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Ordinary Weekly Pay (OWP)

At first glance, OWP looks straightforward. It is the employee’s “ordinary weekly pay” at the start of the holiday. But what exactly does that include?

• Is it just base salary?
• What about regular allowances?
• Does overtime count?
• What if the employee receives board and lodging?

The answer: yes, these can all be included.

This is where many businesses get caught. If you are paying a regular allowance, and your contract does not specifically say it stops during leave, that allowance continues to be paid on top of the leave payment. At the same time, it is also included in the OWP calculation. The result? The employee receives the allowance twice. Payroll professionals call this “double-dipping” and it often happens because payroll was not consulted when allowances were introduced.

What’s excluded from OWP?

The Act carves out certain types of payments:

• Irregular payments
• One-off payments
• Discretionary payments

But be cautious. What you think is discretionary may not meet the legal definition. A labour inspector could rule that a payment you assumed was discretionary is in fact regular, and therefore should be included. Section 8(c) of the Holidays Act provides the framework, but interpretation can be risky.

Calculating OWP when it’s unclear

If OWP cannot be determined because of excluded payments, a formula must be applied:

Gross earnings for the last 4 weeks, less excluded payments, divided by 4.

There is also provision for an employer and employee to agree on a special OWP rate, as long as that rate is equal to or greater than the statutory calculation. Importantly, you cannot simply use the base salary in the employment agreement unless it meets the definition.

And if all else fails, Section 11 of the Holidays Act allows a labour inspector to determine OWP. Most employers would prefer to avoid this outcome, as it suggests payroll processes are not compliant.

Key question: How is your system calculating OWP? And how does it handle fortnightly and monthly employees?

Average Weekly Earnings (AWE)

AWE is designed to capture fluctuations over time. The calculation is:

Gross earnings over the last 52 weeks ÷ 52.

This method smooths out irregularities, but raises another question: what counts as gross earnings?

• Are bonuses included?
• Are allowances included?
• Does a seasonal top-up or Christmas cash bonus fall into the calculation?

These decisions matter. Misclassifying payments can either short-change employees or overpay them. Both outcomes create risk, financial for the employer and compliance exposure if challenged by a labour inspector.

Another common issue arises with employees paid fortnightly or monthly. Payroll systems must be able to apply the same rules consistently, regardless of pay cycle. A system that averages incorrectly or overlooks certain earnings can cause significant underpayments.

Leave accrual and payments

This is where the Holidays Act leaves employers with less guidance. The Act does not define “leave accrual.” It only defines leave entitlement and leave taken in advance.

Most payroll systems show both entitlement and accrual balances, but many treat them the same way at payout. That can be problematic.

Here’s why:

• If leave is taken in advance, it must be paid at the greater of OWP or AWE.
• If the employee later resigns, the accrual time is ignored. Instead, the employer recalculates pay based on 8% of gross earnings since the last leave anniversary, less any leave in advance already paid.

This can lead to a deficit if the earlier advance payment was higher than the 8% calculation.

Best practice for accruals

• Treat accrual and entitlement as separate balances.
• Where possible, configure your payroll system to record gross earnings since the last anniversary, so the 8% calculation can be applied correctly. Few systems handle this well, but it is the most accurate approach.

Final reminders

Holiday pay is not just about calculation, timing matters too.

• Once you have determined the correct rate for an annual holiday, that rate must stay the same for the entire holiday period, even if it runs across multiple pay cycles. Payroll systems should not be recalculating it each pay run.
• Under Section 27 of the Holidays Act, holiday pay must be paid before the employee goes on holiday, unless there is a written agreement to process it in the usual pay run. This often gets overlooked but is a legal requirement. 

Why this matters

Annual leave payments may seem straightforward on the surface, but the reality is complex. Missteps create compliance risk, employee disputes, and potential financial liability. Systems must be configured correctly, contracts must be clear, and payroll professionals must be involved when allowances or new payment types are introduced.

“The greater of” may sound simple, but applying it correctly is where most payroll mistakes happen. Ensuring your payroll system interprets them correctly is one of the most important steps in building a compliant, trusted workplace.

