Employment Leave Act has arrived - what you need to know

The most significant change to payroll in over 20 years is here — a complete replacement of the Holidays Act.

The Employment Leave Act 2026 passed its third reading in Parliament and received Royal Assent on 6 August 2026. with a two year window before it actually kicks in on 6 August 2028.

Not all parties agree with the new Act, so with the general election coming on 7 November 2026, it will be interesting to see if anything changes once the next government is formed.

There is a lot we don't know yet, as MBIE is building out guidance over time. In the meantime, here's the practical shape of it, without the legislative jargon.

Hourly rate model — day one accrual

Leave builds from day one, in hours, not days. Under the old Act, annual leave entitlement kicked in after 12 months. Under the new Act, employees accrue annual leave (at a minimum of 0.0769 hours for every standard hour worked) and sick leave (at 0.0385 hours per standard hour) from their very first day. This is a genuinely significant shift in how payroll systems will need to calculate things — but it also means employees don't have to wait a year to build up leave, and it removes a lot of the "when exactly did their entitlement kick in" confusion.

LCP payment for casual and additional hours

A new payment covers casual and additional hours. Rather than trying to force annual and sick leave accrual onto irregular or casual hours (which is where a lot of the historical confusion came from), those hours now attract a 12.5% Leave Compensation Payment (LCP) paid alongside the regular wages. The payment is intended to cover the annual leave, sick leave, and other leave value in one clean payment, rather than trying to track fractional entitlements on hours that don't follow a set pattern.

Public holiday entitlement test

A clearer entitlement test Whether a public holiday is a paid day for an employee depends on whether it's an "otherwise working day" (OWD) for them. The new Act sets a clear test: if the employee has worked (or was on paid or unpaid leave) for 50% or more of the relevant days of the week — for example, Mondays — over the 13 weeks before the public holiday, it counts as an OWD. The new Act also tidies up how this is determined more broadly, including closing a gap where employees who worked extra days beyond their set roster could have missed out.

Alternative Holidays Workers accrue alternative holiday hours at a rate of one hour for every hour worked on a public holiday that's an OWD. Workers who only work some of their contracted hours on a public holiday get time and a half for the hours they actually work, plus leave pay for the unworked hours.

How leave is taken, recorded and paid

Taking Leave. Under the new Act, Employees can use accrued leave hours to take any part of a standard day off work, and this is taken, recorded and paid in hours against contracted hours. There is no inflated leave rate as there is under the Holidays Act 2003.

Per shift payments. Leave payments will now be calculated per shift rather than per calendar day, so an employee working two different-rate shifts in one day won't have their leave payment default to the lower rate.

Cashing up. At present, a worker can request to cash up their 4th week of annual leave entitlement. Under the new Act, employees can request to cash up 25% of their annual leave balance as at their last 12-month employment anniversary, in each 12-month period — meaning there's now the ability to cash up much larger annual leave balances than before. There is still no requirement for Employers to cash up leave.

Clearer pay slips. The new Act requires employers to provide a detailed pay statement every pay period, itemising each component that makes up the employee's pay — a real step up from current requirements.

Proof of Sick / Family Violence Leave

If an employee can't provide proof for Sick Leave or Family Violence Leave, employers can still withhold payment until they do — but can no longer deduct the leave from the employee's balance while that's happening. I haven't personally seen employers deducting balances that were never paid out, but it's possible it's been happening — so this clears it up for anyone in doubt.

Bereavement & Family Violence Leave

Bereavement and Family Violence Leave no longer has a six-month qualifying period and is available from day one. This also now includes casual employees and represents a widening of protection compared with the current Act. The number of days remains the same, and payment for this leave will be made based on standard hours for the day taken at the standard hourly rate.

Key "fish hooks" to watch

There are elements causing real concern for businesses that you need to be aware of:

Standard Hours. Leave accrues based on standard hours. If someone works 40 hrs per week, then they would accrue 160 hours over a 12-month period. If they change their work pattern, and move to 20 hours per week, they still keep their 160 hrs of leave, giving them essentially 8 weeks of leave. Same applies to other way. If employee starts on 20 hrs, then moves up to 40 hours after 12 months, they will only have equivalent of two weeks of leave at 12 months.

Casual staff costs. The 12.5% LCP applies even where casual employees would not ordinarily qualify for sick leave. This represents a meaningful increase in labour costs for businesses that rely on casual workers.

