Leave pay: Terminology and calculations

Leave pay: Terminology and calculations

Business, Human Resources, Legislation, Payroll / eTorQue

At HRTorQue, we’re continually inundated with queries regarding leave pay. It’s an increasingly complex area, so let’s go back to the basics to help you navigate this payroll minefield.


Statutory leave is the leave that you are entitled to under the basic conditions of employment – i.e. the same number of days you ordinarily work in a 21-day period. So, if you work Mondays to Friday, you will work 15 days in a 21-day period and are then entitled to 15 days leave for each full year worked.

Statutory minimum leave in terms of the Basic Conditions of Employment Act (BCEA) may not be paid out other than on termination of employment. However, where the company provides more than the statutory minimum, this additional leave may be bought or sold. As an example, an employee who works 5 days a week MUST take 15 days’ annual leave per cycle. But where the company grants 20 days’ annual leave, 5 of those days may then be paid out rather than being taken.

Calculating leave is set out in s35(5) of the BCEA, supplemented by the regulation on calculating remuneration for employees in terms of section 35(5), and set out in the decision table. How we calculate the value of leave will not change if it’s to be paid out, as there would be no basis for that differentiation. If you were to take that leave, you would be paid a certain amount, and that is the same amount that would be paid if leave is bought or sold – if it’s statutory leave.

‘Remuneration’ is defined as the payment in money or kind, or both in money and in kind, made or owing to any person in return for that person working for another person.

‘Wage’ means the amount of money paid or payable to an employee in respect of ordinary hours of work or, if they are shorter, the hours an employee ordinarily works in a day or week. Wage would therefore exclude payments in kind and payments done for work outside of ordinary hours.

The term ‘wage’ is used for the calculation of:

  • Overtime
  • Sick leave pay and family responsibility leave
  • Public holidays

An ‘allowance’ is a payment to allow work to take place. Examples of such payments include transport allowance, tool allowances and uniform allowances. The important point to note here is that these payments allow work to take place and bears no relation to actual work done. So, for example, a transport or uniform allowance would still have to be paid even if work was not done.

In terms of labour terminology, a ‘benefit’ is something that an employee enjoys because of their association with their employer. The best examples of this would be the ability to purchase clothing rejected during the manufacturing process while working for a clothing manufacturer, and the ability for bank employees to receive low interest loans while working at a bank. The benefits acquired by the employee have no bearing on the employee’s ability to work or their performance. When thinking of the term ‘benefit’ in terms of tax legislation, one would think of contributions to pension or provident funds, or a fringe benefit gained, but it can also include other items.

Employees cannot be financially worse off if they are on leave. This means that overtime payments, commissions, shift allowances and the like, should be included in their leave pay. In this case, employers are required to average the last 13 weeks of these earnings for weekly paid employees and 3 months for salaried employees, to arrive at leave pay. This exercise is particularly difficult if your payroll system isn’t set up or equipped to store information of this nature.

1. Inclusions in ‘remuneration’
Paragraph 1 of the Government Notice deals with the inclusions in remuneration. These are:

Housing / accommodation
This is included as it is a form of salary. If issuing notice pay, this would be included as the employee would in all probability no longer have the use of the accommodation. If the employee was on leave and still using the accommodation, then this value can be ignored.

Car allowance or company car
The travel allowance issue is very technical and difficult to apply in practice. The business use portion of a travel allowance can be excluded from the leave payment. Experts in this field suggest that the business kilometres travelled should be multiplied by an acceptable per kilometre rate to arrive at this exclusion. The Automobile Association (AA) could be a reliable source for the per kilometre rate. We suggest a consultation with our tax and compliance expert in this regard if you have any questions.
If the employee has the use of a company car while on leave, then no calculation would be necessary. If, however, the employee does not have the use of the vehicle over this period, a recalculation would be necessary. You would need to determine a per kilometre cost for the use of the vehicle (using the history available). This value would then have to be multiplied by the estimated number of private kilometres that would have been travelled if the employee had worked. This value would have to be included in the leave pay to compensate the employee for losing the private use of the car when he is on leave. This exercise is likely to cause much debate if applied in practice.

Any payments in kind
Any other payments in kind must be included (except those specifically excluded in the ‘exclusions from remuneration’ paragraph below).

Employers’ contributions
Employers’ contributions to pension, provident and medical aid funds are specifically included. Obviously, if the employee is on annual leave and the company is still making these contributions then these amounts would not be included in annual leave. If, however, the employee’s employment had been terminated and leave pay was being paid out then these contributions would have to be included in this payment. These same facts would apply for contributions to disability and funeral funds.

