Reforming the Holidays Act: What’s Changing & What Employers Need to Know

The Government has announced that it will repeal the Holidays Act 2003 and replace it with a new Employment Leave Act. So, what do you need to know?

The Holidays Act reform comes with challenges: updating systems, recalculating entitlements, and ensuring employment agreements are compliant. Employers who begin reviewing their current practices now, and who plan for the transition ahead, will be better positioned when the law changes.

We are here to help: If your organisation needs support and advice on what to do, or help modelling the impact of the proposed changes, our employment law team is ready to assist.

Why the Holidays Act Reform?

These reforms are intended to simplify leave rules, make entitlements clearer, reduce compliance risk, and ensure fairness, particularly for part-time, variable-hour, and casual workers.

- The current Holidays Act has been widely criticised as overly complex. Many employers struggle to correctly calculate leave entitlements (annual, sick, and public holiday leave) especially for those with variable hours.

- There have been significant remediation payments by businesses (notably in public services like health) for underpayment of leave entitlements.

- The policy aim is to make the system more predictable and transparent, so that both employees and employers can clearly understand and comply with their rights and obligations.

Key Proposed Changes

Here are the main changes proposed under the new Employment Leave Act as of the latest Cabinet decisions.

Note: these are not yet law and will require the drafting and passing of the Bill; there is a 24-month implementation period once the Bill is passed.

Area	What is Changing	Implications / Who Benefits / Who Might Be Impacted
Accrual of Annual & Sick Leave	• Leave will accrue continuously in hours from the first day of employment, rather than waiting 12 months for annual leave, or 6 months for sick leave. • Employees will accrue leave in proportion to the hours they work. • Sick leave accrual similarly in hours, pro-rata to hours worked.	• More fairness for part-time and variable hours workers under current law, some employees receive the same sick leave entitlement even if working far fewer hours. • Employers will need to adjust payroll systems to record hours worked and accrue leave accordingly. • Some employees may see reduced “minimum” sick leave compared with current full-entitlement if they work part-time or very few hours—a trade-off for proportionality.
Leave Compensation Payment (LCP)	• Introduce a Leave Compensation Payment of 12.5% of ordinary hourly wage rate for hours worked in circumstances where leave is not being accrued. This covers: – All hours by casual employees (i.e. those without regular fixed hours) instead of accruing leave. – Additional hours worked above contracted hours for other employees (unless covered by salary). • This replaces or extends the current “Pay-As-You-Go” system (which is 8%) for those who have agreed to irregular or intermittent work.	• Casual workers will generally see an increase in entitlements via the higher rate. • For employers: simplifies administration of casual hours and overtime beyond contracted hours. However, will require tracking of additional hours or identifying when LCP applies vs when accrual of leave applies. • Some costs might increase for certain employers, but policy expectation is that for many employers the effect will be broadly cost-neutral overall.
Payment of Leave / Leave Rates	• All leave types (annual leave, sick leave, alternative holidays, etc.) will be paid using an hourly leave pay rate. That rate is based on the employee’s base wage on the day of leave. For piece-rate work, there will be an average hourly rate applied. • Fixed allowances will be paid in full during leave; variable components like bonuses, commissions or variable allowances generally will not form part of the hourly leave pay rate. • Parental leave: when employees return from parental leave, their annual leave pays will be at the full leave rate (not reduced) when they take leave.
Access to Bereavement & Family Violence Leave	• Employees will be eligible for bereavement and family violence leave from their first day of employment. • These leaves will be accessible in part-day units (i.e. hours) rather than full days only.	• Greater fairness and earlier access for all employees, including casuals, part-time workers from day one. • Employers will need to adjust policies and records to allow leave in smaller units (hours).
Public Holidays & Alternative Holidays	• The criteria for determining whether an employee is “otherwise working” on a public holiday (and thus entitled to public holiday pay/alternative holiday) will be clarified and improved. • Alternative holidays will accrue on an hours-basis: one hour of alternative holiday for every actual hour worked on a public holiday (or required to work) that is an “otherwise working day.” Also, those accrued hours can be taken or cashed up under more flexible conditions.	• Employers with irregular or variable rosters will have clearer rules about when public holiday entitlements apply. • Employees who work sometimes on public holidays but have no fixed pattern will benefit from clearer rights. • Payroll/roster systems will need to be updated.
Cashing Up Leave Balances / Large Leave Balances	• Workers with large annual leave balances will have more flexibility to “cash up” leave: up to 25% of total annual leave balance per year, rather than being limited to one week’s leave under current rules.	• Employees who have accumulated unused leave will have more opportunity to convert part of that to cash. • Employers need to plan for cash flow and leave liability under this more flexible regime.
Notice of Annual Closedowns & Other Process-Related Changes	• The notice period for annual closedowns is proposed to increase from two weeks to three weeks (21 days). • Employers must provide pay statements each pay period that clearly itemise pay and leave entitlements/ accruals. • Contracts/employment agreements will need to include sufficient roster or hours-work information, or a notional roster if actual roster isn’t fixed, to determine leave entitlements.	• Employers will need to review and possibly revise employment agreements and payroll practices. • Clear record-keeping will become more important.
Transitional Provisions & Implementation Timeline	• Once the Bill is passed into law, there will be a 24-month implementation period before the new rules come into force. • Employers will need to convert existing leave balances under the Holidays Act into the new hours-based system during the transition. • The schooling sector (State and State Integrated schools) may need more time than 24 months because of payroll, contract, and systems complexity—up to 10 years.	• Employers should begin preparing: checking payroll systems, contracts, leave balances, and employment agreements well ahead of the date when changes come in. • There may be sector-specific challenges, especially in industries with variable hours, seasonal work, retail, hospitality, health etc.

