This article documents how you establish and pay out staff where a compulsory annual closedown occurs in your business.
There are two methods available:
- Automatic (assisted) method, and
- Manual method
If your business continues to operate and/or does not have a compulsory closedown then do not proceed with the following.
Pre-conditions
- The company (or the part of the company the employee works in) must close down completely (otherwise you are not permitted to change the employee's anniversary date)
- the 8% calculation is performed on earnings for all periods ended prior to the nominated anniversary date (day and month)
Eligible staff
An employee is eligible for Compulsory closedown % payments:
- if they are still within their 1st year of service (and not casual or contractor)
- the current period end date is later than the Nominated Anniversary date day and month (NAD)
goPayroll users: You must enter the Nominated Anniversary Date (NAD) in Settings (this is the next compulsory closedown date). Going forward, the day and month alone are used as the basis for determining if an employee is eligible for payment. There's no need to continually update the NAD unless you are changing where it falls. Your processes are automated but can also be performed manually if you deviate from standard processes.
Desktop payroll users: use the manual method below.
AUTOMATIC (assisted) METHOD
- Enter the nominated anniversary date in Settings
- This will automatically create an allowance code for "Compulsory closedown %". This code is available for use only with automated processes.
Paying out the 8%
- Payrun..Import..Bulk add Compulsory closedown %
- this scans for eligible* staff (and adds them to the payrun if necessary)
- calculates 8% of liable gross earnings, LESS annual leave already paid
- You must not override the number of pay periods or days paid to account for the "estimated" length of time covered by the "Compulsory closedown %" as this is a lump sum payment and not reflective of any time off.
Post process
- The Process Pays task changes the employee's anniversary date to the nominated anniversary date and adjusts the employee's annual leave balance back to zero (if they had already consumed annual leave).
Deviating from the automatic process
If an employee is included in the payrun by the automatic scan process and you do not wish to include them (they may not be subject to the closedown rule), then simply delete the Compulsory closedown % allowance from their pay (or remove them from the payrun). They will automatically become ineligible after 12 months of service.
Any other deviation from the process above means you need to use the manual methods provided below.
Unfortunately, the Act does not take practical matters such as "almost 52 weeks of service" into account, so the employee may well receive ~4 weeks of percentage value even though the closedown is generally 1.2 weeks duration (excl public holidays).
There is no provision to "spread" payments and if you wish to do so then you will need to use the manual methods provided below.
MANUAL METHOD
- You must create an allowance code for "Common anniversary payout" to be used only once during the employee's first year of service
- the allowance must be set up using the "ex-gratia payment" category (which is used for this type of lump sum payment, and ensures the amount is taxed using Extra Pay rules and IS flagged as non-accruing (previous advice from MBIE was incorrect, confirmed as excluded from GE on 30.7.20)
Calculating 8%
- You must manually calculate 8% of the employee's liable earnings paid prior to the the common anniversary date
- Do NOT rely the employee's termination value from their Leave Balances if they have consumed any annual leave already. Instead, you should obtain total earnings since they started until the period ending on or before the anniversary date - use the Termination Pay calculation tool (right-click menu), or print their history since start date, then calculate 8%
- Deduct the value of any annual leave already paid out
Paying out the 8%
- The Act and MBIE are silent as to the tax treatment - IRD advise it should be paid as an Extra Pay allowance (similar to a cash-up, but using the "Bonus and Commission" category) - see above for setup details
- Add the "Common anniversary payout" allowance entry for the value calculated above to their pay covering the closedown period (e.g. in the final pay before closedown)
- Note that the amount paid could well exceed the actual value of the time the employee is on leave
- You must not override the number of pay periods or days paid to account for the "estimated" length of time covered by the "Common anniversary payout", but you should take into account if multiple periods are covered due to the addition of Public Holidays or any additional annual leave being taken in advance.
- Ref p51 of this guide: https://www.employment.govt.nz/assets/Uploads/d53229842c/holidays-act-2003-guidance-holidays-leave-.pdf
Post process
- change the employee's anniversary date to the agreed common anniversary date (it must be a date AFTER the period end date that the 8% was calculated to).
- set the employee's annual leave balance to zero (if it's not already) and annotate with a comment that identifies why the adjustment has been made (this should only occur if the employee has already consumed leave in the first year of service).