After years of frustration, payroll corrections, and compliance issues, the Government has finally delivered a replacement for the Holidays Act 2003.
The new Employment Leave Act introduces a fundamentally different approach to annual leave, sick leave, bereavement leave, and family violence leave. While the changes are not expected to take effect until 2028, businesses should start understanding the new framework now, particularly those with complex payroll systems or employees whose hours vary from week to week.
Why the Change?
For many employers, the Holidays Act has been one of the most complex pieces of employment legislation in New Zealand.
Calculating annual leave, determining relevant daily pay, and managing employees with irregular work patterns has resulted in widespread payroll errors across both the public and private sectors. Many businesses have spent significant time and money undertaking payroll reviews and remediation exercises.
The new legislation aims to create a simpler, more transparent system that is easier for employees to understand and easier for payroll systems to administer.
The Biggest Change: Leave Will Accrue in Hours
Rather than employees receiving annual leave as a four-week entitlement after 12 months of employment, leave will accrue from the employee's first day of work.
Under the new framework:
- Annual leave will accrue in hours.
- Sick leave will accrue in hours.
- Leave balances will be tracked and taken in hours.
- Employees will be able to take part days of leave more easily.
For many businesses, this will be a significant shift away from the traditional "weeks of leave" approach that has existed for decades.
Day One Leave Entitlements
One of the most notable changes is that several leave entitlements will become available immediately.
Under the current rules, employees generally need to complete qualifying periods before accessing certain leave entitlements. The new legislation will allow:
- Annual leave accrual from day one.
- Sick leave accrual from day one.
- Bereavement leave from day one.
- Family violence leave from day one.
This is expected to provide greater flexibility for employees while simplifying administration for employers.
A Single Method of Calculating Leave Pay
A major source of complexity under the Holidays Act has been determining whether annual leave should be paid based on ordinary weekly pay or average weekly earnings.
The new legislation replaces these calculations with a single hourly leave pay rate across all leave types.
The intention is to make leave calculations more predictable and significantly reduce payroll errors.
Changes for Casual and Additional Hours
The legislation introduces a distinction between:
- Standard hours
- Additional hours
- Casual hours
Instead of accruing annual and sick leave on additional or casual hours, a new 12.5% Leave Compensation Payment will apply.
For casual employees, this effectively replaces the current 8% holiday pay arrangement and may result in a higher payment being received as work is performed.
Greater Flexibility Around Cashing Up Leave
The new legislation will also provide employees with more flexibility to cash up annual leave.
Employees will be able to cash up to 25% of their annual leave balance each year, subject to employer agreement and any workplace policies in place.
What Does This Mean for Employers?
Although the legislation has passed, employers are not required to make immediate changes.
The Government has allowed a transition period of approximately two years before the new system comes into force on 6 August 2028. This gives payroll providers and employers time to prepare for the changes.
However, now is a good time to:
- Review your payroll systems and software.
- Understand how leave is currently recorded.
- Identify employees with irregular or variable work patterns.
- Review employee hours in current employment agreements and update where these have changed
- Discuss planned software updates with your payroll provider.
- Keep informed as MBIE releases further guidance.
Importantly, employers must continue to comply with the existing Holidays Act requirements until the new legislation officially takes effect.
Final Thoughts
The replacement of the Holidays Act represents one of the most significant employment law reforms in recent years.
For many employers, the move to an hours-based system should reduce complexity and increase confidence that leave is being calculated correctly. However, the transition will still require planning, particularly for businesses with large workforces, shift workers, or complex payroll arrangements.
As further guidance becomes available, businesses should take the opportunity to understand the new rules and ensure their systems are ready well before implementation.
If you would like to discuss how these changes may affect your business, or whether your current payroll systems are likely to be compliant under the new framework, contact the team at DCH.
