Look, if you’re an employer or an HR professional in Aotearoa, I know what your number one compliance priority has been for years. Dealing with the old, complex rules of the Holidays Act 2003 has been an absolute nightmare. It has resulted in widespread non-compliance, immense administrative burden, and remediation costs running into the billions across both public and private sectors. You’re trying to run your business, but calculating leave pay often feels like deciphering hieroglyphs.
The good news? The cavalry has arrived. The new Holidays Act reforms are here, and they represent the fundamental, structural change needed for genuine Holidays Act 2003 simplification. This legislative overhaul, driven by the proposed Employment Leave Bill, prioritizes clarity and workability, ensuring employees receive their correct entitlements while giving employers confidence in their Holidays Act compliance NZ payroll.
In this article, we cut through the legislative jargon. We will explain exactly how the system changes are working—from the shift to hours-based accrual for permanent staff to the introduction of the upfront Leave Compensation Payment (LCP) for casual workers. The goal of these Holidays Act reforms is simple: to give you the actionable steps you need to prepare your business for the changes coming in 2025 and beyond.
The shift to hours-based accrual: Holidays Act 2003 simplification
The core reason the previous Act failed was its reliance on entitlements defined in weeks, which became impossible to manage for employees with variable hours. The shift to an hours-based accrual system for the majority of the workforce (about 93% of employees) is the key to achieving true Holidays Act 2003 simplification. This new approach calculates leave earned hour-by-hour, starting from the employee’s first day of work.
Annual leave and sick leave accrue from day one
Under the current rules, employees must wait 12 months for annual leave and six months for sick leave entitlements to kick in. The Holidays Act reforms eliminate this waiting period, allowing both annual and sick leave to accrue immediately. This ensures immediate access to entitlements, though the full amount remains proportionate to hours worked.
How the new hours-based accrual system works
Accrual is based strictly on “contractual hours,” defined as all hours an employee is required to work and be paid for, which they cannot refuse. The statutory minimum rates are set precisely to ensure a standard full-time employee receives the equivalent of four weeks of annual leave and ten days of sick leave annually. These changes provide clarity where the previous Act required complex employer judgement.
The new system calculates leave earned based on a fixed ratio for every contractual hour worked. This approach is designed to produce outcomes equivalent to the status quo for employees working a standard five-day, 40-hour week.
Key Accrual Rates and Entitlements:
- Annual Leave: Accrues at a rate of 0.0769 (4/52) of an hour of annual leave per contractual hour worked. This rate is calculated to deliver the equivalent of four weeks of annual leave per year.
- Sick Leave: Accrues at a rate of 0.0385 (2/52) of an hour of sick leave per contractual hour worked. This ensures employees working standard hours receive the equivalent of 10 days per year.
- Sick Leave Cap: The total stored sick leave entitlement is capped at 160 hours, reflecting the existing 20-day limit under the status quo. New accrual stops once this cap is reached until a worker has used some of their stored entitlement.
- Accrual during Leave: Leave continues to accrue at the same rates on contractual hours during paid leave, and during parental leave under the Parental Leave and Employment Protection Act 1987.
Changes when employee hours fluctuate
A major source of compliance headaches in the past was the requirement for annual leave balances to automatically “scale” up or down when an employee’s working week changed. If an employee increased their standard hours, they received an immediate, effective increase in their leave balance without having earned it.
The new system eliminates this complexity: accrued leave hours are simply “banked,” reflecting only the hours actually worked in the past. This means employers will no longer need to monitor and re-calculate annual leave balances every time a working pattern changes, greatly reducing risk and administrative burden. An hour of leave will retain its value regardless of changes in working hours.
Also read: What is the legal age to work in New Zealand ?
Understanding the Leave Compensation Payment (LCP) system
To address variable working arrangements, the Holidays Act reforms introduce a separate, bespoke system called the Leave Compensation Payment (LCP). This monetary compensation is paid upfront at the time the hours are worked, fundamentally simplifying compliance for roles where tracking stored leave entitlements is impractical. This system covers approximately 5% of employees classified as casual and 9–12% of employees for their additional, non-contractual hours.
Who receives the leave compensation payment (LCP)?
The LCP replaces the need to accrue and store annual and sick leave in situations where those hours are non-guaranteed or intermittent. This arrangement is designed to keep the core leave system simple for the vast majority of employees with regular hours.
The LCP is intended for situations where the accrual of leave is complex.
The LCP is Payable for Hours that are:
- Additional Hours: Any hours worked by employees above and beyond their guaranteed contractual hours. These hours previously complicated annual leave pay calculations when the employee took leave.
