Why the Holidays Act needed reform
The Holidays Act has been a compliance minefield, spawning billions in remediation costs across both public and private sectors. Health NZ alone faces liabilities exceeding $2 billion and has paid millions to consultants to remediate the issues so they can pay their current and former employees.
Successive governments have tried and failed to fix it, but Workplace Relations Minister, Brooke van Velden is determined to deliver what others could not: a framework that is simpler, fairer, and future-proof.
The changes proposed by the Minister promise clarity and simplification. Leave will accrue in hours from day one, sick leave will be pro-rated, and casual workers will receive upfront compensation. Payroll teams may finally breathe easier, and as organisations prepare for this 24-month transition. The changes definitely aim at making payroll teams’ workload less onerous, however whether they benefit all Kiwis is still to be seen.
What’s changing, and what it means for your business and employees
The proposed Employment Leave Act introduces a fundamental shift in how leave is earned, tracked, and paid. There are three key areas the changes aim to address: annual leave, sick leave entitlements, and pay as you go (PAYG) employees.
Annual leave
Employers can easily record and report leave balances without constant updates to work patterns, reducing back-office overhead. For employees, the hours-based accrual system ensures leave is earned equitably based on the mahi they put in.
Australian payroll teams have long scoffed at the complexity of New Zealand’s annual leave system, and for good reason. The sheer volume of calculations required every time an employee takes leave has been a costly overhead for businesses. The new approach to use hours based accrual brings us closer to the Australian model, reducing complexity and creating opportunities for payroll software providers to expand into New Zealand, increasing competition and innovation.
Sick leave
Sick leave has been contentious since entitlements doubled from five to 10 days. Like annual leave, the change won’t affect the typical 9–5 worker. The real impact will be on part-time and variable-hour employees who represent a lower percentage of the workforce but cause the most compliance headaches. Minister van Velden argues the reform is fairer, as those working more accrue more leave. Critics counter it disproportionately affects women, particularly working mothers, who often take time off to care for sick children. It’s also been noted that Māori and
Pasifika workers are disproportionately affected, as they are more likely to be employed in roles with variable work patterns and less predictable hours.
PAYG employees
Casual employees will see a moderate win with an increase in their pay checks each week, with PAYG rising from 8% to 12.5%. However, in our view this doesn’t tackle the underlying struggle these casual employees face. The small change in their pay doesn’t help when a parent has to turn down a shift to care for their sick child; their pockets are still stung by missing a day’s pay and the extra 4.5% isn’t going to make a difference.
A little more focus is needed to ensure these employees aren’t penalised when their work pattern suggests they are filling a permanent role. Stricter rules around how long an employee can be on a casual contract and the regularity of their work would help those on casual contracts. If you couple this with an accrual system for leave, the employee receives the leave they earn through hours worked; this means the employer isn’t disadvantaged and neither is the employee.
Other key changes
Leave compensation payment for additional hours worked: Any hours worked on top of contracted hours will not accrue annual or sick leave, however workers will receive an upfront payment of 12.5% for each additional hour worked.
Parental leave: Returning parents will now receive full pay for annual leave which is a major shift from the status quo.
Annual leave cash-up: Employees can cash up 25% of their annual leave balance each year, reducing employer liability.
Bereavement and family violence leave: Available from day one.
Clearer public holiday rules: A new test helps determine public holiday entitlements for employees without fixed workdays. If an employee has worked at least 50% of the same weekday over a recent period (for example, three out of six Tuesdays), that day counts as an “otherwise working day.” This provides clearer guidance for casual and part-time workers.
Mandatory pay statements: Employers will be required to provide clear pay statements each pay period, itemising pay and leave in a way that’s transparent and easy to understand.
Implementation timeline: Once passed, businesses will have 24 months to transition their systems and processes. This will sting for organisations that have already invested heavily in adapting to the old system, however the long-term benefits should outweigh the short-term pain.
Five tips to help you prepare for the upcoming changes
1. Do you understand your workforce work patterns?
The shift to hours-based accrual means you’ll need accurate tracking of contracted and actual hours.
2. Are your payroll systems and processes ready?
Many providers will need to rebuild their payroll platforms to accommodate the changes. Engage early with your payroll, and time and attendance vendors to understand their roadmap and timelines. Review your rostering and payroll systems now to ensure they can handle the new model. Ensure your internal procedures are updated to capture the changes.
3. How will this affect your cost base?
The increase in leave compensation for casual workers and changes to parental leave payments may raise costs. Model these impacts now to avoid surprises.
4. Are your employment agreements aligned?
Employment agreements may need updating to reflect new entitlements and accrual methods. Legal reviews and consultation with your employees and unions will be essential.
5. Are you communicating clearly with staff?
Transparency builds trust. Employees will want to know how their entitlements are changing and what it means for their leave balances and flexibility, so communicate early and clearly about how the changes will impact your employees.
A more workable system, but not without challenges
The reforms aim to deliver a simpler, fairer system, but they demand significant operational change. Businesses that act early by reviewing systems, updating policies, and engaging employees will navigate the transition more smoothly. Like any business change, good open communication is the key to success.
As with any change in people’s pay, there’s never going to be universal happiness, however the proposed changes show promise. We look forward to seeing the finer details.
