FAQs: The Holidays Act and the new Employment Leave Act

• The Employment Leave Act will simplify leave calculations by moving from weeks and days to an hours-based system with clearer rules.
  
  
• Employers must clearly define and classify standard, additional and casual hours across employment agreements, time capture and payroll systems.
  
  
• Employers should start preparing now to ensure systems, processes and employees are ready for the 2028 transition.

The biggest overhaul of New Zealand leave law in more than 20 years is coming. While the Employment Leave Act won't take effect until 2028, the changes will fundamentally reshape how leave is accrued, taken and paid. From hourly leave entitlements to new public holiday eligibility tests, payroll teams will need to start preparing well before the deadline. We asked Datapay’s Head of Payroll Compliance Chris Mar about what the reforms mean, what employers should be thinking about now, and how organisations can get ready for the transition. 

The Holidays Act 2003 was designed for a Monday to Friday, single employer, fixed-hours workforce. It worked well for that: you worked 40 hours a week, and you got four weeks’ holiday. But modern working patterns are very different, with variable hours and people working several jobs. This type of work doesn’t fit into the rigid framework.  

Over the past 10 years there has been a lot of focus on underpayments with Holidays Act calculations. There have been billions of dollars in remediation paid in healthcare and education, across private entities, small businesses, multinationals, and government agencies. For a long time there has been discussion about how to reform the Holidays Act to make it simpler so people are less likely to get things wrong. 

The new Employment Leave Act 2026 will clarify the rules. One problem with the existing Act is that there are a lot of places where judgement is required. The Employment Leave Act makes it clearer how leave should be accrued and paid. That’s the fundamental change – it simplifies the basic calculations, so judgement doesn’t need to be applied.   

New Zealand is moving from a leave system based on weeks and days, to a system based on hours, so you’ll accrue annual and sick leave based on hours actually worked. There is now a very clear distinction: you earn leave on your standard hours of work, but any additional hours or casual hours do not accrue annual or sick leave. Instead, these earn a leave compensation payment of 12.5%.   

The intention is for employees and employers to be able to understand their leave entitlements, and how they are paid, without complicated calculations. 

One of the biggest pain points around Holidays Act is that it has five different pay rate concepts that determine how you pay leave. Now, those five different pay rates are going down to one.  

Also, there was no clear test on what was an ‘otherwise working day’, which determined whether you were entitled to a public holiday or not. Would you otherwise have worked on a specific day? That’s easy for a person that works a standard 40-hour, 5 day week. But there are a lot of cases where people work variable working patterns where it is not obvious if an employee was to work a specific day.  The new Act provides a legislative test.  

The key thing employers need to meet the requirements is to understand the classification of the different hours their employees work: the concept of standard hours, additional hours and casual hours. Everything else flows from that.   

It starts all the way back at the employment agreement – are standard hours of work defined for your workforce? What about additional and casual hours? And is it clear on what days and times standard hours are to be worked. If those aren’t clear, you can’t meet the requirements of the Act.

For industries with flexible, variable workforces, where workers receive additional payments, these changes will simplify leave pay.  

We’re going to a single rate of pay for leave based on the lowest hourly rate of pay that would otherwise have been paid for the shift or day of work. Currently, leave calculations take into historical averages, but these will no longer be considered in your base rate of pay for leave. As an example, commission-based workforces will be impacted by this.  
 

One other change is with accrual. Under the existing Act, leave is valued at the time it is taken. For example, if you went from working a standard 40 hours per week to working part time for 20 hours a week, your leave entitlement followed that as well. So if you’d had four weeks’ leave owing, when you switched to working part time your leave went down from 160 hours to 80 hours.   

Under the new Act, leave accrues based on hours. Even if you change to part-time, the leave you had already built up continues to be yours. It’s a lot more understandable; it fits with how we feel about leave, which is that it’s ‘in the bank’.

There’s now a specific identifiable test for what is an ‘otherwise working day’. That makes it easier for people who work flexible or variable hours to know whether they’re entitled to a public holiday or not, and we can write the test into the software.   

For employees whose employment agreements specify fixed standard hours and who occasionally or frequently work extra, these extra hours become additional hours and will attract the new leave compensation payment of 12.5%.  For casual workers, all hours worked are casual hours and so all these hours will attract the new leave compensation payment.  But annual and sick leave is not accrued on additional or casual hours so the impact is employees may receive more pay in the hand in leave compensation payments but less annual and sick leave to take away from work.    

This is for annual leave and sick leave only, whereas bereavement and family violence leave is now available to all employees from day one which is new.    
 

Complying with the new Act does come down to a clear understanding of the different types of hours. That understanding starts from the employment contract, then into time capture, and then into payroll. While the payroll calculates leave and makes the payments, the earlier inputs from the employment agreement and the time in attendance systems need to be right. You need that clear distinction of hours.  

That’s why compliance isn’t just a payroll problem – it’s an HR, employment relations and education issue. Employers need to explain to employees how it will affect them. It might require teams to work with their employee representatives to work through the changes and make sure it’s clear what the different types of hours mean.   

And you definitely don’t want to be leaving compliance to the last minute. Two years seems like a long time, but in reality it will go really quickly.  

Under the existing rules, there was a lot of judgement – and software doesn’t do judgement well. It needs clear, definable rules. The Employment Leave Act operationalises those rules.  

You’ll need good systems in place to identify and classify hours of work which the payroll software and team need to get leave entitlements right. For employers who are preparing for the changes, definitely work with your software provider.   

Unless you have that clarity for standard, additional and casual hours, you will still have the same ‘rubbish in, rubbish out’, problem that exists with any system. But if you have that key concept sorted out, I believe the transition will be simpler.  

We’ve been following the changes closely, and we’ve been providing feedback during the process, as much as we could. Now, the Act has just passed, so we’re working to develop the capability to provide the calculations under the new Act. At this point in time, we’re trying to see how it all fits in with the current system – some aspects we can build upon, for others we have more work to do.   

This is a significant change, and I won’t shy away from that. That’s why the industry pushed for a two-year timeframe before this gets switched on. That gives us a timeframe to work through it, and MBIE is going to provide guidance through different scenarios so we can make sure we’ve understood the Act as intended. We’re waiting in anticipation for that to come through.  

Nobody tries to get things wrong, but it’s been hard to get holiday pay right. These reforms should reduce the levels of confusion and ambiguity, and reduce the amount of judgement involved, which means calculations should be more accurate and understandable for both employers and employees alike.