Annual leave can be confusing for both employers and employees. Under the New Zealand Holidays Act 2003, workers are entitled to a minimum of four weeks’ paid annual leave per year (20 working days for full-time employees). However, understanding the difference between entitled, accrued, and advanced leave is crucial for proper payroll management and ensuring compliance with employment law.

The Three Types of Annual Leave

1. Entitled Annual Leave

Entitled leave is the total amount of annual leave an employee has the right to take based on their completed service. In New Zealand, employees become entitled to four weeks of annual leave after each completed 12 months of continuous employment.

Key characteristics:

• Earned after completing a full 12-month period of employment
• Represents leave that has been fully “unlocked” and can be taken
• Cannot be taken away by the employer
• Must be paid out at the employee’s current rate if employment ends

2. Accrued Annual Leave

Accrued leave is annual leave that is accumulating progressively throughout the employment year but hasn’t yet been fully entitled. It’s essentially leave that is “building up” as the employee works through their current 12-month period.

Key characteristics:

• Accumulates progressively during the current employment year
• Calculated on a pro-rata basis (e.g., after 6 months, 2 weeks accrued)
• Cannot normally be taken until the 12-month entitlement period is complete
• Must be paid out on termination at 8% of gross earnings for that period

3. Advanced Annual Leave

Advanced leave (also called leave in advance) is when an employee takes annual leave before they have actually earned or accrued it. This requires agreement between the employer and employee.

Key characteristics:

• Requires written agreement between employer and employee
• Creates a “negative” leave balance
• If employment ends before the leave is earned back, the employer can deduct the overpayment from final pay
• Commonly used for employees who need extended leave early in their employment

Practical Examples with Payslips

Example 1: Employee with Entitled Leave

Scenario: Sarah has been employed for 18 months. She completed her first 12 months and became entitled to 4 weeks (20 days) of annual leave. She’s taken 1 week (5 days), leaving 15 days of entitled leave. She’s also 6 months into her second year, so has accrued 2 weeks (10 days) additional leave.

📄 View Example Payslip

Sarah Johnson – Employee with Entitled and Accrued Leave

What this shows: Sarah has 15 days of entitled leave (from her first year) that she can take at any time, plus 10 days of accrued leave building up in her second year. The accrued leave will become entitled leave once she completes her second full year of employment.

Example 2: Employee Taking Annual Leave

Scenario: Mark has 25 days of entitled annual leave available. He’s taking 2 weeks (10 days) of annual leave this pay period for a family holiday.

📄 View Example Payslip

Mark Thompson – Employee Taking Annual Leave

What this shows: Mark’s entitled leave balance decreased by the 10 days he took. He was paid his normal rate for this leave. His accrued leave continues to build up separately and wasn’t affected by taking entitled leave.

Example 3: Employee with Advanced Leave (Negative Balance)

Scenario: Emma started employment 3 months ago and has accrued 1 week (5 days) of leave. She requested and was granted 2 weeks (10 days) leave in advance for a pre-booked overseas trip, creating a negative balance of 5 days.

📄 View Example Payslip

Emma Williams – Employee with Advanced Leave (Negative Balance)

What this shows: Emma took 10 days of leave but had only accrued 5 days, resulting in a negative balance of 5 days. She’ll need to work for approximately 2.5 more months to “earn back” this advanced leave. If she were to resign before earning it back, her employer could legally deduct the overpayment from her final wages.

Example 4: New Employee Building Accrued Leave

Scenario: James started his job 1 month ago. He hasn’t completed his first year yet, so he has no entitled leave, but he’s accruing leave progressively. After 1 month, he’s accrued approximately 1.67 days (1/12th of 20 days).

📄 View Example Payslip

James Chen – New Employee Building Accrued Leave

What this shows: James has zero entitled leave because he hasn’t completed his first year, but his accrued leave is progressively increasing. If he were to resign now, he’d be paid out the 8% of his gross earnings for the period worked (not necessarily the exact hours shown, as the 8% calculation is more accurate for variable earnings).

Quick Reference Comparison Table

Aspect	Entitled Leave	Accrued Leave	Advanced Leave
When Available	After completing each 12-month period	Building progressively during current employment year	By agreement, before it’s earned
Can Be Taken?	Yes, at any time (with notice)	Generally no, until entitlement period completes	Yes (that’s the point!)
Balance Calculation	Full weeks/hours earned	Pro-rata based on time worked	Negative balance
On Termination	Paid at current rate	Paid at 8% of gross earnings for period	Employer may deduct overpayment
Typical Balance Display	15 days	5 days	(5) days or -5 days

Important Compliance Points for Employers

When managing annual leave in your payroll system, keep these key points in mind:

Separate Tracking: Your payroll system should separately track entitled leave and accrued leave. Many New Zealand payroll systems maintain both balances and clearly distinguish between them on payslips.

Accrual Calculations: Accrued leave should be calculated progressively throughout the employment year. The formula is typically: (Days worked in current year ÷ 365) × 20 days (or hours equivalent based on the employee’s working pattern).

Advanced Leave Agreements: Any leave in advance must be agreed to in writing. The agreement should specify that if the employee leaves before earning back the advanced leave, the employer can make deductions from final pay (within the limits allowed by law).

Payment on Termination: If employment ends, entitled leave is paid at the employee’s current rate, while accrued leave is paid at 8% of the employee’s gross earnings for the incomplete year. For advanced leave, you may deduct the overpaid amount from final wages.

Leave Year Anniversary: When an employee completes a 12-month period, their accrued leave converts to entitled leave. Your system should automatically process this conversion on the anniversary date.

Common Scenarios and Solutions

Scenario: Employee wants to take leave before their first anniversary
Solution: This requires granting leave in advance. Ensure you have a written agreement in place and understand that this creates a negative balance that must be earned back.

Scenario: Employee has both entitled and accrued leave – which is used first?
Solution: Legally, you should use entitled leave first, as this is leave they’ve fully earned. Accrued leave typically can’t be taken until the entitlement period is complete (though employers may agree otherwise).

Scenario: Part-time employee – how do you calculate their leave?
Solution: Part-time employees are entitled to the same 4 weeks per year, but this is calculated based on their regular working pattern. The hours entitled and accrued should reflect their part-time status.

Best Practices for Payslips

Your payslips should clearly show:

• Separate line items for “Annual Leave Entitled” and “Annual Leave Accrued”
• Clear labeling when leave is advanced (e.g., “Annual Leave – Advanced” or showing a negative balance)
• Previous balance, movements during the period, and current balance
• Any relevant notes explaining unusual balances or situations

Conclusion

Understanding the difference between entitled, accrued, and advanced annual leave is essential for both employers and employees in New Zealand. Proper tracking and clear communication on payslips helps ensure compliance with the Holidays Act 2003 and reduces confusion or disputes about leave entitlements.

For employers, investing in a good payroll system that properly tracks these different leave types will save considerable time and help you stay compliant. For employees, understanding your payslip and knowing what leave you have available helps you plan your time off appropriately.

Need Help? If you’re unsure about your annual leave entitlements or calculations, consider consulting with a qualified payroll professional or employment relations specialist. Paymasters can help ensure your payroll is compliant and your employees are receiving their correct entitlements.