Additional Hours, Bonuses and commissions excluded. Variable earnings such as additional hours, bonuses and commissions will not be included in the leave pay rate, meaning employees working extra shifts or on performance-based pay could receive leave payments significantly lower than their normal earnings (based on base hours only). This may create a practical disincentive to take leave.

Parental leave accruals & payments. Annual leave will continue to accrue while an employee is on parental leave, as it does now. This is, however, in contradiction to the hours-based accrual system being implemented, where all other unpaid leave types do not accrue leave. It will be interesting to see how this is applied when employees renegotiate their work patterns on return from 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). Under the new Act, 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.

The cumulative cost impact of these clauses could be significant for small businesses and employees.

Importantly, the current Holidays Act is not going away. Employers must continue applying the existing legislation until the new Act is fully in force.

When does this actually come into force?

This is the part that matters most for your peace of mind right now:

6 August 2026 — Royal Assent received. The law exists, but almost none of it is active yet.
6 August 2028 — most of the Act's leave and payment provisions come into force here, applying from the start of each employee's first pay period on or after that date.
6 August 2029 — employers have one year from the new rules taking effect to update their employment agreements to reflect the new minimum requirements.
2036 — the schooling sector doesn't need to comply until 2036 at the latest

For the vast majority of small businesses, 6 August 2028 is the date that matters. Everything else between now and then is preparation time. And we must use it well. This is where we come in. We are here to dig into the detail and cut through the fluff to pass on the information to you, so you know what you need to get this right.

What to do right now

You don't need to do anything to your payroll today. But "nothing to do" isn't the same as "nothing to think about." The volume of change in 2026 is significant, but manageable with the right preparation. Here's where to start:

Verify all settings in your current payroll system are correct and apply with the current Holidays Act 2003.

Review employment agreements and determine what clauses may be unworkable under the new Act — for example, extra weeks of leave. These won't come under the new Act's leave calculations, and will need their own set of rules wrapped around them. If you want to increase leave for employees between now and then and pay it based on Holidays Act calculations, reference those extra weeks explicitly to the Holidays Act 2003 — a re-negotiation will be required once the new Act comes into force. So, review but do not change anything related to new Act just yet.

Ensure your leave balances are correct. In our leave balance reviews, everyone who keeps balances in hours while not working the same hours each day or week has issues with incorrect balances. Get your current payroll sorted now, so you can move into the transition secure in the knowledge your team's balances are right.

Do some calculations to work out the likely cost increases for your business, so you can budget for higher payroll costs — including the upcoming KiwiSaver increases, and potential future minimum wage and ACC changes.

Invest in upskilling — particularly on the current Holidays Act — before the new legislation arrives. Get any issues with your current payroll sorted now. They're not going to go away on their own.

If you're involved in payroll, stay connected with us so you get all the updates as they happen.

This is a big legislative change, but it comes with one of the longest lead-in periods we've seen for employment law reform in New Zealand — built to give businesses time to get it right, rather than scramble. The payroll and employment law landscape is changing at pace. Those who come through 2026 in the best shape will be those whose advisors helped them act early, review their documents, and understand what these changes actually mean in practice.

For accountants, bookkeepers, VA's and Payroll Professionals, staying ahead of these updates isn’t just about compliance — it’s about being a trusted advisor to the businesses you serve.

For business owners and payroll administrators, I know it feels overwhelming and there is a lot of information floating around. I also know it's easy to ask Chat or Claude... but understanding the implications of the rules is a whole different story. Ensure someone is on your team that you can trust to support you, provide you with information you need and genuinely has your best interest at heart.

I'll be building out our Small Business Training Hub education on this topic over the coming months, to make sure plain-English, practical guidance and support is available for everyone. Subscribe to stay up to date and ensure you are not left unprepared.

The landscape is constantly changing — but with the right support, it doesn’t have to be complicated, and you don’t have to do it alone.

PS: We have a free replay of the webinar we did earlier this year on the Small Business Training Hub platform. You can watch it here.

Di Crawford-Errington is a Master Bookkeeper, Certified Payroll Leader, and President of the Institute of Certified NZ Bookkeepers. She runs The Ontrack Group, which includes Ontrack Payroll and the Small Business Training Hub.

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Categories: : Employment, Payroll