What’s wrong with the Holidays Act 2003?

Employers have struggled with the current Holidays Act 2003 (“the 2003 Act”) since it was introduced. The main difficulty is that entitlements are calculated in weeks, while workers’ hours can vary from week to week.

Several large, high-profile employers have underpaid employees, often inadvertently and despite having sophisticated payroll systems in place. In 2018, Bunnings New Zealand acknowledged it owed $11m to current and former staff members going back as far as 2004[i]. Health New Zealand Te Whatu Ora took over more than 20 separate payrolls when it was formed, and it will take years to resolve the annual leave payment shortfalls. As of 31 August 2026, it has paid more than $961m to more than 86,000 current employees and 44,000 former employees[ii].

The 2003 Act penalises workers returning from parental leave, because the pay rate is affected by periods not worked. It also gives part-time workers the same sick leave entitlement as full-time workers, while workers on fixed-term contracts of less than six months have no sick leave entitlement.

Until 6 August 2028, the 2003 Act still applies, even if your software and systems have been updated for the new Act. Key points to keep in mind include:

2003 Act - Annual Leave Entitlement and Hours

A worker is entitled to four weeks’ annual leave after 12 months’ continuous employment. If a worker’s weekly hours change, their leave is scaled up or down in proportion. If a worker increases their weekly hours, their leave balance increases in hourly terms.

Casual workers and employers can agree to pay as you go annual leave at 8% of gross earnings, but it isn’t mandatory.

2003 Act - The Impact of Extra Hours on Annual Leave

Employers must pay the higher of Ordinary Weekly Pay (OWP) and Average Weekly Earnings (AWE). A waged worker who works extra hours will have a higher leave pay rate when they take annual leave.

Some salaried workers are compensated for extra hours by additional pay. This is reflected in a higher leave pay rate.

2003 Act - Using Annual Leave and Cashing Up

A worker can take part of a week as annual leave. The employer and worker must agree on the portion of leave taken.

A worker can cash up one week of annual leave in each 12 months, by request.

2003 Act - Sick Leave and Other Entitlements

A worker is entitled to 10 days’ sick leave after six months’ continuous employment. A new entitlement of 10 days arises after a further 12 months, capped at 20 days unless the employment contract increases the cap. The 10 days are not apportioned for people working fewer than five days a week.

Sick leave is taken as a full day. The 2003 Act doesn’t allow for parts of a day.

Casual workers are unlikely to benefit from sick leave entitlement due to impracticality and compliance issues.

Workers are eligible for bereavement and family violence leave after 6 months, and the 2003 Act only provides for a full day’s leave.

2003 Act - Leave Entitlements Accrue during Unworked Periods

Annual leave continues to accrue while a worker is on leave, receiving ACC compensation and in the first week of other unpaid leave.

When a worker takes annual leave soon after returning from parental leave, the average earnings calculation gives them a very low pay rate for that leave.

2003 Act - Public Holiday Leave and Entitlements for Working

Workers are entitled to paid leave on a public holiday if it is an otherwise working day (OWD), considering a range of factors. It can be confusing for workers who don’t have a set weekly pattern.

If the worker works on a public holiday, they earn 1.5 times their usual pay rate for the hours worked and receive a whole day alternative holiday in lieu, even if they only work for part of the day.

Changes under the Employment Leave Act 2026 reforms

There is a transition period of 24 months to allow employers and payroll providers to adapt their systems to the new Act, until 6 August 2028. If you have underpaid your employees under the 2003 Act, you still have an obligation to make up the shortfall. You can read the MBIE report on the changes[iii], but we’ve summarised the key points here:

2026 Reforms – Three Types of Working Hours

The new Act defines and distinguishes standard hours, additional hours (like overtime) and casual hours. An employee cannot have standard hours and casual hours for the same role.

2026 Reforms - Annual Leave Based on Hours Worked

A worker is entitled to annual leave from the first day of employment, including workers on fixed-term contracts. It is calculated at a rate of 0.0769 hours per standard hour, which is equivalent to four weeks over a 52-week year. The leave hours are locked in and are not scaled up or down if the worker later changes their weekly hours.

2026 Reforms - The Impact of Extra Hours on Annual Leave

A waged worker who works additional hours will not accrue extra annual leave or sick leave on those hours. Instead, they will receive leave compensation when the additional hours are worked. The rate is 12.5% of the worker’s ordinary hourly rate.

