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Following years of payroll issues, billions paid out to correct underpayments, and ongoing pressure from both businesses and unions, the Government has announced it will replace the current Holidays Act to finally resolve what it describes as New Zealand’s flawed leave system.
Workplace Relations and Safety Minister Brooke van Velden announced today, September 23, that Cabinet has approved the decision to repeal the Holidays Act 2003 and introduce a new piece of legislation called the Employment Leave Act.
The goal of the reform is to simplify how leave entitlements are calculated and ensure workers are paid accurately.
“Annual and sick leave will now be accrued in direct relation to the number of hours worked, whether someone is employed full-time or part-time,” van Velden said.
“Parents who return to work after parental leave won’t face reduced holiday pay, sick leave can be used in hourly increments to better reflect real situations, and employers will have clear, easy-to-follow rules,” she said.
The existing law, which has been in place for two decades, has often been labelled as overly complicated, especially for industries like tourism, hospitality, and healthcare, where irregular work schedules are common.
Employers frequently miscalculate leave entitlements, leading to widespread breaches and significant financial remediation in both the public and private sectors.
As of August, Health NZ Te Whatu Ora had paid over $544 million to more than 72,000 current staff to correct leave payments. Across the health system, the total potential liability is estimated to exceed $2 billion.
“The current law is confusing for both employers trying to apply it correctly and for employees trying to understand their rights,” said van Velden.
What the changes mean
Currently, employees become eligible for four weeks of annual leave only after completing a full year of continuous work. Sick leave is granted after six months of employment, with a set allocation of 10 days per year—regardless of the employee’s weekly hours.
Under the proposed changes, both sick and annual leave would start accumulating from day one, based on hours worked rather than fixed timeframes.
For instance, someone working 40 hours per week would accumulate 0.0769 hours of annual leave and 0.0385 hours of sick leave for every hour worked. This would total 160 hours (equivalent to four weeks) of annual leave and 80 hours (equal to 10 days) of sick leave over a full working year.
Instead of a standard entitlement, leave would build up in proportion to the hours an employee is contracted to work.
Casual workers, rather than earning sick or annual leave or receiving the current 8 per cent “pay-as-you-go” holiday pay, would instead receive a 12.5 per cent leave payment for each hour worked. This same 12.5 per cent payment would apply to any extra hours worked beyond an employee’s contracted schedule.
Under the new framework, employees could take sick leave in hourly increments instead of being forced to use a full day at a time. In addition, bereavement leave and family violence leave would be available from an employee’s first day on the job. Workers returning from parental leave would receive their normal pay when taking annual leave, removing the current financial disadvantage.
Employers would also be required to issue itemised payslips each pay cycle, clearly outlining both wages and leave in a way that’s easy to follow.
Employees with large leave balances would have the ability to request cashing out up to 25 per cent of their total annual leave each year, offering more flexibility in how leave is used.
“The era of overly complicated leave calculations is coming to an end,” said van Velden.
“A single, simplified method will be used to calculate all types of leave. For most employees, their entitlements won’t change—only the way those entitlements are worked out.”
Van Velden also noted that the reforms would benefit casual workers and new parents, with the latter receiving full annual leave payments upon their return, and casuals effectively gaining a 4 per cent increase through the new 12.5 per cent leave loading.
“These updates will make leave easier to understand and manage—for workers, employers, and their families—bringing more clarity and consistency to the system.”
The revised rules are expected to apply to around 2.2 million workers with fixed hours, as well as many thousands of part-time and casual employees.
There will be a 24-month implementation period after the Employment Leave Bill is passed into law, to allow for a smooth transition for employers and payroll providers.
