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New Zealand employers preparing for changes to annual leave and sick leave under the Employment Leave Act 2026.
New Zealand’s leave management system is set for its biggest overhaul in more than 20 years.
The Employment Leave Act 2026 has now passed into law and will replace the Holidays Act 2003 from 6 August 2028, introducing a new hours-based approach to annual leave, sick leave, bereavement leave, family violence leave, public holidays and alternative holidays, together with significant changes to leave payment calculations and annual leave cash-up rules.
While employers do not need to make any immediate changes, now is a good time to start understanding what is coming and how it may affect payroll systems, employment agreements and leave management processes.
Why is the Law Changing?
The Holidays Act has long been criticised for being overly complex and difficult to apply correctly, particularly for employees with variable hours, shift patterns, commissions, allowances, overtime or irregular work arrangements.
The Government has introduced the Employment Leave Act to create a simpler and more predictable framework that provides greater certainty for both employers and employees.
Importantly, the current Holidays Act remains in force until August 2028. Employers must continue to follow the existing rules until then.
The Biggest Change: Leave Will Accrue in Hours
Under the current system, employees generally become entitled to four weeks of annual leave after 12 months of employment and gain access to sick leave after six months.
Under the new legislation, annual leave and sick leave will accrue progressively from an employee’s first day of employment based on their agreed standard hours of work. Leave will be recorded in hours rather than weeks or days.
This means employees will build up leave continuously throughout their employment rather than waiting for milestone dates to receive new entitlements.
For employers, this should create a more transparent and easier to administer system, particularly for part time and variable hour employees.
Employees Begin Accruing Leave From Day One
One of the most significant changes is that employees will begin accruing annual leave, sick leave, bereavement leave and family violence leave from their first day of employment.
This replaces the current eligibility periods where employees generally need six months of service before becoming entitled to sick leave, bereavement leave and family violence leave, and 12 months before receiving annual leave entitlements.
Leave Will Be Taken Hour by Hour
The new legislation introduces a straightforward approach to using leave.
Employees will use one hour of accrued leave for every hour of work they take off. This means leave can be taken in part days or smaller increments more easily than under the current framework.
For businesses with flexible working arrangements, shift workers and part time staff, this should provide greater flexibility and reduce many of the complicated calculations currently required.
A New Way of Paying Leave
The Employment Leave Act introduces a single hourly leave payment method across different leave types.
Under the current Holidays Act, employers often need to compare multiple payment calculations, such as ordinary weekly pay and average weekly earnings, which has been a common source of errors and underpayments.
The new legislation aims to simplify this process by using a consistent hourly leave pay rate.
Greater Flexibility to Cash Up Annual Leave
The Employment Leave Act also introduces greater flexibility around cashing up annual leave. While employees are currently limited to cashing up one week of annual leave each year, the new framework will allow employees to cash up a larger portion of their accrued leave balance.
Although many of the detailed administrative requirements will become clearer as implementation guidance is released, employers should be aware that the changes may result in increased requests to cash up leave and may require updates to payroll and leave management systems.
Changes for Additional and Casual Hours
Another major reform affects casual work and hours worked above an employee’s standard hours.
The new legislation introduces three categories of hours: standard hours, additional hours and casual hours, with different leave treatment applying to each category.
Instead of accruing annual leave and sick leave on additional and casual hours, employers will pay a 12.5% leave compensation payment at the time those hours are worked.
This is expected to simplify leave calculations for businesses with fluctuating workforces and employees whose hours vary significantly.
Public Holiday Rules Will Also Change
The legislation introduces a new and clearer test for determining whether a public holiday falls on an employee’s otherwise working day.
For workers without regular work patterns, new assessment methods will be used to establish eligibility for public holiday entitlements.
This is another area where many employers have historically struggled with compliance.
What Should Employers Do Now?
Although the new law does not take effect until August 2028, the transition period is designed to give employers, payroll providers and software developers time to prepare.
A useful starting point for many businesses will be reviewing how working hours are documented. The new legislation places significant emphasis on the distinction between standard hours, additional hours and casual hours. Employers may benefit from reviewing employment agreements, hours of work clauses, availability provisions, rosters and payroll practices now to identify any areas that may need updating before the new framework comes into effect.
Over the next two years, employers should consider:
- Reviewing payroll system capability
- Understanding how standard, additional and casual hours are currently recorded
- Reviewing whether employment agreements clearly define employees' standard hours of work
- Identifying employment agreement updates that may be required
- Reviewing leave policies and procedures
- Monitoring guidance released by Employment New Zealand and MBIE
Businesses with large numbers of shift workers, casual employees or staff on variable hours will likely need to start planning sooner rather than later.
Preparing Your Business for Change
The Employment Leave Act 2026 represents one of the most significant employment law changes New Zealand employers have seen in decades. While the intent is to simplify leave administration and reduce compliance issues, most businesses will still need to undertake careful preparation before the new framework takes effect in August 2028.
For now, employers should continue following the Holidays Act 2003 while keeping a close eye on further guidance and implementation resources as they become available.
Get Ready with RSM
Need help understanding how these changes may affect your business? The RSM People & Culture team can help you assess your current leave practices, review employment documentation, and prepare for upcoming legislative changes with confidence.
Contact Kerryn Strong to learn more.