Some salaried workers are compensated for additional hours by extra pay. The leave compensation rate is 12.5% of the worker’s ordinary hourly salary rate.

2026 Reforms - Using Annual Leave and Cashing Up

A worker can use annual leave hours to take part of a day off work. The employer and worker must agree on the portion of leave taken.

A worker can cash up 25% of their annual leave as at their last employment anniversary, by request. This gives more flexibility for cashing up balances and reducing leave liability.

2026 Reforms - Sick Leave Based on Hours Worked

A worker is entitled to sick leave from the first day of employment, including workers on fixed term contracts. It is calculated at a rate of 0.0385 hours per “contracted hour” (being equivalent to 10 days / 52 weeks at 5 days a week). It will be capped at 160 hours. A worker can use sick leave hours to take any part of a day off work. It doesn’t have to be a full day off.

2026 Reforms - Bereavement and Family Violence Leave

Workers will be eligible to take bereavement leave and 10 days’ family violence leave from their first day of employment. Employees can take part days of leave.

2026 Reforms - Casual Workers’ Leave Compensation

Casual workers will receive leave compensation, which is a combined annual leave and sick leave payment set at 12.5% of an ordinary wage rate and paid in every pay period. The leave compensation is a replacement for accruing annual leave or sick leave and starts from the first day of employment.

2026 Reforms - Leave Accruals during Parental Leave Only

Annual leave and sick leave continue to accrue while a worker is on paid leave. They do not accrue while the worker is receiving ACC compensation or taking other unpaid leave.

Workers earn leave during parental leave. If annual leave is taken soon after returning from parental leave, they will receive similar leave pay as if they hadn’t been on parental leave. This increases their minimum entitlement compared to the 2003 Act.

2026 Reforms - Notional Leave Rosters

This is a new concept. If the employment agreement doesn’t specify the days and times of the week worked, or the number of hours for a salaried employee, then the employment agreement must include a notional leave roster.

2026 Reforms - Public Holiday Leave and Entitlements for Working

Workers are entitled to paid leave on a public holiday if it is an otherwise working day (OWD), as set out in their employment agreement. If the employment agreement is unclear then the OWD test is based on 7 of the previous 13 weeks.

Employers must provide 21 days’ written notice of an annual closedown, up from 14 days, and set out the leave requirements.

If the worker works on a public holiday, they earn 1.5 times their usual pay rate for the hours worked and alternative holiday hours in lieu, not a full day. If they only work some of their contracted hours that day, the unworked hours are paid at the regular leave pay rate.

2026 Reforms - Pay Statements Required

Employers will be required to provide pay statements to workers every pay period, itemising pay and leave balances.

How to Prepare for the Employment Leave Act 2026

We think that the Employment Leave Act 2026 will provide welcome relief to both employers and workers, by making leave calculations easier to understand. Casual workers, fixed-term workers and parents returning to the workforce will have better access to leave entitlements. The disparity in sick leave between part-time and full-time workers will be resolved.

Review employment agreements, collective agreements, workplace policies and payroll processes to identify what needs updating and when. If you are negotiating collective agreements or individual employment agreements before 6 August 2028, make sure they deal with the change in leave provisions from that date. Check the Employment New Zealand website for transition guidance. Before updating employment contracts or payroll systems, speak with your HR adviser, payroll provider or chartered accountant. You should also identify any gaps in your payroll and employment data that may affect leave conversion.

The best approach is to start early, keep good records, and make sure your payroll, employment agreements and policies are ready before the new rules take effect.

-       Serena Irving

Serena Irving is a director in JDW Chartered Accountants Limited, Ellerslie, Auckland. JDW is a professional team of qualified accountants, business consultants, tax advisors, trust and business valuation specialists.

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An article like this, which is general in nature, is no substitute for specific accounting, HR and tax advice. If you want more information about the issues in this article, please contact your adviser or the author.

  [i] https://www.rnz.co.nz/news/business/359845/bunnings-to-pay-staff-11m-for-holiday-pay-miscalculation

[ii] https://www.healthnz.govt.nz/health-professionals/employment-information-agreements/holidays-act-remediation

[iii] https://www.mbie.govt.nz/dmsdocument/31197-explainer-what-changing-with-employment-leave