Senior Associate and former MBIE Senior Labour Inspector Lynn Booker summarises the changes proposed by the reform of the Holidays Act 2003, and what the new Employment Leave Act could mean for employers.

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I imagine for a lot of employers it’s a “here we go again” moment.

We have been told several times over the past few years that changes are coming that will simplify the Holidays Act and make it easier for employer to implement and employees to understand.

It has been announced that indeed there is a proposal for a reform to the Holidays Act 2003 which will mean it will be replaced by the Employment Leave Act.

My view, for what it is worth, is that if these changes go ahead it will indeed address the long waited and long needed accrual of annual leave and sick leave in hours, rather than days. Leave will also be take in hours, and this will align with practices many employer’s payroll systems currently operate.

There will be a 24-month implementation period between when the Bill has passed and when it comes into force. This will provide the time for payroll providers and employers to make changes to business and payroll systems.

Employers will be required to comply with the Holidays Act 2003 until it is repealed and should there be any historic underpayments, employers will still have an obligation to rectify this.

So, what are the changes?

Annual Leave

• At present all workers are entitled to four weeks’ annual leave after 12 months ‘continuous employment’.
• The new system will provide that workers earn annual leave from day one in direct proportion to contracted hours of work. Annual leave accrues at a rate of 0.0769 hours (4/52) per “contracted” hour (providing the equivalent of four weeks’ leave for workers whose contracted hours do not change).

Sick leave

• At present, eligible workers are entitled to 10 days’ paid sick leave after six months, and a new entitlement arises after every subsequent 12 months, regardless of the number of days they work per week.
• The new system will provide that workers earn sick leave from day one, in direct proportion to contracted hours of work. Sick leave accrues at a rate of 0.0385 hours (2/52) of sick leave per “contracted” hour. There will be a cap of 160 hours.

Taking Annual leave

• When taking annual leave at present, the first step is to agree on the portion of leave being taken on what genuinely constitutes a working week for that worker.
• Under the new system workers can use accrued leave hours to take any part of a day off work and this is taken, recorded and paid in hours against contracted hours.

Cashing up

• At present a worker can request a cash up of their 4^th week of entitlement.
• The new system will allow a worker to request to cash up 25% of their annual leave as at their last 12 month employment anniversary in each 12 month period. This means that, there is the ability to cash up large annual leave balances.

Working extra hours – waged workers

• At present a worker who works extra hours has the payment for those hours taken into consideration as gross earnings for the annual leave calculation.
• The new system will provide that any extra hours worked by a waged worker on top of contracted hours will not accrue annual or sick leave, but a leave compensation payment will be paid at the time the hours are worked. The rate will be 12.5% of a worker’s ordinary hourly wage rate.

Working extra hours – salaried workers

• Most salaried workers do not receive extra salary for extra hours worked.
• Under the new system, if a salaried worker receives additional wages for extra hours worked, the leave compensation payment will be payable at a rate of 12.5% of the ordinary hourly salary rate.

Casual workers

• At present an employer can pay an employee 8% of gross earnings in each pay period instead of provide the worker with physical paid annual leave, if work is intermittent or irregular.
• Under the new system, all workers with no contracted hours will receive a leave compensation payment instead of accruing annual and sick leave for every hour they work. The rate will be set at 12.5% of a worker’s ordinary hourly wage rate and paid in every pay period. The leave compensation payment is in lieu of accruing both annual leave and sick leave. The 12.5% is a calculation based on the value of both these entitlements (7.69% for annual leave and 3.85% for sick leave, with a small addition to recognise other factors.

 Fixed-term arrangements

• At present if a worker is employed on a fixed-term basis for less than 12 months they can be paid “Pay as you go” for annual leave on the same basis as casual workers.
• The new system will provide that all fixed term workers must accrue and be able to take annual and sick leave from the first day of employment on their contracted hours. They will also have access to bereavement and family violence leave.