- Casual Work: All hours worked by employees who have no contractual hours, whose work is irregular or intermittent, and who can refuse work offered to them.
- The Rate: The LCP is paid at a fixed rate of 12.5% of the ordinary hourly wage rate for every hour worked.
Impact of Holidays Act changes casual employees
For casual employees (estimated to be around 100,000 workers, typically in sectors like hospitality and retail), the LCP simplifies their entitlements dramatically. It replaces the current, often complex and unused, sick leave eligibility tests and the non-mandatory 8% Pay-As-You-Go (PAYG) system.
The 12.5% rate is intentionally set to compensate for the foregone accrual of both annual leave (7.69%) and sick leave (3.85%), plus a small addition to recognise other factors like the relative insecurity of the work. By monetising these entitlements upfront, the system is simple to understand for the employee and greatly reduces compliance risk for the employer associated with leave for casual staff.
Simplifying pay: The single rate for all leave types
One of the most significant complexities of the Holidays Act 2003 was the need for multiple different leave payment calculations—such as having to pay the greater of Ordinary Weekly Pay or Average Weekly Earnings—which required extensive employer judgement. The Holidays Act reforms introduce a straightforward solution: a single, simple hourly base rate used for all accrued leave types.
Introducing the single hourly base rate for leave payment
Payment for accrued annual and sick leave will now be based entirely on the employee’s current base rate of pay, expressed as an hourly rate, applied consistently across all forms of accrued leave. This consistent approach eliminates the need to calculate different pay rates depending on the type of leave taken.
For employees whose wages are entirely made up of piece rates (common in sectors like fruit picking), an average hourly rate will be derived to ensure they have a stable base rate for leave payment. This streamlined method is expected to be much simpler for employers like James, who runs a small plumbing business.
Exclusions: variable pay versus fixed allowances
The new payment rules clarify which components of remuneration are included or excluded from the leave pay calculation, removing past requirements to reflect variable payments in the leave rate. This shift means that while fixed allowances continue to be paid, variable components are dealt with separately.
This change simplifies payroll management but also means employees who rely heavily on variable payments, like commissions or high penal rates, will see those payments excluded from their single hourly leave pay rate. The cost of providing leave is expected to decrease for some employers because variable payments will no longer contribute to the leave liability.
| Payment Component | Treatment under Holidays Act 2003 (Status Quo) | Treatment under New Employment Leave Bill (New System) | Rationale |
|---|---|---|---|
| Hourly Base Rate/Salary | Used in complex calculations (Ordinary Weekly Pay/AWE), requiring judgment. | Used as the single hourly leave pay rate for all accrued leave. | Achieves system simplicity and certainty. |
| Fixed Allowances (e.g., contractual higher duties allowance) | Included, paid in full during leave. | Continues to be paid in full during leave. | Maintains consistency with the contractual nature of the allowance. |
| Variable Payments (e.g., penal rates, commissions, bonuses) | Included in calculating the greater of OWP or AWE, requiring tracking of variable pay history. | Excluded from the single hourly leave pay rate. | Variable components are addressed by the 12.5% LCP on additional hours. |
Major policy changes affecting specific employee groups
Beyond the core mechanics of hours-based accrual and the LCP, the NZ leave entitlement changes 2025 include targeted policy decisions to address inequities and high liability risks within specific employment situations, particularly concerning parental leave and long-term absence due to injury. These reforms aim for a fairer outcome for new parents while clarifying boundaries for non-work periods.
Improved entitlements for parental leave
The current system uses a legislative “override” that can financially penalise employees returning from parental leave, as their annual leave pay is often calculated based on low average earnings during the 12-month period post-return. The new Employment Leave Bill removes this complexity and ensures parents are fully supported.
Under the reform, new parents receive an increased benefit compared to the statutory status quo:
- Employees will accrue annual leave and sick leave in full for the duration of their parental leave, calculated at the normal rate as if they were at work.
- When an employee takes annual leave upon returning to work, it will be paid at their full, normal leave rate (the single hourly base rate), removing the complex and financially disadvantageous calculation override. The Minister views this as a considerable benefit that outweighs the cost increase placed on employers in this instance.
Defining “contractual hours” and exclusion periods
The hours-based system is grounded in “contractual hours,” but clear decisions were needed regarding when leave accrues during periods when the employee is not working. The Minister agreed that, in a departure from the status quo, leave should not accrue during certain long-term non-working periods where significant liability risks exist, particularly for small employers.
