The Employment Leave Act (Leave Act) has now been passed. The Leave Act overhauls the Holidays Act 2003 (Holidays Act) and completely reshapes the system that governs employee entitlements in New Zealand.
For employers who have long struggled with the complexity of the Holidays Act, the Leave Act sets out clearer rules around employment entitlements, as well as simpler leave calculations. The Leave Act will however mean changes to payroll systems, employment agreements and day-to-day leave management that employers will need to be aware of.
Employers have been provided with a two year transition period and only have to start complying with the Leave Act from 6 August 2028.
We have set out below the key changes, and what steps employers should think about taking now.
Key changes under the Leave Act
One simplified pay rate for all leave types
A single hourly leave pay rate will applies across annual leave, sick leave, bereavement leave, family violence leave, and public holiday-related leave, removing the current maze of different calculations needed to calculate an employee’s leave pay rate. Variable remuneration (bonuses, commission etc) is not included in this calculation. This will have a significant impact on those employees whose remuneration includes a large proportion of variable payments.
Leave accrues in hours, from the first day of employment
Instead of a lump-sum entitlement after 6 or 12 months, employees will accrue annual leave (0.0769 hours per standard hour worked) and sick leave (0.0385 hours per standard hour worked) from their first day of employment. All employees will also have access to bereavement and family violence leave from their first day of employment. This approach means that employees will earn leave in direct proportion to the hours they actually work, rather than the current “one size fits all” approach under the Holidays Act. Sick leave accrual will be capped at 160 hours.
Leave Compensation Payment (LCP) for casual and additional hours
Rather than accruing leave on casual work or additional hours beyond standard hours, workers will receive an LCP of 12.5% of their ordinary hourly rate, paid each pay period. This replaces “Pay as you go” arrangements for casual workers and removes the need to factor extra hours into leave pay calculations later.
Leave balances stop scaling automatically
Currently, an annual leave balance held in weeks scales automatically when a worker’s hours change. Under the new system, accrued hours are “banked” and reflect the hours actually worked in the past by the employee. This means employers won’t need to recalculate balances every time an employee’s hours change.
Parental leave “override” removed
Employees returning from parental leave will be paid at the normal leave rate when taking leave, rather than at the lower average-earnings rate that currently applies. This will remove a long standing penalty which applied to parents who take parental leave. This change comes into force on 1 July 2027.
Clearer rules for transfer of employees
The Leave Act will allow employees’ entitlements to be transferred to a new employer in a restructuring situation – like the sale of a business. This has previously happened in most cases despite this being in breach of the Holidays Act.
More simple remediation processes
The Leave Act provides for more simple remediation processes where previous under payments have occurred. This is a welcome change given the long, complex and expensive processes which had to be undertaken in the past.
When does the Leave Act come into force?
There is a 24-month implementation period before the Leave Act comes into force, giving employers and payroll providers time to update their systems. Until then, the Holidays Act continues to apply in full.
Employers and employees will have one year after the Leave Act comes into force to update employment agreements to reflect the new framework. If agreements haven’t been updated by then, the new statutory minimums will override any conflicting terms in existing agreements – even if these agreements provide more generous entitlements.
How employers can start preparing
Although the Leave Act won’t come into effect for another two years, and detailed guidance is still to come, employers should consider:
Review employment agreements and policies: Review employment agreements and policies and start amending them to reflect the new Leave Act.
Identify the employees who will be most affected: Casual workers, those working additional hours beyond their standard hours and those who receive variable payments will see the biggest practical changes, due to the LCP and the removal of variable pay from leave calculations. It is important to identify these employees early, and ensure that there is understanding around how their leave entitlements will be calculated, once the Leave Act comes into force.
Audit current payroll and leave systems: Understanding how leave is currently calculated and how this will change will make it much easier to map the transition to the new rules within the Leave Act.
Talk to your payroll provider early: The Leave Act will change the way that employee entitlements are calculated in an employer’s payroll system. It is worth having early conversations with your payroll provider to gain an understanding of these changes, and the effect they will have.