Payment for leave

• At present there are different calculations for different leave types. This includes a higher of Average Weekly Earnings (AWE) or Ordinary Weekly Pay (OWP) calculation for annual leave and Relevant Daily Pay for sick, bereavement and alternative leave.
• The new system will ensure the same hourly leave pay rate will be used for all types of leave. It will be based on a worker’s base wage for the day of leave. There will be a particular calculation for those workers on piece rates.
• In addition to the hourly leave pay rate, fixed allowances (such as an accommodation allowance) will be paid in full during leave, like normal.
• Other components of pay, like bonuses, commissions and variable allowances will not be included in the hourly leave pay rate.

Parental leave

• At present the Parental Leave and Employment Protection Act 1987 overrides the Holidays Act and when a worker takes annual leave, the calculation for that leave pay is at the rate of their Average Weekly Earnings for the preceding 12 months (and not the greater of AWE and OWP).
• The new system will provide that workers will continue to earn leave during parental leave. When annual leave is taken, after return to work, it will be calculated and paid as if the worker had not been on parental leave.

Bereavement and Family Violence Leave

• At present a worker must be employed for 6 months to be eligible for paid bereavement or family violence leave.
• The new system will allow all workers to access bereavement and family violence leave from day one. There will also be changes to the way they can take the leave in full or part days.

Public holidays

• At present workers are paid on a public holiday if it is an Otherwise Working Day (OWD) for them. This has always been a challenge for those workers who do not have a clear work pattern, are on roster and irregular work patters. There is a test to assist in the determination of an OWD and also the legislation changed on 1 April 2011 to allow employer to pay an Average Daily Rate where the Relevant Daily Pay could not be calculated.
• The new system has tidied up the test making is simple and straightforward. If the worker has worked 50% or more of the relevant days (e.g. Mondays), unfortunately it is not clear what the time period for this calculation would be; some practitioners expect it to be the 13 weeks as this is commonly used.

Entitlements for working on public holidays

• At present workers receive a full day alternative holiday when they worked on a public holiday that is an otherwise working day for them.
• Under the new system workers will accrue alternative holiday hours at a rate of one hour for every hour worked on a public holiday that is an otherwise working day. Workers who work only some of their contracted hours on a public holiday will receive time and half for the hours they actually work and leave pay for the unworked hours.

Pay Slip (Pay Statements)

• At present, although employers are not required to provide pay slips, they must keep an accurate record of wage, time and holidays and this should be made available if a worker requests information about their pay and leave.
• The new system will require the employer to provide clear pay slips every pay period itemising each component that makes up the worker’s pay.

The impacts for employers and employees

There is no doubt that this reform has been a long time coming and the simplicity of the calculations will be welcomed by many.

There could be some challenges for employers to change a days-based leave record to an hours based record. It is likely that this will have a process where the carried forward entitlement in hours is agreed.

It does provide a benefit for many workers with an uplift in access to entitlements where previously they had to wait six months to become eligible.

People returning from a period of parental leave will no doubt be pleased that their annual leave value is not diminished and they can take this leave, at its full value, within 12 months of returning.

There will likely be some push back from those workers who do not work a 40 hours week and have their sick leave entitlement reduced to reflect the hours worked.

Employers will also need to carefully consider the implication of paying 12.5% to those workers on PAYE for annual and sick leave.

It might also be wise to consider the pros and cons of the new “cashing up” of annual leave. Certainly the new system may provide the employer an opportunity to manage those high leave balances but does it provide the employer confidence that their workers are having paid time off to rest and recuperate.

It might be helpful for employers to consider its obligations under the Health and Safety at Work Act 2015 to ensure there is no potential risk for an employee to claim that it is not promoting a proactive safety culture by allowing the employee to cash up and not take the physical leave.

We will keep you up to date with changes as they happen. The Minister indicated that her intention is to have the new Act passed before the next elections. A draft is expected early 2026.