2. Exclusions from ‘remuneration’
The exclusions from remuneration are as follows:

Payments made to enable an employee to work
Payments that enable the employee to work are excluded from remuneration. These payments include tool allowances, a transport allowance to enable an employee to catch a taxi to work or the provision of transport to get an employee to work.

Relocation allowance
This allowance is also regarded as a payment to enable an employee to work and would also be excluded from remuneration.

Gratuities and gifts
A birthday present or flowers when you are sick would fall into this category. An award due to good performance (reaching targets etc.) would not fall into this category and would be included in remuneration as it’s paid because of work done.

Share incentive schemes
The logic behind the exclusion of these payments is that such payments are sporadic and are not issued in terms of a regular practice.

Discretionary payments
The best example of a discretionary payment would be a profit-sharing payment. These payments are not based on an employee’s individual performance and so are excluded from remuneration. Bonus payments that are based on performance and are not guaranteed will also be excluded. However, if there is a pattern or expectation based on previous years’ payments, then this payment is likely to be classed as non-discretionary and would then be included.

Entertainment allowance
This is not deemed to be a payment for work done as the nature of this payment is intended to be of a reimbursive nature. The purpose of this allowance has in the past however become a bit distorted, and was mainly used as a means of reducing an employee’s tax liability. The tax deductibility of entertainment expenses was withdrawn as of the 2003 year of assessment.

Education or schooling allowance
An educational allowance would not fall into remuneration, as the allowance is not paid for work done. The allowance is intended to allow employees to up-skill themselves thereby improving both their effectiveness and efficiency.

Payments in kind
The value of ‘payments in kind’ become a factor when payments must be made for leave, notice and severance pay when an employee leaves an organisation. It’s critical that these values be correctly determined, as the employee cannot be left worse off than when he or she was in actual employment. Earlier we looked at the company car scenario and pointed out that calculating a value in this situation could be a daunting task. It’s important to remember that the values for tax purposes cannot be used, as they are not an accurate reflection of an asset’s worth and are merely reflected on the employee’s pay slip for taxation purposes.

This legislation is applicable from the 1st July 2003. This means that only leave that accrues after this date is subject to this legislation. The Payroll Authors Group has always maintained this legislation is merely a clarification and that nothing has really changed. Companies must however follow the current clarification as it means that their leave pay liability will only increase as of 1 July 2003. Prior to this date, companies have generally paid at a rate according to their policy at the time.

The concept of an employee not being worse off when they are on leave was highlighted earlier. This point is particularly important when an employee earns payments that fluctuate each month. To accommodate this, the legislation requires that for weekly paid employees an average of the past 13 weeks of earnings be used. For salaried employees, an average of the past three months must be used.

If the employee has not been employed for the full 13 weeks prior to termination, then a more representative period must be used. Seasonal workers or other workers whose income fluctuates according to market demand would be unfairly disadvantaged if the averaging process was performed over the less productive months. There would then be an unfair advantage to the employer if the averaging was done in the higher earning months. In these cases, we believe that the averaging should be done over a full year to ensure fairness.

An employee still in employment is not entitled to a pro-rated share of their bonus, as he/she will get the bonus when it’s actually paid. If the employee’s employment is terminated however, they will be entitled to a pro-rated share as they would not be in employment when it’s paid out. This fact assumes that the bonus is guaranteed.

The above explains how to pay an employee who is still employed and takes leave. You would use the remuneration rate for both statutory and non-statutory leave taken.

It also explains how to pay an employee who terminates employment and is owed leave.

Added to this, we’re often asked how we calculate the leave for an employee who wants to sell leave, but is still employed. Please remember that the statutory minimum leave in terms of the BCEA may not be paid out other than on termination of employment, as this is contrary to the Act. However, when the company provides more than the statutory minimum, such additional leave may be bought and sold, should the employer allow it. So, using an example, under the Act, a 5-day worker is entitled to 15 days of paid leave a year. The employer, however, gifts the employees 18 days a year. This means that there are 3 days non-statutory leave gifted. The company policy allows the employee to sell those leave days. Because it’s a gift, we are of the opinion that the employer can dictate the value of the daily leave pay by using either the wage rate or the remuneration rate as the basis for payment. We would suggest that the company have a clear policy in writing in this regard though.

For any extra clarification, we can supply you with the relevant policies and documents you may need. Alternatively, please contact us on [email protected] to set up a time to chat, we’d love to meet with you!