K3 Insights

The Government introduced the Employment Leave Bill (the Bill) earlier this year, which sought to replace the Holidays Act 2003 (the Previous Act) to fundamentally change how employee leave is earned, recorded, taken, and paid in New Zealand. The Bill passed its first reading on 12 March 2026 and was referred to the Education and Workforce Committee. Submissions closed on 14 April 2026, the Bill passed its third reading on 29 July 2026, and received Royal Assent on 6 August 2026, becoming the Employment Leave Act 2026 (ELA).

The ELA will come into force on 6 August 2028 which allows a grace period for employers to come up to speed with the implications of the ELA while the previous Act remains in force until that date.

The overarching theme is simplification. The reforms are intended respond to long-standing concerns that the Previous Act was overly complex, difficult to apply to modern working arrangements, and challenging to implement accurately in payroll systems. These issues have contributed to widespread non-compliance and significant payroll remediation costs for many employers.

At its core, the ELA seeks to replace a system based largely on weeks, days, and subjective assessments with a more objective, hours-based framework. These replacements are intended to provide greater certainty for employees with variable hours and simplify leave and payment calculations where working patterns are irregular and change over time.

Proposed changes

Leave Moves to an Hours-Based System

Under the Previous Act, employees became entitled to four weeks' annual leave after 12 months of continuous employment.

The ELA now allows annual leave to accrue in hours from the commencement of employment, at a minimum rate of 0.0769 hours per standard hour worked (equivalent to four weeks a year for a standard 40-hour week).

Sick leave also changes. Rather than employees becoming entitled to 10 days after six months of employment, with further entitlements arising annually under the Previous Act. Sick leave now accrues progressively in hours from the employee's first day of work at a minimum rate of 0.0385 hours per standard hour worked, capped at 160 hours.

A New Approach to Public Holidays

The ELA also proposes changes to the concept of an "Otherwise Working Day" (OWD), which determines whether an employee is entitled to certain public holiday benefits.

Rather than relying on a broad assessment of work patterns and expectations, the ELA introduces a more objective test for employees without agreed working days.

In general terms, a day may be treated as an OWD if the employee worked (or was on paid or unpaid leave) on the same day of the week as the public holiday in at least 50% of the preceding 13 weeks.

Alternative Holidays Based on Hours Worked

Under the Previous Act, an employee who works on a public holiday that would otherwise have been a working day receives a full alternative holiday, regardless of the number of hours worked.

Consistent with the ELA’s broader hours-based approach to leave entitlements, employees now accrue alternative holiday hours equal to the hours worked on the public holiday. Those hours can then be taken as leave or cashed up in accordance with the new framework.

Simpler Leave Payment Calculations

One of the most significant reforms concerns how leave is paid.

The Previous Act required employers to apply multiple calculation methods, including ordinary weekly pay, average weekly earnings, relevant daily pay, and average daily pay. These provisions have been a major source of payroll errors and remediation exercises.

The ELA now simplifies leave payments by adopting a largely hourly-rate-based approach. It also removes certain complex rules relating to leave taken following periods of parental leave or volunteer leave.

Replacing Pay-As-You-Go Holiday Pay

The ELA introduces a new Leave Compensation Payment (LCP), which now replaces the previous 8% "pay as you go" holiday pay option available for casual and irregular-hours employees.

The LCP is now calculated at 12.5% of the worker's ordinary hourly rate and paid automatically on all casual and additional hours worked, without needing employer/employee agreement (unlike the current 8% option, which requires agreement in advance).

Key Takeaways 

The ELA represents the most significant reform of New Zealand's leave laws since the Previous Act came into force.

Once it is formally in force, the changes could reduce payroll complexity, compliance risks, and the likelihood of future remediation exercises. 

Despite the extensive policy work undertaken, some uncertainty remains as to the practical operation of the new regime. Many of the proposed provisions are yet to be tested in practice, and it is possible that new areas of dispute or litigation will emerge as employers, employees and the Courts interpret and apply the new legislation. As with the Previous Act, the success of the reforms will ultimately depend on whether the new framework achieves the balance between simplicity, fairness and practical workability that it is intended to deliver. 

Although the ELA will come into force on 6 August 2028, employers should begin familiarising themselves with the proposed framework now. Given the scale of the proposed reforms, early preparation will be critical.