By Alice Peacock

Copyright newsroom

The Government is moving forward with plans to overhaul New Zealand’s “broken” leave legislation and replace it with a new Employment Leave Act.

Speaking to an audience of business leaders in Auckland on Tuesday, Workplace Relations and Safety Minister Brooke van Velden announced Cabinet has agreed to scrap the two-decade-old Holidays Act. A raft of new measures will underpin a simpler, more workable system, she says.

Many of the changes, such as a shift to hours-based accrual system for annual leave, were sign-posted well ahead of the announcement. The same system is being applied to part-time employees’ sick leave, meaning this tranche of workers will be eligible for less time off.

Other key changes include introducing a 12.5 percent Leave Compensation Payment for casual employees, instead of these workers accruing leave, and a shift dictating new parents will receive their full pay for annual leave following a return from parental leave.

Van Velden says the new legislation, yet to be introduced to Parliament, will be “cost neutral” with businesses being better off under some changes and workers benefiting more from others.

Current Holidays Act to be scrapped

The Cabinet has agreed to repeal the 22-year-old Holidays Act and replace it with a new law, named the Employment Leave Act. The draft legislation is expected to be introduced to Parliament by the beginning of 2026.

Changes to leave legislation have been a long time in the making. The last Labour government created a taskforce in 2018 that was charged with simplifying the existing Holidays Act. The taskforce’s recommendations were accepted and a reform drafted, but this did not pass into law before Labour lost the 2023 election. The draft was subsequently scrapped.

Van Velden says her Government gathered submissions on the Labour coalition’s draft bill and initially “worked to take on all of the changes”. She ultimately decided to start afresh based on feedback it wasn’t hitting the mark, she says.

The new Act borrows several of the previous government’s reforms, such as those dictating that employees’ entitlements to family violence and bereavement leave as well as their accrual of sick leave, will begin from their first day.

Van Velden acknowledged the potential disruption businesses could face with a change in government and says she has intentionally made policy decisions she hopes will be supported across the board. A Labour Party press release minutes after the minister’s announcement, however, accused the coalition Government of breaking “yet another” election promise by cutting sick leave for part-time workers.

Shift to hours-based leave accrual

Shifting to hours-based accrual for sick and annual leave will mean workers can choose to only take the hours they need off work, rather than a whole day.

Both types of leave will begin to accrue from their first day of work. A cabinet paper prepared by van Velden’s office and released alongside the changes, sets out that annual leave accrues at a rate of 0.0769 hours per hour worked. For a full-timer, this equates to the current four weeks a year.

Sick leave will accrue at a rate of 0.0385 hours per hour worked – equating to the current 10 days a year for a full-time worker.

“No more adjusting balances when hours of work change or trying to define what constitutes a working week for a staff member with a variable schedule, it also means no more waiting six months to access sick leave or 12 months to access annual leave,” the Minister says.

“I know this is a change that most employers will welcome, but I expect workers will also welcome the flexibility of being able to take a few hours of annual or sick leave rather than a full day, whether it’s to attend a medical appointment or a school theatre production.”

Bonuses and commission excluded from holiday pay rate

As part of the new legislation, alternative components of pay such as bonuses, commissions and variable allowances such as those for special duties will not be included in the hourly leave pay rate.

This means annual leave payments will be based on a worker’s base wage rate, rather than their total pay package. The Cabinet paper notes this will result in lower leave payments for some employees, compared with the status quo.

“My understanding, talking to a range of businesses is there has been a hesitancy to allow people to have bonuses because of the windfall gains that come in annual leave, where you could give a bonus, and then it really increases what someone gets paid far more than they would on a normal week with their annual leave,” van Velden says.

Asked about this proposed legal change by a business person whose workers are paid in the majority by commission, the minister points out they are the “minimum standards” and that any employer wanting to offer its workers a higher rate of holiday pay, is entitled to.

Sick leave for part-timers

Moving to a pro rata system means sick leave entitlements will be proportionate to an employee’s hours worked.

“Pro rata sick leave is not only fairer for being more proportionate, it should ensure workers have access to the amount of sick leave they work for.

“For example, a person working one day a week who is sick for a week will only need to use one day of sick leave. By comparison, a full time worker working five days a week would need to use five days of sick leave if they are sick for a week,” van Velden says.

An employee working 40 hours a week with the standard four weeks of annual leave currently will continue to receive 10 days of sick leave.

Minimum sick leave entitlements were increased from 5 to 10 days per year by Labour in July 2021, during the coronavirus pandemic. Employers of casual and part-time workers are currently obliged to offer the 10 days, provided their employee works at least 40 hours a month.

This aspect of van Velden’s legislation attracted criticism from the Public Service Association and the Council of Trade Unions, though the latter balanced its criticism of part timers’ sick leave reduction and the exclusion of bonuses from holiday pay with praise for its simplification of the current laws.

Enter the ‘Leave Compensation Payment’

A new Leave Compensation Payment will see part-time workers’ sick and annual leave entitlements show up in the form of a 12.5 percent upfront payment in their wages, rather than as accrued time off.

The same payment system will be applied for workers in jobs where they’re paid for overtime hours; they will not tot up additional holiday or sickness hours but instead receive the same proportion of additional pay, applied to their additional hours.

Estimates of the proportions of employees within each system, laid out in the cabinet paper, say 93 percent of New Zealand workers are in a permanent employment relationship. Of this proportion of workers, 9-12 percent received overtime pay and therefore would receive the Leave Compensation Payment for additional hours.

A distinct 5 percent of workers are ‘casual employees’ and would therefore solely receive the Leave Compensation Payment to account for their sick and holiday accrual.

“These changes will lead to the system being much simpler to administer and understand, meaning employees are much more likely to get their correct entitlement to leave, or otherwise receive LCP,” the cabinet paper reads.

Leave accrual for new parents and the injured

Under the new legislation, parents returning from parental leave will receive their full pay from annual leave.

Currently, employees earn annual leave while on parental leave, but they often receive much less pay than usual when taking this holiday time, if taking it in their first 12 months back. This is because of ‘parental leave override’, which means holiday pay is calculated at the rate of average weekly earnings for the preceding 12 months.

“This change removes a long standing source of frustration and disadvantage for parents re-entering the workforce,” van Velden says.

“It also avoids replicating the complex and confusing annual leave payment rules after parental leave.”

While the actual leave entitlement accrual of workers will not change while they are on parental leave, its accrual is being removed for injured employees who are off work while receiving ACC weekly compensation.

Van Velden’s legislation is currently being drafted. It is expected to be introduced to Parliament by the start of next year following which it will be considered before a select committee.

Upon the law being introduced, there will be a 24-month transition period to allow for changes to be made to pay and business systems.

The cabinet paper notes Erica Stanford, the Minister of Education, has advised the schooling sector will instead need up to 10 years to implement the changes due to the need to overhaul its central payroll system – based on the infamous Novopay payroll.

As with all major system changes, there will be an implementation cost that businesses will be expected to swallow. The aim is that this will be offset by lower compliance cost and reduced risk of disputes and remediation claims.