PRINCIPALS OF ANNUAL LEAVE PAY

PRINCIPALS OF ANNUAL LEAVE PAY

This schedule put the spotlight squarely on the fact that most employers at the time calculated a value that was too low for these three types of payments

The requirements in the BCEA for these calculations were not new – they had been there for many years prior to the schedule – but employers were either not aware of them, or if they were, they chose to ignore them.

It appears as though not much has changed since then. Thirteen years later there are still a significant number of employers who are not aware of these legal requirements.

Basic Conditions of Employment Act

The provisions in the BCEA for annual leave pay can be found in section 21(1) read with section 35(4).

Section 21(1) provides that:

An employer must pay an employee leave pay at least equivalent to the remuneration that the employee would have received for working for a period equal to the period of annual leave,  calculated:

  • at the employee’s rate of remuneration immediately before the beginning of the period of annual leave; and
  • In accordance with section 35.

Similar provisions can be found in the BCEA for notice pay and severance pay calculations.

Section 35(4) specifies how to calculate leave, notice and severance pay as follows:

If an employee’s remuneration or wage is calculated, either wholly or in part, on a basis other than time or if an employee’s remuneration or wage fluctuates significantly from period to period any payment to that employee in terms of this Act must be calculated by reference to the employee’s remuneration or wage during:

(a) The preceding 13 weeks; or

(b) If the employee has been in employment for a shorter period that period.

The problem is that remuneration for the leave pay calculation must include variable value and irregular frequency payments such as performance bonuses, commission and overtime.

Principles of the Annual Leave Pay Calculation

Including the average of these variable payments into the remuneration rate that is used to calculate leave pay, resulted in a significantly larger leave pay value than anticipated by many employers. Budgets did not cater for these unexpected extra costs, and provisions for leave payments had to be recalculated and adjusted.

The principle is that employees have a right by law to take annual leave, and when they exercise this right, they should not earn less while on leave than when at work, otherwise they would be financially prejudiced by doing so.

Equally, employees should not be better off when on leave than when working.

Before looking at the calculations in more detail, note that this calculation of leave pay applies only to annual leave specified by the BCEA. Any leave granted by the employer in excess of the BCEA minimum of 21 calendar days can be accumulated, valued and paid at the discretion of the employer – normally specified in the employer’s leave policy.

Also note that while the BCEA specifies the averaging period as 13 weeks (3 months), this can be interpreted to be a minimum period and if a fairer overall result for both the employer and the employee can be achieved by taking the average over the entire year, then this is acceptable.

There are two circumstances that require employers and payrolls to calculate leave pay:

  • Annual leave taken while employed;
  • Annual leave days owing that must be paid out on termination.

How to calculate leave pay while still employed

If there are remuneration payments which the employee continues to enjoy while on leave, then these must not be included into the BCEA remuneration rate per day, otherwise they would be paid twice, and the employer is not expected to pay twice.

Examples of these payments are employer contributions that will normally continue to be paid while the employee is on leave, housing accommodation and any non-discretionary bonus that will be paid in due course when the employee returns from annual leave.

If the employee who is taking leave earns only fixed amounts such as a salary, there are obviously no fluctuating payments (overtime, commission and performance bonuses) to be averaged and included into the BCEA remuneration rate per day to be paid to the employee whilst on leave.

The employee’s earnings while on leave will then be exactly the same as when he is working. If the employee taking leave earned fluctuating remuneration (overtime, commission or a performance bonus) in the 13 weeks prior to taking leave, then these fluctuating payments must be averaged over the 13 weeks prior to the leave being taken, and included into the remuneration rate per day that is used to calculate the employees leave pay while on leave.

The employees earnings while on leave should then be very much the same as the average earned during the 13 weeks prior to taking the leave, or if the fluctuation is for example seasonal, then the average over the year.

How to calculate leave pay on termination

At first thought it seems that there should be no difference to the leave pay calculation when the employee is terminated compared to the calculation used when taking annual leave while still employed – both must be paid at the remuneration rate per day, including the average of variable remuneration.

However on termination, the calculation of leave pay, notice pay and severance pay must include the following categories of payments into the final remuneration calculation:

  • Payments in kind (employer contributions and benefits that are remuneration) that the employee no longer enjoys as a result of the termination. If the employee does not enjoy a payment in kind during the notice period, then the equivalent cash value must be paid as compensation.

For example, if housing is normally provided, and a payment is made in lieu of notice, the housing must still be provided, or an equivalent cash payment made.

  • Non-discretionary bonuses must be pro-rated and included because the employee will no longer be employed at the time when the bonus would have been paid out in the future.

In conclusion

It seems illogical to pay an employee for overtime while he or she is basking in the sun on the beach, and having to do so raises the blood pressure of many financial managers.

Remember the principles – employees should not earn less while on annual leave than when at work otherwise they would be financially prejudiced by doing so, balanced by the fact that the employer is not expected to pay ‘twice’.

Referance: Rob Cooper