Final Payment

07/05/2021

It is important to be aware of the procedural and legal requirements around final payment for an employee. There are a number of nuances and factors that affect the final payment made to an exiting employee. Assuming that an employee has completed 12 months of service, they may be entitled to public holidays after their employment has been terminated. It is also a timely reminder to always check up on your payroll systems, particularly because of the complexities around the holidays act and calculating holiday pay. We have seen numerous cases of employers relying on their payroll systems and have been subject to significant settlement payments as a result of an error in their payroll system.

Please see the full article below by Employment New Zealand:  

Employees who are leaving their employment for any reason (eg by resignation, retirement, redundancy, dismissal or completion of fixed term) usually get their final wages and holiday pay on their last day of work, but may be paid it in their pay for the final period of their employment.

Public holidays

There is a rule that means employees are sometimes entitled to be paid for public holidays that fall after their employment has ended (ie after their termination date). This can happen if the employee has unused annual holidays they are entitled to at the time their employment ends. This rule doesn’t apply to employees who haven’t completed 12 months' service because they haven’t become entitled to annual holidays yet.

To work out whether an employee is entitled to paid public holidays that happen after their employment has ended, follow these steps:

1. Treat any remaining annual holidays that the employee is entitled to as if the employee had taken them immediately after the date their employment ended.
2. The employee must be paid for a public holiday if it:
   • happens within the time period created by adding on these remaining annual holidays to the end of employment, and
   • happens on a day that the employee would have worked if they were still employed, and the day wasn’t a public holiday.
3. If the employee is entitled to be paid for a public holiday then:
   • the period that the annual holidays covers is extended by one day for each public holiday the employee is entitled to be paid for, and
   • this new extended period may contain more public holidays which also need to be considered for payment.

The payment for any public holidays is calculated in the usual way. They are paid at the rate of relevant daily pay or average daily pay (if applicable) for the day.

Note that this situation has no effect on the actual end date of employment. 

For example: an employee works 5 days a week, Monday to Friday. At their termination date of 22 December (which in this example falls on a Friday eg 2017) they have 5 days remaining of annual holiday entitlement. If these 5 days are added on to their termination date this takes them to 29 December. Two public holidays fall within this period, (25 and 26 December), so these must be treated and paid as public holidays.

The 2 days’ annual holidays which would have covered the 25 and 26 December are then added on to the end of the period (ending on 29 December). This creates an extended period which ends on 2 January. This extended period includes the public holidays 1 and 2 January. These public holidays are also treated and paid as public holidays.

1 and 2 January are now treated as public holidays, this means two annual holiday days are not being used. These two annual holiday days are then added on to the end of the period ending on 2 January, creating a new extended period ending on 4 January. There are no public holidays falling on 3 or 4 January so this has no further effect.

Alternative holidays

When an employee leaves, they may have unpaid or untaken alternative holidays from when they worked a public holiday. If this is the case, the alternative holidays should be paid at the RDP or ADP (if applicable) for the last day of the employee’s work. This is regardless of the rate of pay at the time they earned them. Alternative holidays don’t have an effect on the employee’s termination date for working out pay for public holidays.

Sick leave and bereavement leave

There is no legal entitlement for unused sick or bereavement leave to be paid out when an employee leaves their employment. Some employers choose to pay out a part or all of any unused sick leave entitlement.

Annual holidays

How much an employee gets paid for annual holidays in their final pay depends on how long they have been working for the employer.

Employment ends before the employee has an entitlement to annual holidays

These employees get an annual holiday payment of 8% of their gross earnings less any amount the employee:

• has been paid for annual holidays taken in advance
• has been paid for annual holidays on a pay-as-you-go basis.

Gross earnings are calculated since the commencement of employment and include any other payments made in the employee’s final pay.

Employment ends after the employee has an entitlement to annual holidays

There are two calculations to do to work out the annual holiday payments for these employees:

• The employee is paid for any remaining annual holidays that they are entitled to. These are paid at the rate of the greater of ordinary weekly pay or average weekly earnings, as if the holidays were being taken at the end of the employment, plus
• The employee gets an annual holiday payment of 8% of their gross earnings since their last anniversary date for annual holidays including other payments made in the final pay, less any amount the employee:
  • has been paid for annual holidays taken in advance
  • has been paid for annual holidays on a pay-as-you-go basis.