K3 Insights

Few pieces of employment law have caused as much confusion as the Holidays Act 2003. The Government’s plan to replace it with a new Employment Leave Act is a welcome reset, but it also means employers need to prepare now for major operational changes.

Government commentary in late 2025 suggested the ambition was to have the Bill passed before the end of the current Parliamentary term. With the election announced for 7 November, the Bill would then be likely to passed by September 2026. Once passed, the two-year transition will push practical implementation into 2027-2028. With the shift to hours-based entitlements and clearer record-keeping, this will fundamentally alter how leave is managed. Here are the Top 3 things employers should start thinking about now.

1. Understand the Big Shifts Coming

Under the proposed model, leave will accrue in hours rather than weeks, meaning employees who regularly work more than 40 hours per week will earn proportionally more annual-leave hours. In addition, proposed changes to the Holidays Act include increasing the pay-as-you-go rate for casual employees from 8% to 12.5%, and for permanent employees introduces a 12.5% leave payment for hours worked above contracted hours, rather than those additional hours accruing further leave entitlements.

Employers should analyse their workforce profile now:

• How many employees work over 40 hours or regularly above their contracted hours?
• What additional leave hours or leave payments will arise under the new framework?
• What impact will this have on workforce planning, cover during peak leave periods, and resourcing costs?
• What is the overall cost and payroll impact of 12.5% leave payments for casual and additional hours worked?
   

While these changes aim to make leave entitlements and payments more equitable, they also increase the complexity of scheduling and payroll management, particularly for businesses that rely on overtime, variable hours, or seasonal peaks.

2. Start Your Preparation Now

You don’t need to rewrite your contracts yet, but you should review them. Look closely at definitions of ordinary pay, gross earnings, and working week to identify where updates may be required once the Act takes effect.

If you’re issuing new agreements, ensure they won’t conflict with the future framework — for example, by defining sick leave in hours for part-time employees or adding wording that allows adjustment once legislation is enacted.

This phase is about readiness, not reaction. Map the areas that will need attention so you can act quickly when the final details are confirmed.

3. Watch for Hidden Pitfalls

Historical liabilities remain a risk, particularly for casual or variable-hour workers. Keep robust records of hours and pay and reconcile leave balances regularly.

Don’t overlook change management- payroll teams, line managers, and employees will all need training to understand new entitlements and calculations. Clear communication will be just as important as system upgrades.

Summary

The Holidays Act reform is the biggest employment-law shift in over a decade. For proactive employers, it’s a chance to simplify systems, strengthen compliance, and improve employee trust. The businesses that start preparing now will be the ones avoiding frantic clean-ups later.