Written by: Dawn Grant

What’s missing? The myth of “accrued leave”

Let’s start with what isn’t in Section 16: accrued leave.

If you searched the Holidays Act 2003 for the terms “accrued leave” or “leave accrual”, you’d come up empty. Neither term appears in the legislation.

Yet most payroll systems use these terms to describe leave earned during the first 12 months of employment – and in every 12-month period after that. Some systems even show two leave balances:

• Leave accrued
• Leave entitled

But here’s the thing: only “leave entitled” is legally recognised. “Leave accrued” is a system construct – not a legislative one.

So what’s the problem?

If there’s no mention of leave accrual in legislation, but your system displays leave accrued, how do you know it’s correct?

And if leave is accruing – how is it accruing? In weeks? In most systems, leave accrual is in hours, sometimes in days, and possibly in weeks if you’re lucky.

How does this accrual work for employees with varied hours? Is it based on hours worked – also known as proportional accrual?

And how does that get translated into a 4-week entitlement once the 12-month mark is reached?

Understanding “continuous employment”

Let’s go back to Section 16 – “each completed 12 months of continuous employment.”

Let’s review what continuous employment means.

At first glance, it seems simple: work 12 months, get 4 weeks of leave. Easy, eh? Yeah, nah.

What happens if an employee takes time off during those 12 months? Is employment still considered continuous? In most cases, yes.

Even some types of unpaid leave are considered continuous employment – think unpaid sick leave, unpaid bereavement leave, unpaid jury duty, etc.

Only unpaid leave not related to these categories, and greater than one week, is excluded from the definition of continuous employment.

So what does your system do in those cases?

• Does it push out the leave entitlement date (anniversary date)?
• Reduce the divisor?
• Or… does it do nothing at all?

The ACC scenario: an easy one to miss

Here’s one to look out for: unpaid injury leave while an employee is receiving weekly compensation from ACC.

If an employee returns after a period of injury leave, however long, the time away is still considered continuous employment.

That means the employee may be entitled to 4 weeks of annual leave, even if they haven’t worked at all during the past 12 months.

As the company isn’t paying the employee, and the role may have been filled by someone else, this often drops off the radar. Confusion and frustration follow when the employee returns and claims their 4 weeks of leave.

Surely they’re not entitled? Oh yes, they are.

But what is “4 weeks of leave” really?

Here’s the big question – what exactly does 4 weeks of leave mean in your system?

Is the balance stored in hours or in weeks?

If it’s in hours, how do you know the correct number of hours have been converted into the equivalent of 4 weeks?

Have the employee’s regular hours changed in those 12 months?

• Has a full-time employee gone part-time?
• Has a part-time employee gone full-time?

Are the hours now more or less than the equivalent of 4 weeks?

So what’s the problem?

If there’s no mention of leave accrual in legislation, but your system displays leave accrued, how do you know it’s correct?

And if leave is accruing – how is it accruing? In weeks? In most systems, leave accrual is in hours, sometimes in days, and possibly in weeks if you’re lucky.

How does this accrual work for employees with varied hours? Is it based on hours worked – also known as proportional accrual?

And how does that get translated into a 4-week entitlement once the 12-month mark is reached?

Section 17: Agreement (or disagreement)

Section 17 of the Holidays Act explains how the entitlement to 4 weeks’ annual holidays can be met. The recommended approach? Employer and employee should agree on how the 4-week entitlement is fulfilled.

But who actually has those conversations?

In most cases, it’s left up to the payroll system to define the 4 weeks of annual holidays. But is that definition correct? Are you relying on a flawed system?

What happens when there’s no agreement?

Even worse, under Section 17(2), if the employer and employee can’t agree, then a Labour Inspector can make the determination.

Yikes.

The Labour Inspector may also refer to Section 12 of the Act, which defines an otherwise working day. Are these otherwise working days accurately recorded in your time and attendance system? If not, then the door is open for the Labour Inspector to dig even deeper – something you want to avoid.

