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Annual Leave Not Accruing in Xero Payroll

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I’ve recently dealt with Xero Payroll records where Annual Leave has not been accruing. In one case this had been going on for several years resulting in a very high Holiday Pay balance, and a negative Annual Leave balance from the Annual Leave taken in advance. You generally cannot pay out Holiday Pay unless the employee is finishing employment.

Annual Leave should accrue once an employee has worked for 12 months. A couple of things can happen which would stop this accrual happening automatically in Xero Payroll.

Why is Annual Leave not accruing in Xero Payroll?

Firstly, there needs to be a normal payrun covering the date Annual Leave is due to accrue. For example, if you’ve been running Unscheduled Pay Runs, rather than using a regular calendar, Xero won’t recognise this and Annual Leave will not accrue.

Another reason is if there are no Standard Hours in the Employment Tab. If your employee works variable part time hours, you still need to put in minimum hours. If you leave the hours as 0 hours a day, 0 days a week, then Annual Leave will not accrue.

When Annual Leave doesn’t accrue, the Holiday Pay balance will continue to grow and won’t be removed every year as it should be.

How to fix this situation

  1. First, check the Leave Transactions report.
    For annual leave you should see 4 weeks of annual leave (Xero Payroll represents this in hours) being added every 12 months, and negative hours every time the employee has taken leave. In the situation where Annual leave has not been accruing, the normal 12 monthly positive accruals will be missing.
    For Holiday Pay you should see 8% of normal earnings accumulating every payday. Then at the 12 month mark, you should see the total being reversed so the Holiday Pay balance goes back to zero. This happens at the same time Annual Leave accrues.
  2. Work out what the correct Annual Leave balance should be. Check for any errors. Confirm what any missing accruals should have been.
  3. Confirm what the holiday pay balance should be. It should only be the 8% of payruns since the last Annual Leave accrual.
  4. Check that the AL accrual settings are correct in the employee Leave Tab. Normally these are set to 4 weeks every anniversary date.
  5. Check that the standard hours in the employment tab are correct. These standard hours are what Xero uses to determine how to represent the employees 4 weeks AL, in hours. For example if the standard hours are 6 hours a day, 5 days a week, each week will be represented by 30 hours so 4 weeks will be represented by 120 hours a year.
  6. Process an Unscheduled Pay to reduce the holiday pay balance and to add in the missing Annual Leave accruals.
  7. If you had been using Unscheduled Pay runs, set up a new Pay Calendar for the next period you want to process a normal pay for and allocate employees to that calendar.

As long as your Employment Start dates are correct, and the Standard Hours are correct, then the Annual Leave will accrue at the next anniversary.

Need more help using Xero Payroll for your business? Living Business can find creative ways to help you and configure the solution best suited to your needs. Get in touch with us to find out more.