Holidays Act reform: what’s been decided and what it means for employers
The Holidays Act 2003 has long been criticised as overly complex, creating widespread compliance challenges and payroll headaches. After years of consultation, Cabinet has confirmed the major policy decisions for its proposed replacement: the Employment Leave Act, which Minister Brooke van Velden announced this week.
While not yet law, this reform represents the biggest shift in leave entitlements in decades and it’s important that employers start understanding what’s coming
Current act vs proposed employment leave act
| Feature | Current Holidays Act 2003 | Proposed Employment Leave Act (Cabinet decisions) |
|---|---|---|
| Annual leave accrual | 4 weeks per year, granted after 12 months, measured in weeks. | Accrues in hours from day one: 0.0769 hours per contracted hour worked (equivalent to 4 weeks for a 40-hour employee). If hours greater than contracted hours are worked, a 12.5% compensation payment is made per hour worked. |
| Cashing up Annual Leave | Up to one week can be cashed up in 12 months. | Up to 25% can be cashed up each 12 months. |
| Sick leave | 10 days per year (after 6 months, then every 12 months). Same entitlement for full-time or part-time staff. | Accrues in hours from day one: 0.0385 hours per contracted hour worked, capped at 160 hours (20 days). Pro-rated for part-timers, available immediately, and can be taken in part-days. |
| Casual employees | 8% "pay-as-you-go" holiday pay instead of accruing annual leave. No sick leave entitlement. | No leave accrual. Must be paid a 12.5% leave compensation on top of hourly rate each pay period (shown separately on payslip). |
| Extra hours (permanent staff) | Overtime arrangements vary. No specific statutory compensation. | 12.5% leave compensation on hours worked above contracted hours for waged staff. For salaried staff, applies only if extra hours are separately paid. |
| Fixed-term employees | Often treated like casuals with PAYG loading. | Accrue annual and sick leave from day one, same as permanent employees. |
| Public holidays | Complex "otherwise working day" rules. Time-and-a-half for hours worked. Alternative holidays generally day-based. | New otherwise working day test for variable hours (50% rule). Clearer rules for part-worked days. Alternative holidays accrue hour-for-hour for OWDs and may be cashed up. Time-and-a-half remains. |
| Bereavement and family violence leave | Bereavement: 3 days per event (eligibility rules apply). Family violence leave: 10 days after 6 months. | Entitlement remains the same and is still in days, but available from day one. Both can be taken in part-days. |
| Parental leave | Employees accrue annual leave while on parental leave. Annual leave is paid at a lower rate for the 12 months following parental leave. | Employees continue to accrue while on parental leave. Annual leave taken after returning is paid as normal. |
| Accrual during unworked periods | Annual leave does not have to accrue while on unpaid leave of greater than one week, however employers must advise this to employees. Alternatively, employers can change the divisor for annual leave payment calculations. | Annual and sick leave accrue during paid leave and certain specified situations, but not during unpaid leave or while only on ACC. |
| Annual Leave payment calculations | Greater of Ordinary Weekly Pay or Average Weekly Earnings, which includes bonuses and variable allowances. | Standardised: hourly leave pay rate based on base wage for the day of leave. Fixed allowances included, but bonuses and variable allowances excluded. |
| FBAPS leave payment calculations | Relevant Daily Pay, or if not possible or practicable to determine, then Average Daily Pay | Standardised: hourly leave pay rate based on base wage for the day of leave. Fixed allowances included, but bonuses and variable allowances excluded. |
| Payslips | Not explicitly mandatory. | Mandatory itemised payslips required, showing pay and leave clearly. |
My take so far
There is a lot of positive movement here. Shifting to hours-based accrual from day one makes sense and aligns better with modern work patterns, especially for part-time and variable-hour employees. The new proportional method also feels like a step back to older versions of the law that were simpler to administer.
The ability to cash up 25% of annual leave and for alternative holidays to accrue hour-for-hour should be more straightforward for payroll teams to handle. Making sick leave pro-rata also seems fairer, particularly for part-time staff.
At the same time, the 12.5% leave compensation for casuals and additional hours is effectively a cost increase for employers and may be difficult to manage in practice, particularly around contracted hours (for those who work variably). It is essentially a 4% uplift compared to the current system. That is significant once KiwiSaver and other on-costs are factored in, and businesses will need to plan for it.
What I am still cautious about
Casual definition: there is still no clear legislative definition of “casual.” That leaves ambiguity about who this applies to, which could create compliance risk.
Commission and bonuses: excluding variable pay from leave calculations will leave some employees worse off. Staff reliant on commission or bonus structures may feel disadvantaged unless employers restructure pay packages.
Public holidays: while the new Otherwise Working Day test should bring clarity, those with highly variable hours or allowance-heavy contracts may still end up underpaid for public holidays compared to what they would expect today.
Extra hours: the rules for salaried staff are less clear. Where extra hours are covered by salary, there is no additional compensation, but this could cause friction where workloads are consistently high.
Final thoughts
Overall, these reforms strike a better balance between simplicity and fairness than the current Act, but they will bring new cost and compliance considerations for many employers.
Businesses that start preparing early will be best placed to transition smoothly when the Employment Leave Act comes into force.
The most important thing to do right now is to:
Continue to ensure current compliance: even though changes are coming, your duty to comply with the existing Holidays Act remains - both now and historically.
Stay updated: when the draft Bill is released (expected early 2026), review it carefully and prepare submissions or raise your concerns via the Select Committee process.
Review current employment contracts, especially for staff on commission, allowances or variable hours.
Evaluate your workforce mix: if you employ many casuals or lots of overtime, begin running forecasts under the proposed changes.
Reconsider contract structure: would paying allowances (rather than purely variable pay) position you more favorably under the new rules?
If you are concerned about how these changes might affect your business, or want peace of mind that your Holidays Act compliance is in order, let’s talk. Send me an email kathleen@resolvepay.co.nz today for an obligation free chat.
