New Zealand’s most troublesome piece of payroll legislation is on its way out. The Employment Leave Act 2026 received Royal assent on 6 August 2026 and will replace the Holidays Act 2003 from the first pay period beginning on or after 6 August 2028.
That two-year runway is deliberate. It gives payroll providers, software vendors and employers time to rebuild systems, rewrite employment agreements and retrain the people who run the pay. It is not a long time.
This article is a plain-English look at the two changes that matter most to anyone who touches a pay run – how leave will accrue, and how leave payments will be calculated – set against the way the Holidays Act does it today.
Nothing changes yet. Until August 2028, the Holidays Act 2003 remains the law and every entitlement, calculation and compliance obligation under it continues to apply in full.
Why the Holidays Act had to go
The Holidays Act 2003 measures annual leave in weeks, sick leave in days, and then asks payroll systems to translate those units into hours for people whose work patterns are anything other than fixed. Layered on top are four separate pay calculations – ordinary weekly pay, average weekly earnings, relevant daily pay and average daily pay – each applying to different leave types, some of them requiring a “greater of” comparison every time leave is taken.
The result has been two decades of remediation projects, Labour Inspectorate investigations and payroll arrears running into hundreds of millions of dollars across the public and private sectors. The problem was never that employers were careless. It was that the Act asked a weeks-based framework to describe a workforce that increasingly works variable hours.
The Employment Leave Act’s answer is to measure everything in hours and pay everything at one rate.
Change one – leave accrual moves to hours, from day one
How it works under the Holidays Act 2003
- Annual leave: four weeks, granted as a lump sum on each anniversary of 12 months’ continuous employment. Nothing is legally available before that first anniversary unless the employer agrees to leave in advance.
- Sick leave: 10 days, granted after six months’ continuous employment and again every 12 months, with a maximum accumulation of 20 days.
- Balances are held in weeks and days, and the value of a “week” moves when an employee’s work pattern changes.
- Casual and irregular employees can be paid holiday pay as you go at 8% of gross earnings where they meet the criteria.
How it will work under the Employment Leave Act 2026
- Annual leave accrues from the first day of employment at 0.0769 hours for every standard hour worked.
- Sick leave accrues from the first day of employment at 0.0385 hours for every standard hour worked, capped at 160 hours.
- Balances are held in hours. They do not automatically revalue when hours change.
- Leave can be taken by the hour. An employee uses one hour of accrued leave for each hour away from work, so part-days are handled without workarounds.
- Additional hours and casual hours do not accrue leave. Instead they attract a 12.5% leave compensation payment paid in the pay period the hours are worked.
What that looks like in practice
An employee with 40 standard hours a week accrues 3.076 hours of annual leave a week – about 160 hours over a year, which is the same four weeks they have today. Sick leave accrues at 1.54 hours a week, roughly 80 hours a year, or the equivalent of 10 eight-hour days.
The entitlement, in other words, has not been cut. It has been re-expressed in a unit that payroll systems can actually calculate without ambiguity.
The Act also introduces three categories of working time that employment agreements will need to reflect clearly: standard hours (the hours an employee is required to work), additional hours (hours beyond standard, separately paid) and casual hours (where there is no guaranteed work). Which category an hour falls into determines whether it accrues leave or attracts the 12.5% payment – which makes accurate agreements a compliance issue, not an administrative one.
Change two – one hourly rate for every type of leave
This is the change with the greatest financial consequence, and the one most likely to prompt questions from employees.
The Holidays Act position
| Leave type | Current calculation |
|---|---|
| Annual holidays | The greater of ordinary weekly pay and average weekly earnings over the previous 52 weeks |
| Public holidays, sick, bereavement, family violence leave | Relevant daily pay, or average daily pay where daily pay is not practicable or varies |
| Alternative holidays | Relevant daily pay or average daily pay |
Average weekly earnings draws on gross earnings, which captures overtime, most allowances, commission and productivity payments. For employees with significant variable earnings, this comparison regularly produces a higher rate than base pay.
The Employment Leave Act position
A single hourly leave pay rate applies to every type of leave:
- Salaried employees – the salary attributable to one standard hour.