Final note: payment is a separate issue

And don’t get me started on payment for those 4 week, that’s a subject for another article.

So…eight simple words that cause so much consternation and angst – not less than 4 weeks paid annual holidays.

So… is your system compliant?

Is your system compliant? The question isn’t whether you trust your system –  it’s whether your system actually aligns with the Holidays Act.

A quick compliance audit can:

• Review your accrual settings
  
• Check anniversary date handling
  
• Confirm how “4 weeks” is calculated in real-world terms

→ Ask us about a Holidays Act audit today.

Written By: Dawn Grant

Payroll Is Business-Critical. So Why Isn’t It Treated That Way?

Payroll isn’t just a routine back-office task. It’s the process that keeps your people paid, your business compliant, and your reputation intact.

Yet in many organisations, payroll sits precariously on the shoulders of one person. If they’re sick, on holiday, or suddenly unavailable – there’s no safety net.

Even worse, the payroll process itself is rarely documented. That means there’s no guide, checklist, or fallback plan. Just one person’s working memory. And when they’re gone, so is all that operational knowledge.

We’ve seen it first-hand. We’ve supported organisations where multiple payroll staff left at the same time, leaving no documentation behind. With no clear process and no one trained to step in, payroll ground to a halt. We were brought in to help map out the workflow, restore continuity, and get things back on track. It was a stressful moment that could have been avoided with a simple backup plan.

The Hidden Complexity of Payroll

On the surface, payroll might seem like a predictable task. But dig deeper and you’ll find:

• Complex legislative requirements like the Holidays Act and PAYE calculations.
• Confidential employee data that demands strict privacy controls.
• System quirks and workarounds that only your payroll person understands.
• High-volume periods such as EOFY or new system rollouts that stretch even seasoned teams.

It’s not something you can hand off to ‘whoever’s free.’ And it’s certainly not something you want to get wrong.

When payroll fails, the consequences are immediate:

• Staff aren’t paid correctly – or at all.
• Compliance risks snowballing.
• Trust is eroded.
• And if a worst-case scenario unfolds, you could be looking at media scrutiny, legal issues, and reputational damage.

Payroll Support Services: The Third Option (and the Smart One)

This is where payroll support services come in.

Whether you’re facing a short-term absence or need long-term assistance, a payroll support partner like Alxemy offers:

• Continuity – ensuring payroll is processed accurately and on time, no matter the disruption.
• System familiarity – working within your current systems and processes, not overhauling them.
• Compliance confidence – meeting legislative requirements without putting internal teams at risk.
• Scalable capacity – providing extra hands during high-volume or high-pressure periods.

Think of it like business continuity insurance – except it’s proactive, cost-effective, and people-focused.

Why Documentation Matters (And Why So Few Have It)

Another overlooked risk? Lack of documentation.

Most businesses don’t formally document their payroll processes. Not because they’re careless, but because no one thinks to – until disaster hits. It’s an invisible liability hiding in plain sight.

A good payroll support service can help here too. At Alxemy, we’ve worked with clients to:

• Map out payroll processes step-by-step.
• Identify single points of failure.
• Build out backup plans.
• Train secondary resources.

That way, even if someone is unavailable, the show can go on – and staff get paid without panic.

 Be Ready Before You Have to Be

We’re not saying your payroll person is going to disappear tomorrow. But wouldn’t you rather be prepared?

Payroll support isn’t just for emergencies. It’s about resilience, trust, and peace of mind – for your business and your people.

So next time you ask: “What would we do if our payroll person wasn’t here?”  –  don’t default to unrealistic options.

Avoid option 1: (hospital-bound payroll).
Avoid option 2: (winging it solo).
Choose option 3: a trusted payroll support partner who’s ready when you need them most.

Need Help With Payroll Contingency or Coverage?

Whether you’re preparing for leave cover, navigating a high-volume period, or simply want to reduce your payroll risk – Alxemy can help.

Talk to us today about building a resilient, documented payroll function – so you’re never caught off guard.

Visit www.alxemy.co.nz/payroll-processing
Or Contact Us for a confidential chat.