Leave rules overhaul

How annual and sick leave entitlements are changing

After years of confusion, costly payroll errors and endless debate, New Zealand s Holidays Act 2003 (the Holidays Act ) is finally being replaced.

The Employment Leave Act 2026 received Royal Assent on 6 August 2026 and will replace the Holidays Act on 6 August 2028.

The new Employment Leave Act 2026 introduces a simpler, hours-based system for calculating annual leave and sick leave. While the changes are still two years away from taking effect, they will affect virtually every employer in the country, from sole traders with a handful of staff to larger businesses with complex payroll systems.

For many small business owners, the biggest takeaway is straightforward: leave calculations are set to become much easier to understand and administer.

Why change a system that already exists?

For years, the Holidays Act has been a headache for employers.

Calculating holiday pay often involved comparing different formulas and

paying whichever amount was higher. While this worked reasonably well for employees on fixed salaries and standard hours, things became far more complicated for workers with varying hours, overtime, commissions, bonuses or changing rosters.

The result was widespread payroll errors across both the public and private sectors. Even organisations with dedicated payroll teams struggled to get it right.

Most employers were not deliberately underpaying staff. The legislation was simply complicated, and many payroll systems were not designed to handle all of its quirks.

Moving to an hours-based system

The biggest reform is a shift from measuring leave in days and weeks to measuring it in hours.

Under the new system, employees will accrue leave based on their standard contracted hours. Leave balances will be easier to track, easier to understand, and easier to manage through payroll software.

It also means employees can take the amount of leave they actually need. Instead of using a full day s leave to attend a doctor s appointment, they can take only the hours required.

For businesses already operating flexible workplaces, this change aligns more closely with how many employers manage leave in practice.

What happens to overtime and extra hours?

One of the more significant changes affects additional hours worked beyond an employee s standard agreement.

Rather than generating additional annual leave entitlements, those hours will attract a 12.5 percent upfront leave compensation payment, in lieu of annual and sick leave accrual for all additional and casual hours.

For employers, this reduces future leave liabilities building up on the balance sheet. Instead of accumulating potentially large leave balances that may need to be paid out later, businesses will effectively settle that entitlement as the work is performed.

For employees, it means extra hours deliver immediate payment rather than increasing future holiday pay calculations.

Sick leave starts from day one

Another notable change is that full-time and part-time employees will gain access to sick leave from their first day of employment.

Currently, employees generally qualify after six months of continuous service.

Under the new system, sick leave will accrue progressively in hours and be available immediately. Bereavement leave and family violence leave will also be available from day one.

For employers, this may require some adjustment during recruitment and onboarding, but it provides a clearer and more consistent framework for employees.

Casual employees get different treatment

The new legislation also introduces changes for casual workers.

Casual employees will continue receiving a leave compensation payment, paid for each casual hour of work in every pay period, instead of that work accruing annual and sick leave. Employers who wish to provide additional benefits will still be free to do so through employment agreements.

This change is designed to reflect the irregular nature of casual work while simplifying administration.

Leave balances become "banked"

One of the more practical aspects of the new law is the introduction of banked leave hours.

Once leave is earned, it stays in an employee s balance regardless of future changes to working hours.

For example, an employee who accrues leave while working full time and later reduces their hours keeps the same leave balance. Equally, someone moving from part-time to full-time work does not automatically receive a larger leave entitlement simply because their weekly hours increase.

This creates greater certainty for both employers and employees and removes some of the complicated recalculations required under the current system.

More transparency for employers and staff

The new law will also require employers to provide employees with a pay statement for each pay period. The pay statement must include information about payments and deductions made, employer contributions and leave entitlements. Many payroll systems already provide this functionality, but the requirement will help ensure employees can easily see what leave they have available and how it has been calculated.

For business owners, greater transparency should help reduce misunderstandings and disputes.

Not everyone is celebrating

While the reforms have been welcomed by many employers, they have attracted criticism from some employee advocates and unions.

Critics argue that some workers, particularly part-time employees, may accrue less sick leave than they do under the current system. Others point out that employees who regularly work additional hours may no longer receive the benefit of larger annual leave entitlements generated by those extra hours.

Supporters of the reforms counter that the new system is fairer, more transparent and significantly easier to administer.

What should small businesses do now?

The good news is that there is no immediate urgency.

Although the legislation has passed, there is a two-year transition period before the new framework takes effect. Businesses will then have additional time to update employment agreements and payroll processes where necessary.

In the meantime, business owners should:

• Stay informed about the upcoming changes.

• Review payroll systems and software capabilities.

• Speak with payroll providers about implementation plans.

• Audit existing employment agreements.

• Budget for any changes to leave liabilities and employee entitlements.

• Plan staff communications well before the new rules take effect.

The bottom line

For most small businesses, the new Employment Leave Act promises something that has been missing from leave legislation for years: simplicity.

By moving to an hours-based model, reducing complicated calculations and making entitlements easier to track, the reforms should help employers spend less time wrestling with payroll compliance and more time focused on running their businesses.

The transition period provides valuable breathing room, but now is the ideal time to start understanding how the changes may affect your workforce and your payroll systems.

Published in WIRED issue 82/September 2026 by Fencing Contractors Association NZ

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