Payment for Annual Leave – many employers either underpay or under-accrue. Do you get it right?

The Holidays Act specifies that Annual Leave must be paid out at the greater of "ordinary weekly pay" and "average weekly pay". Now, ‘Ordinary weekly pay’ is the pay the employee would receive under his or her employment agreement for working an ordinary working week, which is often pretty easy to determine. But, where an employee usually works more than the ordinary/minimum working week per their Employment Agreement, the Holidays Act provides a formula for “average weekly pay”, which is the correct rate for annual leave.

One thing to be wary of is when an employee often works less than an ordinary working week as defined in their employment agreement. This may happen, for example, if they are often away due to illness and take unpaid leave. In this case, they are still entitled to be paid their 4 weeks of annual leave based on their ordinary weekly pay even though they haven’t fully “earned it”. Payroll systems should get this calculation right – but many small companies don’t.

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