How To Correctly Record and Pay Out Annual Leave in Xero

How To Correctly Record and Pay Out Annual Leave in Xero

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Make sure you avoid these 3 common errors:

  1. Incorrect Annual Leave Balance
  2. Annual Leave not paid out at the correct rate
  3. Annual Leave in Advance being confused with Holiday Pay

Annual Leave Balances

The most common Annual Leave error we find in Xero is that the balances are incorrect. It generally happens when the employees’ standard hours change or they are working irregular hours. For these situations, in Xero Payroll a Manual Adjustment will generally be required to keep the Annual Leave Balance correct.

This is because Annual Leave in NZ is kept in Days/Weeks, whereas Xero Payroll keeps Annual Leave balances in Hours. So when standard hours change, the number of hours in the employment tab of Xero Payroll that is representing a Day/Week, changes. Here’s an example.

Your employee used to work 20 hours a week – represented in Xero Payroll as 5 hours, 4 days a week. Therefore 1 week Annual Leave will be represented by 20 hours. If the employee then changes to 30 hours a week standard hours, then all of sudden Xero Payroll is representing a week as 30 hours, not 20. So the Annual Leave 4 week allocation will change from 80 to 120 hours.

Annual Leave balances in Days/Weeks should be based on current work patterns, not past ones. So if an employee had an AL balance of 80 hours (based on working 20 hours a week), and then they change to 30 hours a week, you would most likely need to adjust the AL balance up to 120 hours, as that is the new representation of 4 weeks for that employee.

Another useful thing to do is to check the “Leave Transactions” report (Reports / Payroll Reports) to see the complete history and if there are any errors or mysteries that don’t make sense such as:

  • A different number of Annual Leave hours accrued in different years
  • Random Annual Leave or other Leave accruals
  • Holiday Pay Balances continuing to accrue for more than one year
  • Annual Leave Cash Up balances that have not been reversed out

I’ve given a fuller explanation in my earlier blog https://livingbusiness.co.nz/blog/xero-part-time-flexible-employee-annual-leave/

Once you have confirmed what the Annual Leave balance should be, it can easily be fixed with an Unscheduled Pay run, which can also be backdated if required.

Annual Leave not paid out at the correct rate

Paying out correctly is an entirely different issue to the Annual Leave balance and is about the $ rate to pay at the time Annual Leave is taken. The problems generally arise when employees are working irregular hours, or their standard hours have changed.

In these situations, it may well be incorrect to be paying out at the standard hourly rate. This is because Annual Leave is required to be paid out at an average rate, if it’s not clear how many hours would have been worked on that day. The best explanation of this in detail is on the government website https://www.employment.govt.nz/leave-and-holidays/

If this has happened, then it can be fixed a couple of ways – might be a good idea to consult with the employee as to their preference. You can adjust the Annual Leave Balance to compensate for any underpayments, or you could recalculate what the payments should have been and pay the shortfall to the employee.

I’ve explained how to do this in my earlier blog. https://livingbusiness.co.nz/blog/xero-part-time-flexible-employee-annual-leave/#adjustments

Annual Leave in Advance being confused with Holiday Pay

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 so is being “terminated” and then reloaded as a new employee in Xero Payroll, under a new employment contract. Find out more about the difference between Annual Leave and Holiday Pay and recording them in Xero.