Calculating Employees Pay
Ordinary weekly pay is the amount an employee receives under his or her employment agreement for an ordinary working week, including:
- regular allowances, such as a shift allowance
- regular productivity or incentive-based payments (including commission or piece rates)
- the cash value of board or lodgings
- regular overtime.
Intermittent or one-off payments as well as discretionary payments and employer contributions to superannuation schemes are not included in ordinary weekly pay.
This means that OWP includes everything an employee is normally paid for a week’s work, such as their salary or wages, but can include other payments as well if they are a regular part of the employee’s pay and relate to the work done each week. For example, if in each pay period the employee receives commission payments for sales made during the pay period, then these payments would be included in OWP. For many people, ordinary weekly pay is clear because they are paid the same amount for each week they work.
If it is unclear whether a payment is regular or not, consider the following:
- The employee shouldn’t be disadvantaged because they took annual holidays rather than worked during that time.
- Consider the frequency of the payment, if the employee usually receives the payment then this is likely to be ‘regular’ (even if they don’t always receive it).
- If the employee works different but predictable shifts, then the ordinary pay (and the payments which are included) should relate to the week they are taking annual holidays.
Ordinary weekly pay formula
When it isn’t possible to work out ordinary weekly pay in terms of the amount the employee normally receives for an ordinary working week then ordinary weekly pay must be calculated in accordance with the ordinary weekly pay formula as follows:
a − b
- go to the end of the last pay period, then from that date, go back four weeks (or if the pay period is longer than four weeks, go back the number of weeks in the pay period), and
- take the gross earnings for that period (a), and
- deduct from the gross earnings any one-off or irregular payments (or other payments) that the employer is not bound to pay (b), and
- divide the answer by four.
Situations where it might not be possible to calculate ordinary weekly pay and the employer may need to use the formula include if the:
- employee’s hours each week vary more than by a minor amount
- employee’s overtime payments are regular but the amount varies unpredictably
- employee earns commission or incentive bonuses each pay period but the amount varies unpredictably or can’t be attributed to a specific week.
In some situations the employer may need to spend some extra time thinking through and discussing with the employee how the regular payments will be included in ordinary weekly pay.
Vikram gets paid a commission of $500.00 (on top of his wages) for every sale he makes over $5,000.00. He usually makes two of these sales each week but sometimes he makes more, or less. Vikram’s employer Erika pays him his commission in a lump sum each month in his normal pay cycle. His commission payments are paid monthly but they do relate to commission he earns on a weekly basis so Erika realises that they should be considered regular payments and should be included in his ordinary weekly pay for the calculation of annual holidays.
Erika knows that she should use the ordinary weekly pay formula to work out Vikram’s ordinary weekly pay because the amount he earns each week varies. Erika discusses her approach with Vikram so that he understands how the ordinary weekly pay calculation is being worked out. The OWP calculation must still be compared to Vikram’s average weekly earnings and the greater amount will be paid to Vikram as the rate for his annual holidays.
Ordinary weekly pay in employment agreements
Some employment agreements have a special rate or formula for ordinary weekly pay, this should be compared to the actual ordinary weekly pay and the greater amount must be used (and compared to average weekly pay to calculate payment for entitled annual holidays).
Average weekly earnings are worked out by calculating the employee’s gross earnings over the 12 months prior to the end of the last payroll period before the annual holiday is taken, and dividing that figure by 52.
Included in gross earnings
Gross earnings includes all payments that the employer is bound to make under the employment agreement or legislation. Employment agreement in this situation covers all the documents (such as the written letter of offer and employment agreement) that are part of the contractual agreement between the employee and the employer. It also may include other agreements (that are written down or verbal), workplace policies, bonus scheme rules, or agreements created by the conduct of the employer and employees.
These payments make up gross earnings and should be included in the calculation:
- salary and wages
- allowances (but not reimbursing allowances)
- all overtime
- piece work
- at-risk, productivity or performance payments
- payment for annual holidays and public holidays
- payment for sick and bereavement leave
- the cash value of board and lodgings supplied
- the first week of compensation payable by the employer under s97 of the ACC Act 2001
- any other payments that are required to be made under the terms of the employment agreement.
Not included in gross earnings
Unless the employment agreement says otherwise, reimbursement payments, ex gratia payments and discretionary payments (eg genuinely discretionary bonuses) are not included in the gross earnings calculations. ‘Discretionary payments’ has a special meaning in relation to the Holidays Act 2003. If an employer must make a payment to the employee, under their employment agreement, commission scheme, bonus scheme rules etc, then it is not a discretionary payment and it must be included. This is the case even if the payment amount is discretionary and could even be $0. It is rare for payments to be excluded so if you are unsure, you should seek advice or err on the side of caution and include the payment.
Other payments not included are those:
- any weekly compensation payable under the Accident Compensation Act 2001 that the employer isn’t bound to make
- made when an employee is on voluntary military service
- for cashed-up holidays that are part of the employee’s minimum entitlement.
Public holiday calculation information can be found here.