The Minister for Workplace Relations and Safety, Hon Brooke van Velden, has today confirmed the Government’s revised approach to reforming the Holidays Act 2003. This follows targeted consultation on an exposure draft Bill in late 2024, and marks a significant shift in direction aimed at simplifying leave entitlements and reducing compliance costs for employers.

The Minister’s announcement confirms that the Government will proceed with an hours-based accrual model for annual leave, and will explore alternative models for more complex work arrangements. This approach responds to longstanding concerns raised by employers, payroll providers, and unions regarding ongoing compliance concerns, and builds on the recommendations of the Holidays Act Taskforce released under the previous Government.

What do we already know about the reforms?

The reforms were expected to include:

• Hours-based leave accrual: Annual leave will accrue based on hours worked, replacing the current weeks-based entitlement system.
• Simplified payment calculations.
• Pro-rata sick leave: Sick leave entitlements will be proportionate to hours worked.
• New eligibility tests for family violence, bereavement and sick leave. 
• Clearer rules for pay-as-you-go leave and closedown periods.

These changes aim to reduce ambiguity, improve system compatibility, and ensure compliance is achievable across all employment types.

What has the Minister announced?

Annual leave calculations will be changing to an ‘hours worked’ accrual model, replacing the current 4-week lump sum entitlement. Leave will accrue from day one at a rate of 0.0769 hours per contracted hour worked. It will continue to accrue while the worker is on paid leave, parental leave, volunteer leave, and jury service, but not during unpaid leave or while receiving ACC compensation. Workers will also be able to cash up 25% of their total annual leave balance in each 12-month period, an increase from the current one-week limit.

Sick leave will also accrue from day one, at a rate of 0.0385 hours per contracted hour worked, and will accrue under the same conditions as annual leave. Sick leave will carry over up to a maximum of 160-hours (equivalent to the current 20 day maximum accrual). This change will particularly affect part-time workers, who under the current system receive a 10-day lump sum after six months, regardless of hours worked.

Bereavement and family violence leave entitlements will now apply from day one for all workers, rather than after six months. These entitlements will remain days-based, but workers will be able to take part days of leave, offering greater flexibility.

Public holidays will continue to be paid on Otherwise Working Days (OWDs). A new OWD test will apply for workers without contracted or regular work patterns, based on whether the employee has worked at least 50% of the corresponding days of the week over a relevant period. This aims to clarify entitlement in cases where work patterns are variable.

Alternative holidays will accrue on a 1:1 hourly basis for every hour worked (or required to work) on a public holiday that is an OWD. These hours can be taken on any day that could have been worked under the employment agreement and can be cashed up at any time, rather than only after 12 months.

In respect of paying leave, all leave will be paid at an hourly leave rate, which is the worker’s base wage for the day of leave, plus an hourly average of piece rates where applicable. Fixed allowances will be paid in full during leave, but incentive payments such as commissions or contractual bonuses will not be included in the hourly leave rate.

Leave compensation payments will be set at 12.5% of a worker’s ordinary hourly wage rate. For casual workers, this will apply to every hour worked. For other workers, it will apply to additional hours worked that are not already compensated by salary. Fixed-term workers will accrue leave from day one.

Who needs to know this and why?

Any organisation with employees in New Zealand should take note of the proposed changes, particularly those with:

• Variable or seasonal workforces
• Complex payroll systems
• Employment agreements referencing current Holidays Act entitlements

This includes employers, payroll providers, HR professionals, and legal advisers. Organisations considering submissions to the Select Committee should begin preparing now. 

What happens next?

These changes will be progressed through the Employment Leave Bill that will replace the Holidays Act 2003). We expect draft legislation early next year and the Minister expects the Bill to pass before next year’s election. Once the Bill has passed, there will be a 24-month transition/implementation period before these changes come into force.

Employers must continue to comply with the current Holidays Act until the new legislation is passed and comes into force. Historical underpayments remain subject to remediation obligations.

Our view

The reforms offer welcome clarity and simplification, particularly for employers grappling with compliance under the current Act. While the shift to hours-based accruals and streamlined entitlements is positive, businesses should begin preparing now to ensure a smooth transition during the 24-month implementation period.

This alert was co-authored by Oliver Boyce and Ella McCall, Solicitors in our Employment team.