A major change to how leave is calculated in workplaces is becoming law.

The Employment Leave Bill repeals the Holidays Act 2003 in an attempt to simplify the regime for workers and employers.

  • Annual and sick leave will be accrued in hours, rather than days.
  • For additional work or casual hours, leave will not accrue - employers instead will pay a set 12.5% 'leave compensation payment'.
  • Full- and part-time employees will be able to get annual, sick, bereavement and family violence leave from the first day of work.
  • Casual workers will be able to access bereavement and family violence leave from the first day of work.
  • Leave can be taken in hours, instead of requiring whole days.
  • Workers will be able to cash in up to 25% of their total annual leave balance every year.
  • Accrued leave hours are 'banked', so entitlements do not change if work hours do.
  • People coming back from parental leave will be paid their usual rates if they take annual leave, rather than a lowered rate because they had not been in work for the full past 12 months.

The bill has passed its third reading and is awaiting royal assent, and is expected to come into force in two years.

What was wrong with the old act?

Employment law expert Bronwyn Heenan, from Simpson Grierson, said it was "incredibly thorny, difficult, complex and very difficult to navigate".

"Most employers don't wake up in the morning and want to not give their employees the correct holiday pay entitlements, but that was what invariably was happening to good employers," she told RNZ’s Nine to Noon programme on Tuesday.

"A great example of that is Health New Zealand - they've already paid out $308 million in remediation payments and they think the bill will top $2 billion. It was just too complex and too difficult to navigate."

Police and the Ministry for Business, Innovation and Employment were also tripped up, with a review into the mess ordered as long ago as 2018.

As RNZ reported at the time, the main difficulty lay with the different ways an employer could calculate holiday pay.

Workers, after 12 months of continuous employment, were entitled to whichever calculation was higher - their ordinary weekly pay or an average over 12 months, which could be difficult to work out if an employee worked variable hours, received commission or got a one-off bonus payment, for example.

There were other quirks, such as not requiring employers to offer annual and sick leave from day one, and entitlements for part-time and casual workers not always being clear due to their shifting work patterns and irregular hours.

The law technically also required employees to use up a full day of annual or sick leave even if they just needed an hour or two to go to the doctor or wanted just the afternoon off.

"The systems just were not geared up for all the complexities of the Holidays Act to make sure leave was calculated," Heenan explained.

"And where the problems arose wasn't people that work five days a week, nine-to-five on a salary… once you get those variable hours, you get the different roster patterns and all of those sorts of things, shift work, gig economy - we just haven't really moved with the time."

How does the new act work?

Annual leave will accrue at 0.0769 hours for each standard hour of work, but not for hours done over and above a person's usual hours, or casual work. Instead, that will attract a 12.5% compensation payment.

"It will be much simpler for employers and it should be a lot simpler for employees to understand what their accrued entitlements are," Heenan said.

"You will accrue leave on your standard hours, so the set hours you might have in your employment agreement, 30 or 40. And then for any hours that you work over and above those, there'll be what's called a leave compensation payment that is set at 12.5 percent - and so you won't get paid out annual leave on those hours, you'll get paid that 12.5 percent in each pay period."

So instead of accruing more annual leave by working extra hours, which could leave a liability on the employer's books they might one day have to pay out in a lump sum (for example at the end of a person's employment), staff will get not just extra pay for the hours worked, but 12.5% on top of that.

Annual leave pay under the old act could sometimes end up higher than a person's usual remuneration. For example, if they worked some extra hours, this would bump up their average weekly earnings, which their annual leave pay had to be match.

Under the new system, those extra hours would earn the 12.5% bonus, and the holiday pay would remain at the person's usual rate, removing the need for complex calculations.

Under the old Holidays Act, casual workers were entitled to at least 8% on top of their usual pay to account for the fact they did not get annual leave. The new rate is higher - 12.5% - but in return, casual workers will no longer be legally entitled to sick leave (employers can still offer it, of course).

The Holidays Act sick leave entitlement is a minimum 10 days a year, available after six months of employment, regardless of how many hours a week you work (including casuals who averaged at least 10 hours a week or 40 hours a month); and it can accumulate to a maximum of 20 (some contracts may allow for more, but these are the legal minimums).

Under the new system it will accrue 0.0385 hours for each standard hour of work, and be available from day one. It does not accrue on extra hours worked, or casual hours - that is being replaced by the 12.5% leave compensation payment.

Sick leave is capped at 160 hours - any work beyond this cap will not accrue any sick leave (unless a contract allows for it).

Heenan said while the government has promoted this as being proportional and fair, it reduces sick leave entitlements for more than half-a-million part-time workers, many of them women.

Bereavement and family violence leave entitlements will be unaffected for all workers - full-, part-time and casual, and available from day one of employment.

Leave is banked, so for example if you worked for 12 months in a 40-hour full-time job and moved into a 20-hour part-time role, you would still have 160 hours of leave to use - so it would last longer. Your entitlement does not recalculate just because you now work fewer hours.

The reverse also applies, however, so a person who worked 20 hours a week for a year who then starts a 40-hour role will only have 80 hours' leave banked - two weeks, not four.

At present, as MBIE put it: "If a worker increases their weekly hours of work, they receive an effective increase in their leave balance. If they reduce their hours, they receive an effective reduction."

In reality, many employers have been using an hours-based system for years already.

"It's a technical breach of the Holidays Act as it currently is, but a lot of employers do that because a lot of employers want to give more than the minimum or be much more flexible with their employees and allow them to take a day's leave or half a day's leave, allow them to take their leave before their leave's actually accrued," Heenan said.

What else does it change?

"An employer now has to provide employees access to - we might have traditionally called it a payslip - but actually access on a pay-period-to-pay-period basis of what their accrued leave entitlements are," Heenan said.

Is everyone happy?

No. Opposition parties have pointed out some employees will lose out on getting extra annual leave entitlements from working more hours or earning more commissions.

Heenan said women not only make up more of the part-time workforce - and so will have less sick leave accruing - but "tend to have more of the childcare responsibilities", including using sick leave when it's actually their kids who are sick.

"It will save employers money, clearly, because they will have to account for less sick leave."

When will the new rules be in place?

While the bill passed last week, there is a two-year transition period before it comes in. The existing Holidays Act remains in force in the meantime.

"There is a two-year grace period for everyone, if you like, to get their house in order," Heenan said.

MBIE says after that, there will be one more year for employers and employees to get new contracts sorted "that are consistent with the framework of the new legislation (for example, by providing a compliant accrual rate for annual leave)".

"I can anticipate a lot of negotiations, particularly collective agreements involved with unions and various employers," Heenan said.

"But if you don't in some respects get your house in order and they're not compliant, then it will just take effect after that period."

If an employer failed to implement the new systems and employees believed they were missing out on entitlements, Heenan said they could "go and talk to the Labour Inspector, who forms part of MBIE, or they can talk to their employer directly, or of course they could raise a claim via mediation or through the Employment Relations Authority".