hours have been cashed up than an actual week (i.e. cashing up 40 hours when a week is actually worth 20 hours), then the worker is legally still owed the one week's leave for the extra 20 hours they were paid.

Not including all allowances

Another important means of cheating workers is by not including all allowances. For example, at McDonald's, there was a night work allowance that wasn't included. A security company had separate site allowances that weren't included.

Not calculating Statutory Holiday entitlement properly

Many companies had a too restrictive way of earning entitlements for working (or not working) on a public holiday.

At Wendy's and McDonald's, for example, they insisted that you had to work four out of four of the previous particular days to earn entitlements. At Restaurant Brands it was three out of four. But both were too restrictive. A recent Employment Relations Authority decision confirmed that working a simple majority of the same days over the previous three months is enough.

So if someone worked 7 out of 13 Mondays before Easter Monday this year they should be paid that day even if they don't work on it. If someone works on that day they should be paid time and a half for each hour worked and earn an alternative holiday.

It is also important that the amount of money workers are paid for their alternative holiday is calculated correctly. If someone works three hours on Easter Monday then they earn an ‘alternative holiday’ (this is to recognise that they had to give up their public holiday). If they use their alternative holiday to take the next Friday off and that was usually an 8-hour day for them, then they should be paid 8 hours for it. That is called Relevant Daily Day (RDP). In some situations, when it is difficult to know what the RDP is, an Average Daily Pay (ADP) formula can be used. Regardless of how long someone works for on a public holiday, they must receive a full day’s leave to use at another time.

Sick, Bereavement Leave.

These days should also be paid at either the RDP or ADP formula.

Incorrectly using pay as you go for annual leave.

Workers that have casual contracts or fixed-term contracts for less than a year are usually paid 8% extra in weekly pay instead of accumulating annual leave. But often workers may start as a casual or fixed-term and then continue as a regular employee. When a casual worker becomes a permanent employee (usually as soon as they start to appear on a roster), then leave should be accrued in weeks. An incorrectly classified “casual employee” who works over a year is also almost certainly entitled to claim four weeks' leave even though they have been paid 8% extra each week. Similarly, a fixed-term worker who works one day more than their fixed-term contract becomes a permanent worker with the rights to the annual leave of a permanent worker.

Not including public holidays that happen after termination.

If a worker has annual leave still owing when they finish work, then it is paid out as if they took the leave after their last day of employment. For example, if someone had three weeks annual leave and their last day of work was December 24th, then when they are paid their final pay it should include pay for Christmas Day, Boxing Day, New Years Day and January 2nd because all these public holidays occurred within the three weeks that they had outstanding annual leave.