Out with the Holidays Act, in with the ‘Employment Leave Act’

Out with the Holidays Act, in with the ‘Employment Leave Act’

For years, one of the most loathed aspects of New Zealand’s employment relations framework has been the Holidays Act 2003—a target of near universal criticism from businesses, unions, and political parties across the spectrum.

After a number of false starts and previous attempts at reform, the Government has announced a fresh proposal to repeal the Holidays Act and replace it with a new ‘Employment Leave’ Act.

The proposed reforms are far more than a simple name change; they will represent a significant shift and simplification in how holidays and leave are calculated and paid for employees should they pass into law. So, what are the proposed changes that employers need to know about, and what do they mean in practice?

A shift to hours-based accrual for sick and annual leave

A key aspect of the Government’s proposal is a new accrual system for annual and sick leave, moving away from entitlements being calculated in weeks or days. In summary:

• All permanent or fixed-term employees will begin to accrue annual and sick leave on an hourly basis from their first day of employment, rather than having to complete 12 months of continuous employment for annual leave or six months for sick leave.
• Annual leave will accrue at 0.0769 hours for each contracted hour worked (including periods of paid leave, parental leave, jury, and volunteers leave, but excluding ACC leave or unpaid leave). This ensures all employees receive the equivalent of four weeks of annual leave over a 12-month period.
• Sick leave will accrue at the rate of 0.0385 hours for each contracted hour worked. For employees working five days per week, this provides the equivalent of 10 days’ sick leave per year. However, those working more or fewer days will see their entitlement adjust proportionately—for example, someone working six days per week will receive 12 days’ sick leave, while a three-day-per-week employee will receive six days, which is less than the current entitlement.
• Sick leave can be accrued up to a cap of 160 hours. Once this cap is reached, accrual stops until some of the balance is used.
• Annual or sick leave will be taken on an hourly basis. For instance, taking leave on an eight-hour workday will require eight hours of leave. An employee who takes leave for a part-day will only use their leave balance for the hours they are absent (e.g. two hours’ leave for a two-hour absence).
• If an employee does not have set or predictable hours specified in their employment agreement, then the employer and employee will be required to agree a notional roster to be used for leave purposes.
• If an employee increases or reduces their normal hours of work, their accrued leave balance will remain unchanged. For example, if an employee with 80 hours of accrued annual leave increases their hours from 20 to 40 per week, their leave balance stays at 80 hours.

The move to an hourly accrual approach is consistent with previous reform efforts and is not a surprise. However, the reduction in sick leave entitlements for part-time employees is a fresh proposal, and has already faced fierce criticism from unions and opposition parties. While these criticisms overlook the current reality that part-time employees receive proportionately more sick leave than full-time employees (in contrast to the approach taken for annual leave), this aspect of the proposal will face stiff opposition through the parliamentary process.

Another aspect of the reforms likely to attract scrutiny is the fixing of leave balances when an employee changes their hours of work. While this benefits employees reducing their hours (full-time to part-time), the downside is that those increasing their hours (e.g. part-time to full-time) will have proportionately less leave compared to the current system. For example, an employee working 30 hours per week with 60 hours of accrued leave (enough for two weeks) who increases to 40 hours per week will still have 60 hours leave, but this will now only be sufficient for one and a half weeks’ absence. This contrasts with the current system, where the employee would retain a two-week leave balance after increasing their hours. Given this is a common scenario for employees returning from parental leave on a graduated basis, we expect that there will be pushes for this consequence of the simplicity drive to be softened.

Payments for annual and sick leave

With the shift to hourly accrual for annual and sick leave, the Government is also proposing that leave be calculated and paid on an hourly basis using a single rate for all leave types. This removes the distinction between how annual, sick, and other leave types are paid, and eliminates the need for employers to navigate different pay methodologies such as ordinary weekly pay or average weekly earnings, and relevant or average daily pay. In summary:

• The annual leave rate will be the hourly wage for waged employees, or the hourly equivalent of the base salary for salaried employees.
• Piece-rate employees will be paid an average hourly rate.
• Annual leave rates will no longer taken into account bonus or commission payments.
• Payments for additional or overtime hours will also be excluded from annual leave calculations. Instead, employers must pay a 12.5% loading (‘Leave Compensation Payment’) for each additional hour an employee is paid for.
• Employees who are entitled to fixed allowances (e.g. accommodations allowances) will still be entitled to these allowances during periods of leave.

