Big changes coming to holiday pay
Posted: 17 September 2026
The Employment Leave Act 2026 became law on 6 August 2026. It heralds the biggest changes to the administration of employee leave since the Holidays Act was passed in 2003, more than 20 years ago. The legislation, however, is not due to take effect until 6 August 2028, so there is plenty of time for employers to prepare.
Employment Leave Act 2026 comes into force in 2028
Why is it changing?
The current system has proved to be complex and especially challenging to apply to employees who have variable working hours or variable pay through commissions. This has led to a number of well-publicised instances of large public sector organisations having incorrectly paid a large number of their employees for their leave over a substantial period. It is likely that this has happened in the private sector as well.
The situations which have occurred in the public sector have garnered more publicity, given the transparency that applies to public sector organisations.
For example, Health New Zealand, that took over from the 24 former district health boards, is currently going through a complex process of identifying and correcting errors with holiday pay dating back to 2010. Health New Zealand has budgeted $1.8 billion to make up previous short payments to its staff for leave. It is also spending tens of millions of dollars on the investigative and administrative work associated with identifying and correcting these errors.
What is changing?
The fundamental change to be introduced is a switch to calculating leave on an hourly basis. The Act also distinguishes between ‘standard hours,’ ‘additional hours’ and ‘casual hours.’ Broadly, ‘standard hours’ are an employee’s ordinary hours, while ‘additional hours’ are hours worked beyond those standard hours. ‘Casual hours’ are hours worked by a casual employee. The legislation retains the ability for an employment agreement to state that an employee’s salary covers all hours worked.
The general rule will be that annual leave will accrue at the rate of 0.0769 hours for each hour worked. Sick leave will accrue at the rate of 0.0385 hours.
Other significant changes include:
- Employees will accrue both annual and sick leave as soon as they begin working. They will no longer have to work for a year before being entitled to annual leave and six months before being entitled to sick leave
- Employees will only accrue annual leave for their normal working hours. They will not accrue leave for any additional hours worked. Instead, they will receive an immediate payment of 12.5% of their normal hourly rate for all qualifying hours worked in excess of their normal working hours
- Employees will be able to take both annual and sick leave on an hourly basis. They may take one or two hours off work for a medical appointment. Under the current law, technically, they may be required to take a full day’s leave for this
- Both annual and sick leave will accrue when an employee is on paid leave or any unpaid leave authorised by any legislation, including parental leave. Leave will not accrue, however, when an employee is receiving accident compensation support
- An employee will accrue additional leave for each hour that they work on a public holiday if that day is a normal working day for them, and
- Employers and employees will be able to agree for employees to ‘cash out’ up to 25% of the value of the annual leave. At present, the limit is one week’s leave.
What do you need to do now?
As an employer, there is nothing that you need to do immediately. The legislation does not come into effect for two years. In the meantime, however, you need to ensure that your payroll system can handle the changes when they come into effect.
Payroll software providers are aware that they must update their software to enable it to implement the new system when it comes into effect.
Watch out for communications from your payroll software provider. You should also bear the upcoming changes in mind if you are considering changing your payroll system.
You must also update the leave provisions in your employment agreements. The Act allows employers a further year after the legislation comes into force on 6 August 2028 to ensure that all employment agreements are updated.
Employers must continue to comply with any provisions in their employment agreements that are more favourable to employees than the Act during this first year. The minimum statutory terms will override any employment agreement that remains unchanged at the end of this period.
If you need guidance on updating your staff’s employment agreements, or any other aspects of this new legislation, please don’t hesitate to contact us.
DISCLAIMER: All the information published in the Property eSpeaking, Commercial eSpeaking, Trust eSpeaking, Rural eSpeaking, and Fineprint newsletters is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this article. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in Property eSpeaking, Commercial eSpeaking, Trust eSpeaking, and Fineprint may be reproduced with prior approval from the editor and credit given to the source. Copyright, NZ LAW Limited, 2026. Editor: Adrienne Olsen. E-mail: [email protected]. Ph: 029 286 3650 or 04 496 5513.
