Processing leave without pay (LWOP)

What is LWOP & when could you take them?

Leave without pay (LWOP) is a type of unpaid leave where an employer allows an employee time off work when they would otherwise be working but doesn’t pay them for this time.

Employees are not entitled to LWOP and the ability to take LWOP is anytime but usually at the employer’s discretion, subjected to whatever may have been agreed on this issue in the employment agreement or could even be negotiated by the employee and employer at the time leave is taken.

It is strongly recommended to record the LWOP agreement in writing.

While an employer does not have to pay wages to an individual who takes unpaid leave, it is important to note that leave without pay does not mean termination of employment, and some other entitlements may still apply. However, LWOP can affect the employee's annual holidays payment and entitlement in some situations.

Some the reasons an employer might agree to a period of LWOP are when an employee:

doesn’t have enough annual holidays to cover the time they want to take off work

doesn't have enough sick leave to cover a period of illness or injury

go for a study leave

go for a sabbatical leave

can’t take parental leave or negotiated carer leave.

See the Holidays Act 2003 on the New Zealand Legislation website and MBIE guidance for the full text of the Act.

This document provides information on workaround for setting up and using the MYOB Advanced Payroll to manage employee’s Leave Without Pay (LWOP).

How are your Annual Leave Entitlements affected by LWOP?

If an employee takes a continuous period of leave without pay for more than one week (not including unpaid sick or unpaid bereavement leave), then both parties could agree to either of the options below:

When LWOP is considered as NOT a continuous employment:

Their anniversary date for entitlement to annual holidays moves out by the amount of unpaid leave taken (not including the first week). This means the employee becomes entitled to their annual holidays later each year from then on (e.g., two and half weeks of LWOP means that the anniversary date should be moved forward by one and half weeks excluding the initial one week). This is the default option unless the below option is agreed.

When LWOP is considered as a continuous employment:

Employer can agree with the employee that their anniversary date for annual holidays entitlement won’t change. If they agree to this, the employer must also reduce the divisor for calculating average weekly earnings (AWE) for annual holidays by the number of weeks or part weeks greater than one week that the employee was on leave without pay (e.g., two and half weeks of LWOP means the divisor should be reduced by two weeks excluding the initial one week, so gross earnings are divided by 50 weeks instead of the usual 52 to calculate AWE).

This does not apply to all kinds of unpaid leave, e.g., unpaid-sick leave, unpaid-bereavement leave, unpaid-parental leave, voluntary service and leave on ACC are exempt from this, so there is no need to adjust the employee's anniversary date or AWE divisor. See “Leave Without Pay on MBIE website” for more information.

How can you handle the Annual Leave Entitlement impacts for LWOP in Advanced?

Currently, MYOB Advanced Payroll doesn’t support Leave Without Pay completely and implementing these options in Advanced Payroll requires some manual steps.

Prerequisites: Before processing LWOP,

Make sure you set up LWOP (unpaid leave entitlement) and its related pay item definitions in the system as shown below. Also “cap accrual per period” option on Annual Leave entitlement settings should be ticked (this makes sure that employee does not earn more than the entitled number of weeks at roll-over, especially when trying to move the employee’s anniversary date).

**** SCREENSHOT of entitlement & pay item definition/setup ***

It is good to have unpaid leave entitlement for LWOP defined in weeks (especially when LWOP period > 1week). This makes it easy to check your entitlement movements (which are in weeks for annual Leave in Advanced Payroll) and adjust the accruals as required.

It is good to have separate entitlements set up for variations in unpaid leave e.g., unpaid-sick leave, unpaid-parental leave and unpaid leave for LWOP impacting Annual Leaves.

You can look into the selected employee Leave details & accrual values on Entitlement History data screen.

Add LWOP Pay Item record into your current pay period where LWOP is taken. Let the Annual Leave accrual pay items & entitlement records remain in the current pay.

**** SCREENSHOT of pay item added into the pay ***

To move the employee’s anniversary date:

Manually calculate the number of weeks employee was on LWOP as per the Holidays Act 2003 guidance -“Leave Without Pay on MBIE website”.

Adjust your Annual Leave Trigger date to move the Annual leave anniversary date to a future date by number of days calculated as per the Holidays Act 2003 guidance -“Leave Without Pay on MBIE website”.

Annual leave will continue to accrue while your employee is on unpaid leave and as a result - employee accrues the leave earlier than expected, so you could reduce the Annual Leave entitlement balance by manually adjusting its accrual balance (i.e., reducing the accrued portion during LWOP period) on Entitlement balance screen (Screen number).

**** SCREENSHOT of Leave Entitlement Balance screen ***

The portion of Annual Leave an employee accrues in a day = (Number of Annual Leaves entitled in weeks / (52weeks * 7days)). You can also check the accrual amount for each pay in Entitlement History Data screen for that employee selected.

To adjust the AWE divisor:

Outside of MYOB Advanced Payroll, keep a count of how many weeks the employee was on LWOP.

When you pay annual leave, go to the Employee Leave Summary screen (MPPP4045) and use the AWE Inspection window to get the Holiday Pay Gross Earnings for the last 52 weeks. (To open the AWE Inspection window, click the amount in the AWE ($) column.)

**** SCREENSHOT of Employee Leave Summary screen *****

Manually calculate a new rate with a reduced divisor. (Remember: reduce the AWE divisor by one for each whole or partial week of LWOP taken beyond the first week.)

Override the system-calculated AWE rate with your manually calculated amount by entering the new rate into the Rate column.

**** SCREENSHOT of Employee Leave Summary screen with field overridden *****

Save the change on the Employee Leave Summary screen and continue to process the pay as normal.

You only need to follow these steps if the AWE rate is going to be used for the employee. The Rate Method column on the Employee Leave Summary screen shows which rate will be used.

Here are some tips & good practices:

Employer & employee agree in advance, especially on the LWOP period, before the employee goes on LWOP.

If the LWOP period is clear and is >1week, shift the AL anniversary date as and when the LWOP period starts, before completing the current open pay so that it displays the new anniversary date in payslip. But if the total LWOP period is unclear then you could wait until the LWOP period is completed (i.e., until the continuity is broken as per the Act).

As and when LWOP cross 1week, you could start adjusting the Annual leave accrual balance at the end of each pay period by the portion equivalent to the LWOP taken in that pay period ((excluding the first week within that continuous LWOP period). Make sure that the total accrual value adjusted should be equal to the portion accrued in LWOP period (i.e., the number of days trigger date is shifted). This could result in less human errors keeping the employee Annual Leave accrual balances up to date. But if you can’t adjust until pay is closed, then in such scenario, you could adjust at least before next pay is opened.

Also, it is a good practice to make sure salary/wages paid are correct at end of every pay where employee had LWOP.

Make sure your employee’s work schedule, timesheets and ESS calendars are reflecting your LWOP period.