- Waged employees – the lowest hourly rate in the employment agreement for the shift or day the leave is taken.
- Commission-based employees – the greater of the standard rate or the minimum wage.
- Piece-work employees – the greater of the hourly rate plus average piece rate, or the minimum wage.
Commission, incentive payments and productivity-based payments are excluded from the rate. Fixed allowances continue to be paid during leave.
The trade-off employers should understand now
For an employee who works a lot of overtime, removing the average weekly earnings comparison will generally produce a lower rate when annual leave is taken than the Holidays Act does today. The 12.5% leave compensation payment on additional and casual hours is intended to compensate for that at the time those hours are worked, rather than at the time leave is taken.
That is a genuine shift in when value reaches the employee, and it is worth explaining to your people well before 2028 rather than in the pay run it first appears.
Side-by-side summary
| Holidays Act 2003 | Employment Leave Act 2026 | |
|---|---|---|
| Unit of measure | Weeks and days | Hours |
| Annual leave | 4 weeks after 12 months | 0.0769 hours per standard hour, from day one |
| Sick leave | 10 days after 6 months, max 20 days | 0.0385 hours per standard hour, capped at 160 hours |
| Taking leave | Days and part-days by agreement | Hour for hour, part-days as standard |
| Casual and additional hours | Optional 8% pay as you go | Mandatory 12.5% leave compensation payment |
| Annual leave pay rate | Greater of OWP and AWE | Single hourly leave pay rate |
| Other leave pay rate | RDP or ADP | Single hourly leave pay rate |
| Variable earnings | Included via gross earnings | Excluded from the rate |
| Alternative holidays | A whole day off | Accrues hour for hour worked |
| Otherwise working day | Multi-factor assessment | Worked 50% or more of that weekday in the previous 13 weeks |
What happens to existing balances
Leave balances held in weeks and days convert to hours using formulas set out in the Act on the day the new rules take effect for each employer. From that date, converted leave is paid under the new rules. There is also a grace period following commencement for employment agreements to be brought into line, and a substantially longer implementation timeframe for the state schooling sector.
What employers should be doing between now and 2028
You do not need to change anything today. You do need to start the groundwork, because the work that determines whether this transition is clean is work that takes months.
- Get your employment agreements right. Standard hours need to be documented clearly for every employee. This is the single biggest determinant of correct accrual under the new Act.
- Understand your workforce composition. Know how much of your payroll sits in standard, additional and casual hours today – that tells you how exposed you are to the 12.5% payment.
- Clean up your current Holidays Act compliance. Balances that are wrong today will convert to hours that are wrong in 2028. Remediation is cheaper before conversion than after it.
- Talk to your payroll provider early. Ask what their conversion approach is and when they expect to be ready. Two years disappears quickly in software development terms.
- Plan how you will explain it to your team. Employees will notice hours instead of weeks on their payslips, and some will notice a different rate.
Where Paymasters sits on this
We have said for years that payroll software represents perhaps 10 to 15% of compliance – the rest is understanding the legislation and applying it correctly. That does not change under the Employment Leave Act. If anything, the transition period rewards employers who understand the rules well enough to check that their systems have implemented them properly.
We are working through the detail of the Act now, and we will be guiding our clients through conversion planning as MBIE guidance and payroll software releases become available. Our managed payroll service and our wider payroll services are built around exactly this kind of legislative change, and thirty years of it is the reason we exist.
If you would like to understand what the Employment Leave Act means for your organisation, contact us for a confidential discussion.
You will find more on New Zealand payroll compliance across our blog.
This article is general information about legislative change and is not legal advice. Employers should seek advice specific to their circumstances.
Sources
- Holidays Act reform: Employment Leave Act – Ministry of Business, Innovation and Employment
- Explainer: What’s changing with employment leave – MBIE
- Employment Leave Bill passes third reading – Buddle Findlay
- Holidays Act 2003 to be replaced by a new Employment Leave Act – Buddle Findlay
- Leaving the Holidays Act behind: New Zealand prepares for a new leave regime – DLA Piper