These changes will make things much more simpler for employers and are likely to mean that leave rates won’t fluctuate as they currently do for employees with variable hours or remuneration.

Further, excluding bonus or commission payments—often the source of complexity and compliance issues— will eliminate the recurring issue of whether a bonus is truly ‘discretionary’ and needs to be included in annual leave payments. However, the trade-off is lower annual leave payments for employees for whom bonuses or commissions are a substantial part of their income. As it stands, the Government is not proposing anything which would offset the financial impact for employees in this situation so we expect that there will be a lot of submitters pushing for adjustments in this area. 

Changes for casual employees

A further headline aspect of the Government’s reform is a proposal for casual employees to receive the 12.5% Leave Compensation Payment for all hours they work, instead of the current 8% holiday pay they receive on a pay-as-you-go basis or at the end of each engagement.

In our view, this change fairly reflects the reality that casual employees, who are currently only compensated for the annual leave they do not receive, also do not qualify for sick leave and have little job security. However, while initial employer feedback seems to be to accepting of this increase given the other reforms it sits alongside, we expect that the higher cost of engaging casual employees will prompt some employers to reconsider whether certain roles should be permanent instead.

Other key changes

Other key proposed changes that employers should be aware of include:

• Eligibility for bereavement and family violence leave: The six-month eligibility threshold will be removed, allowing employees to take family violence or bereavement leave from their first day of employment. While these entitlements would still be calculated in days rather than hours, it will be permissible for employees to take part-days of leave consistent with the new approach to sick leave.
• Annual leave for employees returning from parental leave: With the introduction of a single hourly rate for all leave types, the requirement to use average weekly earnings for annual leave payments to employees returning from parental leave will be removed. This will mean that employees returning from parental leave are not disadvantaged as currently happens, and are paid the same for annual leave regardless of when they take it.
• Cashing up annual leave: Employees and employers will be allowed to cash up to 25% of an employee’s accrued annual leave each year. The current Act only allows cashing up one week, so this change will enable employees with more than one year’s accrued leave to cash up a larger share of their leave balance.
• Eligibility for public holidays: A new test will be introduced to determine when an employee with variable days of work would normally work on a public holiday. The test will be whether the employee worked 50% of the weekdays during the preceding weeks (likely to be assessed over a 13 week period).
• Alternative holidays: Where an employee works on a public holiday, they will accrue alternative holidays at the rate of one hour holiday for each hour worked. This is a change from the status quo where an employee receives a full day alternative holiday regardless of how long they work on a public holiday for.
• Mandatory pay statements: Employers will be required to provide clear pay statements each pay period, itemising pay and leave in a transparent and easy-to-understand manner.

Looking ahead

Overall, we believe these proposed changes will meaningfully reduce the complexity—and hopefully the compliance difficulties—of the Holidays Act 2003. Based on early feedback from businesses and unions, many of the proposed changes appear to have broad support, so we do expect that a number of them will eventually become law.

That said, there is still a long way to go before anything is confirmed. Workplace Relations and Safety Minister Brooke van Velden has stated her goal is to pass a new Act before the Government’s term ends in late 2026. The Minister has also indicated there will be a 24-month transition period after the law passes, meaning the new rules are unlikely to take effect before 2028 for most employers.

In the meantime, the current Holidays Act 2003 remains in effect and employers are still expected to ensure they are fully compliant, addressing any issues as they arise.

Special thanks to Partner Alastair Espie and Solicitor Briana Miller for preparing this article. If you have any questions about the Government’s proposals, or about the current Holidays Act and the difficulties it presents, please don’t hesitate to reach out to our national employment team for assistance.

Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.