Holidays Act reform

The New Zealand Government has agreed to repeal and replace the Holidays Act 2003 with an Employment Leave Act. This reform responds to well-documented issues with the current legislation, which has been widely criticised for its complexity, ambiguity, and poor alignment with modern workforce expectations around how we work and take leave.

The proposed changes deliver on the promise of simplicity, particularly through the shift to an hours-based accrual system for both sick and annual leave. This removes the longstanding challenge of defining a ‘week’ or ‘day’ for employees who do not work fixed and static patterns.  Employees going forward would accrue:

• Annual leave at a rate of 0.0769 hours (4/52) per 'contracted' hour (providing the equivalent of four weeks’ leave for workers whose contracted hours do not change); and
• Sick leave at a rate of 0.0385 hours (2/52) of sick leave per 'contracted' hour (providing the equivalent of 10 days per year for a worker who works five days a week and the same hours every day).

As a result of the hour-based accrual system, leave entitlement calculations will be more straightforward, removing the requirement for adjustments in the case of changes in an employee’s work pattern for annual leave in particular. For sick leave, these changes are designed to promote greater fairness in how sick leave entitlements are applied, with the replacement of the 10-day entitlement with a model that reflects actual hours worked. Leave will also be available from day one, a shift from the 6-month and 12-month thresholds under the existing legislation.

The introduction of a single base rate for the payment of all leave types, replacing the multiple varying rates currently required, eliminates a major source of complexity and non-compliance.

These proposed changes to entitlement accrual rules and leave payment rates are expected to be well received by payroll vendors and payroll teams tasked with maintaining compliant systems.

The Ministry of Business, Innovation and Employment (MBIE) has provided a factsheet outlining the key changes on their website:

MBIE Factsheet - Key changes to the employment leave system

While the reforms simplify the framework, they also introduce new costs and operational considerations for both employers and employees.

A notable shift is the introduction of the leave compensation payment (LCP), set at 12.5% of a worker’s ordinary hourly wage. This will be payable in every pay period for casual employees and for permanent employees for additional paid hours worked beyond their contractual obligations. This represents a departure from the current regime and employers of variable hours workers will need to understand the impact of these rules, particularly due to the 4.5% cost associated with sick leave and ‘insecurity of additional/ casual hours of work’, and the extent to which this cost is balanced by the standardisation of leave rates outlined above.  

The removal of the parental leave override which was clearly forecast will also be potentially challenging for some. Ensuring leave accrued during parental leave is valued the same as for employees who worked during the same period is a positive development for affected employees. However, it may increase costs for smaller businesses already stretched by the need to provide cover during parental leave, as they will now face an additional four weeks (or more) of leave liability when the employee returns.

Workplace Relations and Safety Minister Brooke van Velden has confirmed a 24-month implementation window following the Bill’s passing, meaning the changes are likely to take effect in approximately 2028. Transitioning to the new legislation will require careful planning.

Many employers have already adopted more generous interpretations of the Holidays Act 2003, for example, applying the higher of multiple calculation methods for annual holidays, sick leave, public holidays, bereavement leave, family violence leave, and alternative holidays. With the introduction of the LCP and the 12.5% obligation on paid hours worked outside agreed contractual profiles, it will be important for employees and employers to understand the implications of how existing contractual arrangements will be addressed as part of the transition period.

MBIE is expected to provide guidance on how current ‘weeks-based’ entitlements will be translated into hours. For employees whose work patterns change in the lead up to implementation, this could result in substantial swings in entitlement values. Currently, annual leave balances are valued using the higher of ordinary weekly pay (including allowances and regular overtime) and average weekly earnings (based on gross earnings over 52 weeks). Moving to a base rate valuation may reduce costs for businesses but also diminish the value of leave for employees who regularly work beyond their contracted hours.

This reform represents a major shift in how leave is earned, tracked, and paid and overall we consider that it is a much-needed positive step forward in the right direction. Whilst the proposed changes promise greater clarity and fairness, it is also likely to demand significant operational adjustments. Employers are encouraged to actively engage with the consultation process to understand the full impact of the proposed changes.

Importantly, obligations under the Holidays Act 2003 remain in force and will continue to be applicable for the three years leading up to implementation. Minister van Velden has made it clear that employers will not be granted a ‘clean slate’ - any existing underpayments must still be addressed.