Accrual Exclusions:
- Unpaid Leave: Leave should not accrue while an employee is on most forms of unpaid leave.
- Exceptions for Unpaid Leave: Accrual will continue for unpaid leave related to jury service and volunteers’ leave under the Volunteer Employment Protection Act.
- ACC Compensation: Leave should not accrue when an employee is receiving weekly compensation under the Accident Compensation Act 2001 (ACC leave).
The exclusion of ACC weekly compensation from accrual is a direct response to feedback that accumulating annual leave during long-term ACC leave risks resulting in a significant financial liability, especially if the employee is off work for a long period.
Bonus for Holidays Act reforms: implementation and compliance timeline
While the legislative goal of the Holidays Act reforms is greater long-term clarity and reduced ongoing non-compliance, achieving effective Holidays Act compliance NZ payroll requires a significant transition. Both employers and payroll providers like Paysauce will need time to update systems and processes to align with hours-based accrual and the new LCP system.
Compliance deadlines and the schooling sector exception
The transition period is designed to allow enough time for the required technology and business system overhauls across the economy. Until the new Employment Leave Bill comes into force, all existing rules of the Holidays Act 2003 remain mandatory, meaning employers must continue to comply with the current Act.
- General Implementation Period: A 24-month implementation window is proposed, starting from the date the Bill receives Royal assent, before the new legislation comes into force for most employers.
- Schooling Sector Exception: State and State-integrated schools have been granted an extended transition period of up to 10 years because of the complexity required to overhaul their central payroll system. The Holidays Act 2003 will continue to apply to this sector until the new Bill is brought into force for them by Order in Council.
Addressing non-compliance and remediation obligations
It is critical to remember that the obligation to correct historical mistakes under the existing Holidays Act 2003 does not disappear simply because new legislation is coming. Employers retain a clear duty to remediate any past underpayments caused by non-compliance with the current Act. The massive scale of these remediation payments, running into billions of dollars across the public and private sectors (for example, the estimated $2 billion liability in the health sector), underscores why these Holidays Act reforms are so crucial.
The Minister is authorised to make decisions on transitional, record-keeping, and penalty provisions, including the details of a statutory estimation process for remediation calculations, to help streamline these necessary corrections.
Conclusion
The Holidays Act reforms, driven by the proposed Employment Leave Bill, mark a fundamental and long-awaited change aimed at rectifying the widespread non-compliance caused by the complexity of the Holidays Act 2003. By moving to hours-based accrual and introducing the Leave Compensation Payment (LCP), the government has provided a clearer, more proportional system for managing employee entitlements in New Zealand. While implementation requires significant payroll system overhauls over the 24-month transition period, the long-term benefit is reduced administrative burden, greater compliance confidence for employers, and certainty that employees are receiving their correct entitlements.
FAQ about Holidays Act reforms
To wrap up our guide on the Holidays Act reforms, here are answers to the most frequently asked questions we see regarding the move to hours-based accrual and the Leave Compensation Payment system. These H3s directly address common concerns about how the new Employment Leave Bill affects current entitlements.
What is the biggest difference between the Holidays Act 2003 and the new Bill?
The biggest structural difference is the shift away from weeks and days as the unit of entitlement for regular workers. Instead, leave is now based on hours-based accrual beginning from day one. Furthermore, a dedicated Leave Compensation Payment (LCP) replaces stored leave for additional and casual hours, solving the complexity of managing variable work patterns within a single core system.
Will part-time workers still receive 10 days of sick leave?
No, they will not, as this is a conscious policy change to achieve proportional fairness. Under the old system, all eligible employees received 10 days regardless of hours worked. The Holidays Act reforms adopt a proportionate approach: sick leave accrues based on actual contractual hours worked (0.0385 hours per hour), ensuring that part-time employees receive a sick leave entitlement proportional to the amount they work.
Does the new system simplify payment calculations for all employees?
Yes, absolutely. The new system mandates a single hourly leave pay rate based on the employee’s base wage, removing the need for complex, judgement-based calculations involving Ordinary Weekly Pay and Average Weekly Earnings. However, it is important to note that simplification means variable payments like commissions, bonuses, and penal rates will no longer be included in the calculation of the leave payment.
When will the new Employment Leave Bill come into effect?
The legislation is proposed to come into force after a 24-month implementation period following Royal assent. This is designed to give payroll providers and employers sufficient time to update their systems. Until that date, employers must continue to ensure full Holidays Act compliance NZ payroll under the 2003 Act.