New Zealand employers have long recognised that the current Holidays Act 2003 (Holidays Act) is complex and difficult to apply, leading to widespread compliance struggles and remediation costs.
Prior efforts to update the Holidays Act to address these concerns did not resolve its core issues, prompting calls from both employers and employees for an entirely new framework.
The Government has now confirmed it intends to repeal the Holidays Act and replace it with the “Employment Leave Act” (the Proposed Act). The aim of the Proposed Act is simple: a clearer, more workable system that reduces errors and compliance cost.
Although it is yet to be drafted, we set out below a summary of what we know about the intended Proposed Act and what these potential changes may mean for employers.
Employment Leave Act: what is proposed?
If enacted, the Proposed Act would significantly change how employment leave is earned, taken, and paid, potentially resolving many current complexities.
Below, we outline some key differences between the current Holidays Act and the Proposed Act.
- Annual holidays
The Holidays Act provides all employees with an entitlement to four weeks’ annual holidays after 12 months’ continuous employment. What constitutes a “week” is based on an employee’s ordinary working week at the time that the annual holiday is taken, and this can be difficult to determine for employees with variable days and hours. It also results in unusual outcomes where an employee increases or decreases their standard ordinary working hours.
Under the Proposed Act, employees would start “accruing” annual holidays from day one of their employment at a rate of 0.0769 hours for every contracted hour worked (equating to four weeks per year, based on a 40-hour work week). This would address some of the difficulties that arise from variable working hours or changes in permanent working hours, as it would mean that employers do not have to scrutinise what constitutes a “week” for that employee over time.
Employees would be able to use their accrued annual holiday hours to take any part of a day off work, rather than having to take leave in weeks or portions of weeks (per the current system).
In addition, employees could request to cash up 25% of their total annual holiday balance each year, providing more flexibility than the current limit of one week of an employee’s annual entitlement per year.
- Sick leave
Currently, all employees (other than employees who work very few hours per week or month) receive 10 days’ paid sick leave after six months’ continuous employment. This creates some perceived unfairness, in that a part time employee can take the same number of days of sick leave as a full-time employee.
Under the Proposed Act, sick leave would accrue in hours from day one of employment, capped at 160 hours (for a 40-hour week). This is intended to ensure proportionality between sick leave accrual and hours worked and would result in in a different (lower) entitlement for part-time employees.
Employees would be able to use their accrued sick leave hours to take any part of a day off work, rather than having to take leave in days (per the current system). - Additional or “extra” hours
Currently, casual employees receive an additional payment of 8% of gross earnings for each pay period, but only qualify for other types of leave in certain limited circumstances (based on their hours worked over a six- or subsequently 12-month period). It can be difficult to track when a casual employee has become entitled to sick leave for irregular work patterns.
The Proposed Act would introduce a leave compensation payment equivalent to 12.5% of pay for:
- every hour an employee works above their contracted hours (with certain exceptions for salaried employees); and
- each hour a casual employee works, instead of “accruing annual and sick leave on these hours”.
- every hour an employee works above their contracted hours (with certain exceptions for salaried employees); and
- Bereavement and family violence leave
Bereavement and family violence leave would also be available from day one of employment, rather than after six months’ continuous service (per the current system).
These entitlements would remain days-based, but employees would be able to take part days of leave, providing greater flexibility than the current system. - Clarification of “otherwise working day”
Certain entitlements to leave depend on whether a day is an “otherwise working day” (OWD) for that employee. Under the current test, it is not always obvious which days are OWDs for certain employees, particularly those with irregular working patterns.
The Proposed Act would introduce a new OWD test. If an employee does not have set days of work, a day would be considered an OWD if they have worked (or been on paid leave) for 50% or more of the relevant days in “previous weeks”. However, from the information provided to date it is not clear over what period (i.e., how many of the previous weeks) the OWD 50% test would be assessed. - Public holiday entitlements
Currently, if an employee works on a public holiday that is an OWD, they are entitled to:
- time and a half for each hour actually worked on the public holiday; and
- a full alternative day’s holiday (regardless of how much time they worked on the public holiday).
- accrue alternative holiday hours at a rate of one hour for every hour worked (rather than receiving a whole day’s leave (which is the current position); and
- receive time-and-a-half for the hours worked and paid leave for the unworked hours.
- time and a half for each hour actually worked on the public holiday; and
- Payment types
Currently, different payment calculations apply to different types of holidays and leave. This would no longer be the case under the Proposed Act, as all types of leave would be paid at a single hourly leave pay rate based on the employee’s base wage for the day of leave. Variable components, such as bonuses, commissions, and penal rates would not be included in the leave pay calculation. - Parental leave payments
Annual holiday entitlements for employees returning from parental leave would be more generous under the Proposed Act. Under the Current Act, annual holiday pay is reduced for an employee who takes annual holidays soon after returning from parental leave. That “override” of the normal payment calculations for annual holidays would be removed, so that parents returning to work would receive their normal leave pay when they take annual holidays. - Pay statements
Under the Proposed Act, employers would be required to provide a pay statement for each pay period that itemises pay and leave for employees and enables employees to understand and track their pay and leave entitlements. There will be flexibility as to how this is provided; for example, it could be provided in a physical or digital form, or included in an online portal for employees. - Other matters
The Government announcement also addresses a range of other intended changes, including changes to the approach to holidays and leave for fixed term employees, and the provision of leave entitlements during periods of unpaid leave. The Government announcement also includes some examples of different work patterns, to provide some practical guidance about how the intended new framework would operate in practice.
Timing and transition
The Minister has indicated that she intends to have the Proposed Act passed before the next election (with draft legislation to be released in the first quarter of 2026).
The Government proposes a 24-month implementation period if the Proposed Act is enacted (with the schooling sector to have up to 10 years). During this period, existing leave balances for standard-hours employees would be converted to hours, and casual employees’ annual and alternative holiday balances would be cashed up.
The obligation to correct historical non-compliance with the current Holidays Act will continue although the Minister is proposing to provide a statutory mechanism to allow employers to “estimate liability for non-compliance” to help resolve historical Holidays Act remediation more efficiently.
Key considerations for employers
Although enactment of the Proposed Act could be some time away, employers should turn their mind to the following:
- Consider “future proofing” current employment agreements: Employers should consider how best to “future proof” leave provisions in current employment agreements to minimise the risk of contractually providing more leave than would be required under the Proposed Act, or having to consider transition arrangements to convert current additional entitlements to new arrangements under the Proposed Act. For example, we would suggest not specifying in employment agreements how an “otherwise working day” is to be determined based on the current Holidays Act requirements, given that this is likely to change and become more straight-forward under the Proposed Act.
- Consider payroll functionality: Employers should consider engaging their payroll providers to understand if current payroll systems have the functionality to address the proposed changes.
- Potential cost implications: Employers should consider modelling potential cost impacts of the Proposed Act and its potential effect on employee remuneration.
- Stay “in the know”: Employers should keep a watching brief on any potential changes in order to be prepared.
- Continue to ensure compliance with Holidays Act…for now: Although some reprieve may be on the horizon, employers must continue to comply with the current Holidays Act (and continue with any current remediation processes) unless or until the Proposed Act is in force.
The new legislation does promise to address some of the peculiarities of the current Holidays Act and offer fewer compliance minefields, although, as with all such changes, the “devil will be in the detail”. Bell Gully will continue to track the progress of the Proposed Act.
If you would like help reviewing employment agreements, payroll settings, or modelling cost impacts, please get in touch with the contacts listed or your usual Bell Gully adviser.
Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
