Explaining How Annual Leave Works for Different Types of Employment Agreements

Annual leave is made up of many different components, each with its own calculations and purpose. This article will help you make sense of your employee's annual leave so you will be confident that your payroll is compliant.

Updated: July 2023

In this article

• What is Annual Leave?
• Annual Leave for the Permanent Employee
• Annual Leave for the Fixed-Term Employee
• Annual Leave for the Casual Employee
• Further Resources

---

What is Annual Leave?

According to the Holidays Act, all employees are entitled to a minimum of 4 weeks annual leave after completing 12 months of continuous employment. Where employment agreements are shorter than 12 months, or it is impractical for employees to take 4 weeks of leave because of working intermittently, the Act makes provision for calculating this leave as it is earned as Holiday Pay or PAYG.

So annual leave, also called 'annual holidays', is paid time off work protected by law. An employer is required, by law, to provide this entitlement fairly and compliantly, keeping records of how this responsibility is met.

In the Thankyou Payroll system, the formula used to calculate an employee's annual leave is set in the Employee Profile.

• The setting 'rate set as per the holiday's act' calculates annual leave in allocated days based on 4 weeks of annual leave.
• The setting '8% of gross earnings (temp and irregular scenario)' calculates Holiday Pay as it is earned.

These settings use different formulas as required by the Holidays Act. They are there to keep your payroll compliant. Changing the leave method in the Employee Profile will not convert one calculation formula into the other.

---

Annual Leave for the Permanent Employee

Permanent employees have an ongoing expectation of employment with guaranteed hours each week. They may, or may not have a regular work pattern i.e. permanent full-time or permanent part-time employees and may receive a salary or wages.

The image below illustrates the ongoing annual leave cycle of a permanent employee.

The board is round because the cycle of annual leave repeats every year. Annual leave does not lapse but remains until it is either used or paid out.

Each block on the board represents a month in the year.

Like with a board game, the employee joins the board at 'Start' and moves around the board once each year, accruing leave as they go.

Click on any element in the illustration to see what aspect of annual leave is represented and how it works. 

Key Takeaways

• In the first year the employee will have an accrued leave balance, and a negative allocated leave balance only if leave in advance was granted.
• From the second year, the employee will have both an accrued and allocated leave balance.
• If the leave liability is negative, you have paid for leave the employee has not earned and could be out of pocket if they leave your employment.

---

Annual Leave for the Fixed-Term Employee

Fixed-term employees have a defined end date to their employment agreement. They have the same entitlements and rights as permanent employees, but their annual leave is calculated with each pay as 8% of their gross (called Holiday Pay). They usually accumulate this to be paid at the end of their employment but may choose to have it included in every pay.

The image below illustrates the linear annual leave path of a fixed-term employee.

The board forms a path with a start and finish as a fixed-term agreement has a specified end date. There is no repetition on this board.

Each block on the board represents a month in the year. The board is only as long as the employment agreement, e.g. the example below illustrates an employment agreement of 10 months so there are 10 blocks to this board.

Like with a board game, the employee joins the board at 'Start' and moves along the board towards the finish line, accumulating Holiday Pay as they go.

Click on any element in the illustration to see what aspect of annual leave is represented and how it works. 

Key Takeaways

• Fixed-term employees take leave from their accumulated Holiday Pay balance, lowering this balance by the amount paid for the leave taken.
• Holiday Pay is calculated and paid as a dollar amount ($).
• Holiday Pay must be an easily recognisable amount when paid.
• Fixed-term agreements are usually shorter than 12 months. If a fixed-term agreement is longer than 12 months, the employee will be set up as a permanent employee in the system and they will follow the circular board to calculate their annual leave.

---

Annual Leave for the Casual Employee

Casual employees have no ongoing expectation of work with no guaranteed hours or regular work pattern.

The image below illustrates the singular nature of a casual employee's employment.

The casual employee's annual leave game is a dartboard. They are tallied after each work day and paid in full. There is no repetition or a next step on this board.

Click on any element in the illustration to see what aspect of annual leave is represented and how it works. 

Key Takeaways

• The casual employee receives their annual leave as 8% PAYG with every pay.
• This PAYG must be a recognisable component of every pay.
• 8% PAYG is on top of the minimum wage to be compliant.

---

Further Resources

• You can learn more about annual leave and employment agreements by checking the Employment New Zealand website or contacting them on 0800 20 90 20.