Van Velden announced that the much-criticised Holidays Act 2003 will be repealed and replaced with a new Employment Leave Act.
The Holidays Act is a notoriously complicated regime which has resulted in some large employers having to back-pay workers in the millions of dollars due to mistaken leave calculations.
Previous reform efforts in 2011 and 2018 did not result in any meaningful change. In 2024 van Velden signalled the end to a draft Amendment Bill which was largely based on the work of a task force established in 2018.
That task force sought consensus among government, employers and unions. Van Velden has signalled that following targeted consultation on the draft Amendment Bill, more fundamental changes were needed.
The new legislation is to be introduced to Parliament in early 2026 and implemented before next year’s election. NZCTU has said that the reforms will create winners and losers, resulting in reduced sick leave entitlements for part-time workers which it said would disproportionately impact Māori, Pasifika and women.
However, it welcomed elements of the changes that will mean sick, bereavement and family violence leave begins to accrue from day one of employment, as well as increased casual loading and benefits for workers returning from parental leave.
Van Velden claims that for many people, leave entitlements will stay the same — what will change is how they are calculated.
Most people won’t notice a difference. She also expected that on average these changes will be cost-neutral for employers.
So what exactly are the changes proposed?
Hour-based annual leave and sick leave
Employees will become entitled to annual leave and sick leave from day one, in direct proportion to their contracted hours of work.
Leave will accrue at a base wage for the day of leave.
The same hourly leave pay-rate will be used for all leave types.
Fixed allowances, such as an accommodation allowance, will be paid in full during leave; however, other components (bonuses, commissions and variable allowances) will not be included.
An average hourly rate will be used for those on piece rates, where an employee is paid for the number of units completed (i.e. the number of buckets of apples picked).
The hours-based accrual system for sick leave will be a change for employees who work fewer than five days per week. These employees will no longer receive the same amount of sick leave as someone working full-time. Instead, all employees will receive sick leave hours proportionate to their contracted hours.
Leave entitlements during unworked periods
Annual leave and sick leave will accrue when an employee is on paid leave under any legislation and when on parental, jury and volunteer’s leave.
Calculating and cashing up annual leave
Leave balances will reflect hours actually worked without adjusting for increases or decreases in standard hours. Employers will no longer need to monitor and recalculate annual leave balances based on different working patterns.
A worker will also be able to request to cash-up 25% of their annual leave per year.
Working extra hours
Any hours worked on top of contracted hours will not accrue annual leave or sick leave. Instead, employees will receive an up-front payment of 12.5% for each additional hour worked.
Casual workers
Casual employees will receive a compensation payment at a rate of 12.5% of their ordinary hourly wage instead of accruing annual and sick leave.
Parental leave
Employees will continue to accrue leave during parental leave. Annual leave taken after returning to work will now be paid at the same rate as leave taken at any other time.
Van Velden claims that this change removes the long-standing source of frustration and disadvantage for parents re-entering the workforce. It also avoids replicating the complex and confusing annual leave payment rules after parental leave.
Bereavement and family violence leave
Employees will be able to access bereavement and family violence leave from day one of employment. These entitlements will remain days-based rather than hours-based, but employees will be able to take part-days.
Public holidays
Historically, it has been difficult to determine whether an employee who works infrequent days/ hours is entitled to be paid on a public holiday. The new test will be whether the employee has worked 50% or more of the relevant days in previous weeks.
Employees who do work on a public holiday 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. Employees who work only some of their contracted hours will receive time-and-a-half for hours worked and leave pay for the unworked hours.
Employers will be required to provide clear pay statements each pay period, itemising pay and leave in a transparent and easy to read way.
Annual closedowns
Leave will continue to build and employers will not have to pay out leave or reset anniversary dates when staff have not become entitled yet. The notice period for a closedown will increase to 21 days.
Stakeholders will now have the opportunity to provide specific feedback on the proposed changes at the Select Committee stage. Van Velden acknowledges that the shift to the new pay system will involve a lot of change. Payroll providers and employers will need to change their payroll settings and agree changes with their employees. Cabinet has agreed to a 24 month transition period to provide time for changes to be made to pay and business systems. An extended transition period is expected to be provided for the education sector due to the central payroll system.
While the proposed changes may not be to everyone’s liking, the move to reduce complexity, confusion and compliance is to be welcomed. After 22 years, two attempted reforms and billions of dollars back-paid due to mistaken leave calculations, it seems we may finally be moving in the right direction.
• The opinions expressed in this article are those of the writer and do not purport to be specific legal or professional advice. John Farrow is a partner with Anderson Lloyd, specialising in Employment Law.
