Employment Leave Act NZ: Key Changes to Annual Leave, Sick Leave & Public Holidays
New Zealand employers have long battled with the compliance headache that is the current Holidays Act 2003. After a number of attempts at reform, the Government has confirmed that the Holidays Act 2003 will be repealed and replaced with the Employment Leave Act.
What is the Employment Leave Act?
The Employment Leave Act represents the most significant overhaul of workplace leave in over 20 years. For employers, it promises reduced compliance risk and a more workable framework, though transition will require careful preparation.
The legislation is yet to be drafted, but here is what we know about the new Employment Leave Act and what these potential changes may mean for employers:
Key changes under the Employment Leave Act
Annual leave: New hours-based accrual system
A key change to the legislation is the introduction of a new accrual system for annual and sick leave, moving away from a “weeks / days” approach, to an hours-based system.
- Under the new Employment Leave Act, all permanent or fixed term employees will begin to accrue annual and sick leave on an hourly basis from their first day of employment
- Annual holidays will accrue at a rate equivalent to four weeks of contracted hours per year. A 40-hour employee, for example, will accrue 0.0769 hours for every contracted hour worked (including periods of paid leave, parental leave, jury and volunteers leave, but excluding ACC or unpaid leave).
- Employees may also take annual holidays in part-days or hours. An employee who takes leave for a part-day will only use their leave balance for the hours they are absent.
- 25% of accrued leave may be cashed up each year (compared to the current cap of one week).
Sick leave entitlements from day one
- Currently, sick leave is available only after six months of continuous service and provides 10 days, regardless of the number of hours worked.
- The new Act introduces accrual in hours from day one, proportionate to the hours worked, capped at 160 hours for full-time staff (the equivalent of 10 days). This ensures proportionality for part-time staff and allows employees to take sick leave in part-days or hours, providing greater flexibility.
Additional and casual hours: The 12.5% leave compensation payment
- Currently, casual staff are paid 8% of gross earnings in lieu of annual leave, and entitlements to other types of leave are often unclear. For employees working beyond their contracted hours, employers must also monitor whether leave accruals apply, creating compliance risk.
- The new Act simplifies this by introducing a leave compensation payment of 12.5% of pay for each hour worked by casual employees, and for additional hours worked by permanent staff beyond their contracted hours (with limited exceptions for salaried employees). This is aimed at increasing compensation for casual staff while reducing compliance uncertainty.
Bereavement and family violence leave changes
- Bereavement and family violence leave will be available from the first day of employment (rather than after six months). These entitlements will remain days-based but can be taken in part-days, allowing employees more flexibility and responsiveness to personal circumstances.
Public holidays and alternative holidays simplified
- Public holiday entitlements depend on whether the day is an “otherwise working day” (OWD). The current test is often difficult to apply, particularly for irregular hours.
- Under the new Act, a day will be an OWD if the employee has worked (or been on paid leave) for at least 50% of the corresponding days in recent weeks. Employees working on a public holiday will accrue alternative holidays hour-for-hour, instead of receiving a full day regardless of hours worked. Time-and-a-half pay will continue to apply for hours worked, with ordinary pay covering the balance of the day.
How leave will be paid under the new Act
- Currently, different rules apply depending on the type of leave, often resulting in payroll errors.
- The new Act introduces a single method: leave will be paid at an hourly rate based on an employee’s base wage at the time leave is taken. Fixed allowances (such as shift allowances) will continue to be included, but variable components such as commissions, bonuses and penal rates will be excluded. This is expected to reduce payroll errors and create greater consistency.
Parental leave improvements
- The current Act’s “override” rule often reduces the value of annual leave taken soon after parental leave.
- The new Act removes this, ensuring returning parents are paid at their normal leave rate, providing certainty and equity.
Implementation Timeline: what employers need to know
The Act will provide a 24-month implementation period for transition. During this time, existing leave balances for full and part-time staff will be converted to hours, while casual employees’ entitlements will be cashed up.
Employers must continue to comply with the current Holidays Act until the new Act comes into force, including remediation of historical underpayments
What to expect as the legislation develops
Whilst we now have a good understanding of what to expect from the new legislation, there is still plenty of time for change before anything is confirmed. Whilst the changes so far appear to have broad support from businesses and unions, we anticipate there may be pushback in some areas of the legislation. We will monitor updates closely as various details are ironed out during the parliamentary process.
Employer action plan: preparing for the Employment Leave Act
While the reforms are intended to simplify compliance, employers should plan ahead by:
- Reviewing employment agreements to ensure leave provisions can be adapted to the new framework. Employer should also be wary of existing wording which may have the effect of contractually providing more leave than would be required under the new Act – look particularly for wording in your agreements which restates current Holidays Act requirements which may change.
- Engaging with your payroll providers early to confirm system capability.
- Modelling potential cost implications, particularly for sick leave accrual and the 12.5% leave compensation payment.
- Continuing to comply with the current Act until the Employment Leave Act comes into force.
Our employment team is helping Tauranga and Bay of Plenty businesses prepare for these significant changes. We can review your employment agreements, assess compliance risks, and work with you to develop a transition plan that suits your business.
Contact our employment team if you’d like to talk through what this means for you.
This article was written by Emily Crutchley with assistance from Tayla Bentley.