Payroll Guide to Unpaid Leave

There are a few reasons why salaried and waged employees might take leave without pay, and this naturally affects payroll processing. But never fear, we’re going to share with you a few helpful tips to ensure unpaid leave is processed quickly and correctly. 

When do employees generally take unpaid leave?

Employees aren’t able to take extra time off work unless it’s approved by their employer. Either the employer can outline when it’s permissible in the employment agreement, or this can be negotiated around the time the leave is being taken.

Here are a few reasons why an employee might ask for leave without pay:

1. They don’t have enough annual leave available and want to take more time off work

2. An employee is sick or injured and doesn't have enough sick leave

3. An employee is taking time for their studies

4. They are going on a sabbatical

5. Parental leave or negotiated carer leave is not available to them

No matter what, the employee must seek approval from their employer before taking unpaid leave. If they don’t, the employer may take disciplinary action against them. 

Disclaimer: If an employee doesn’t have enough leave to use over the time of an annual closedown, or they aren’t entitled to leave, there are a few steps an employer must take. These are outlined in this Employment NZ article.

Is there a limit to how much unpaid leave can be taken? 

No, as long as the employer approves it. However, taking more than one week of unpaid leave might affect the employee’s anniversary date.

Here’s a handy flowchart to show what’s going on:

As suggested above, when an employee takes longer than one week of unpaid leave, there are two scenarios with the anniversary date depending on what the employer decides.

1. After an employee takes more than one week of unpaid leave, their anniversary date will be moved out in line with the amount of leave they took. 

For example: John’s anniversary date is 1st March, and he takes three weeks of unpaid leave. His anniversary date will now be moved two weeks forward to 15th March  (the first week of unpaid leave doesn’t affect the anniversary date). 

2. OR, if the employer and employee agree not to move their anniversary date, the divisor for Average Weekly Earnings will be reduced. 

For example: John takes three weeks of unpaid leave, so his average weekly earnings is divided by 50 weeks, not 52 weeks (again, the first week is disregarded which is why it isn’t divided by 49 weeks). 

You can read more about how these calculations work here. 

Do employees get paid for public holidays during their unpaid leave?

In the first week of unpaid leave, the employee will get paid for the public holiday if it’s an Otherwise Working Day for them. However, once the unpaid leave lasts longer than a week the employee will not be eligible for the Public Holiday as they wouldn’t have been at work that day.

How does unpaid leave affect annual leave rates?

The employee may be paid less for annual leave because there will be weeks where they haven’t earned anything, and therefore their average weekly rate will reduce. When it comes to paying their annual leave, this won’t be an issue for the employee as they are still owed the highest of either their ordinary or average weekly pay. Read more about Annual Leave Rates here.

Will my payroll provider handle unpaid leave? 

Well, we can’t answer for other payroll systems, but PayHero certainly takes care of unpaid leave for you. You can select Unpaid Leave as a Leave Request, and if the employee’s anniversary date needs to change, PayHero will adjust it automatically. If you choose not to change the anniversary date when an employee takes extended unpaid leave, you’ll need to manage this manually.

Still curious how PayHero can simplify the process? For more payroll Unpaid Leave payroll FAQs, check out this support article.

If you’re ready to get into it and give PayHero a try, sign up for a free 14 day trial.