Areas That May See Trade-offs

While many of the changes are intended to increase fairness and clarity, some groups may experience changes that reduce or shift certain entitlements (though often balanced by improvements elsewhere). For example:

- Part-time workers may lose the benefit of a minimum fixed sick leave entitlement independent of hours, because under the new scheme sick leave will be strictly proportional to hours worked.

- For some who have variable hours or whose compensation includes significant bonuses or commissions, the fact that leave pay will be based on base wages (and average piece rates, where applicable) but excluding variable bonuses etc., may reduce leave pay in certain circumstances compared with past practices.

It is likely that some employees will welcome the changes more than others; similarly, employers in some industries will face more implementation work.

What Employers Should Be Doing Now

To prepare for the changes, employers should consider:

Audit current leave policies, contracts, and payroll systems. Understand how leave accrual, leave pay, public holiday entitlements, and leave balances are currently handled.
Estimate impact. For example, calculate projected leave accruals under the new hours-based system, especially for part-time/casual/variable hour staff. Estimate cost of applying leave compensation payments.
Update employment agreements. Contracts may need to include clearer roster or work hours information. Make sure agreements allow calculation of leave accrual in hours.
Update payroll and HR systems. Systems must be able to track hours worked, additional hours beyond contracted hours, and apply the new accrual rates and leave compensation payments.
Train staff and managers. Especially payroll, human resources, and line managers need to understand how the new accrual, leave pay, and compensation systems work.
Communicate with employees. Let your workforce know what is changing, when, and how it might affect them. Transparency will help reduce confusion and risk.
Monitor further development. The Bill still needs to be passed, and some details may evolve during select committee, drafting, or implementation phases.

What Remains Unresolved or Under Review

Some aspects are still under consultation or may be subject to change as the Bill is drafted. Among them:

- Exact definitions and tests for “otherwise working day” in public holidays and alternative holiday entitlements.

- How leave balances under the old Holidays Act will be transitioned for all sectors, particularly complex sectors like schooling where payroll and contracts are less uniform.

- Final wording around variable components of pay (commissions, bonuses) and whether/how they are included or excluded in leave pay calculations.

- Some of the policy may include “delegated decisions” that Minister or officials will make later to settle technical issues (e.g. record-keeping, estimation of remediation liabilities) that affect precise employer obligations.

Timeline

- Bill drafting & introduction: The draft Employment Leave Bill will be prepared, then go through the Parliamentary process, including select committee (during which public submissions will be possible).

- Passage into law: Once the Bill is passed, there will be a 24-month transition period to allow time for payroll, contractual, and system changes.

- Implementation: After the transition, the new rules will come into force. Employers will need to have systems in place by that date to comply.

Conclusion

The proposed reforms represent a significant reworking of how leave is accrued, calculated, and paid in New Zealand. The move to accrue leave in from day one, more generous and simpler arrangements for casual workers, fairer treatment for part-time and parental leave cases, more transparent pay and leave statements – all aim to reduce confusion and litigation risk, and to ensure employees understand their entitlements.

Want advice? Contact our team today.

Disclaimer: This update provides commentary on employment law, health and safety and immigration topics, it should not be used as a substitute for legal or professional advice for specific situations. Please seek legal advice from your lawyer for any questions specific to your workplace.