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What is the Difference Between Holiday Pay and Annual Leave?

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In New Zealand, the terms “Holiday Pay” and “Annual Leave” refer to two different things.

The following applies for all types of employees except Casuals who are having their Holiday Pay 8% paid out with every pay.

Annual Leave is what an employee is entitled to after working for 12 months. The 4 weeks Annual Leave gets added in one lump after 12 months of employment, and then every 12 months after that. So, until an employee has worked for 12 months there is no Annual Leave.

Annual Leave is normally 4 weeks. The balance of how much Annual Leave is accrued is held in Weeks, not in a $ value.

When an employee takes Annual Leave, the $ amount to be paid out is based on standard current earnings or an average. It is not a set $ value based on what has been earned in the past.

Holiday Pay is what an employee is entitled to up until when Annual Leave is given at the 12 month mark. Holiday Pay is generally calculated as 8% of gross earnings.

Holiday Pay is generally only paid out when employment ends. It should generally not be paid out during employment (unless casual and being paid every week with no annual leave to be accrued).

When Annual Leave is given to the employee after 12 months of employment, the Holiday Pay balance is taken out and returns to Nil. Effectively the $ value 8% of gross earnings is replaced by the 4 weeks of Annual Leave.

The week after the Annual Leave has been accrued, and the Holiday Pay has gone back to Nil, the Holiday Pay starts to accrue again. It will continue to build up for the next 12 months. After another 12 months, more Annual Leave will be accrued and the Holiday Pay balance will go back to Nil again. And so it goes on…

Why can’t Holiday Pay balance be converted into Annual Leave?

Holiday Balance is a $ value. Annual Leave is held in days or weeks.

A $ value is just that, and it’s never open to interpretation – its a fixed amount.

A number of days or weeks can change depending on the employees work pattern. Here’s an example:

An employee works part time for a year and earns 4 weeks annual leave. At the 12 month mark when the Annual Leave was given, 4 weeks was at 20 hours a week, at a rate of $25 per hour. However, then the employee goes full time and gets a pay rise to $30 per hour. 6 months later when the employee chooses to take Annual Leave their 4 weeks is determined based on their current work pattern (full time). So they are now entitled to 4 weeks of 40 hours as week Annual Leave. The amount they get paid for the Annual Leave is a separate calculation. Here’s my blog about that which might help: https://livingbusiness.co.nz/blog/how-to-pay-out-annual-leave-xero/

Why is my employee entitled to both Annual Leave and Holiday Pay when employment ends?

After 12 months your employee will have both an Annual Leave balance, and a Holiday Pay balance. When employment ends they will be entitled to have both paid out. If you have granted Annual Leave in advance (before it was earned), then this value will be deducted from the balance to be paid out.

It’s common to confuse the Annual Leave in Advance with the Holiday Pay and not be sure how to record and pay them out correctly. The thing to remember is that in general there is never a situation where Holiday Pay is paid out, unless the employee is being terminated. This can happen at the end of employment, or if an employee is changing from Casual to Permanent and is thus being “terminated” and then reloaded as a new employee in Xero Payroll, under a new employment contract.

So if an employee has been working for say 9 months, and would like to take some leave, then this is recorded in Xero Payroll as Annual Leave taken in advance. Even though there is no Annual Leave accrued – and won’t be until 12 months have been worked – it’s quite sensible and normal to allow some leave to be taken.

Once this is processed, there will be a negative Annual Leave balance, and the Holiday Pay balance will remain unchanged.

At the 12 month mark, the Holiday Pay balance will completely reverse out back to Nil, and the Annual Leave due will be accrued. View this on the Leave Transactions report.

To see a conversion of the holiday pay into approximately the amount of Annual Leave Hours available, drill into the Annual Leave Balance and tick the box that sais, “Show Annual Leave in Advance”

Doing this converts the holiday pay balance into Xero’s best approximation of Annual Leave Hours and adds it to the Annual Leave balance. Bear in mind that the Holiday Pay Balance will still display just the same, but the conversion of the holiday pay to Annual Leave will also have been added to the Annual Leave Balance – so you are seeing the holiday pay represented twice.

Here’s an example where the only difference is whether the box is ticked or not: When the box is not ticked, only holiday pay is showing of $3738. When the box is ticked, the holiday pay is still showing of $3738 but it’s also been estimated as Annual Leave in advance and showing as 80 hours Annual Leave.

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