On 24 September 2025, the New Zealand Government announced a major employment law reform: the replacement of the long-criticised Holidays Act 2003 with the new Employment Leave Act. This change aims to simplify leave entitlements, reduce payroll disputes, and provide more flexibility for both employees and employers. From annual leave to sick pay, every worker will feel the impact of this reform.
In this article, we break down the key changes, explain how the new law will work in practice, and outline what employees and businesses should prepare for before the transition takes effect.
๐ Employment Leave Act: Why It Matters for Workers and Employers
Background: Why Replace the Holidays Act?
The Holidays Act 2003 has been a source of frustration for years, with complex calculations leading to payroll errors, back-pay disputes, and costly litigation. Both employees and businesses struggled with unclear entitlements. According to the Ministry of Business, Innovation and Employment (MBIE), over $2 billion in underpayments had to be corrected due to misinterpretations of the Act.
The government has now decided to overhaul the system entirely by introducing the Employment Leave Act, which is expected to take effect in 2026 after parliamentary approval.
- Simplifies leave calculation methods
- Ensures fair entitlements across full-time, part-time, and casual workers
- Reduces compliance costs for employers
More details can be found on MBIEโs announcement and 1News coverage.
Key Changes to Annual Leave
Under the new Employment Leave Act, annual leave entitlements will be accrued on an hourly basis instead of weeks. This ensures that employees who work irregular hours or part-time receive fair entitlements that reflect their actual work patterns.
Employees will also have more flexibility in using their leave, with options to cash out up to 25% of their unused annual leave entitlements each year.
- Accrual based on hours worked
- Flexibility to cash out part of unused leave
- More accurate entitlements for part-time and casual workers
๐ก What About Sick Leave?
Sick leave is shifting from a โdays-basedโ system to an โhours-basedโ system. This means employees can take sick leave in smaller increments โ for example, a two-hour absence for a medical appointment, rather than having to use a full day.
This change will benefit workers with chronic conditions or those who need flexibility for partial-day absences. Employers will also find it easier to track and manage entitlements, reducing disputes.
- Hours-based sick leave allocation
- Greater flexibility for employees
- Reduced payroll errors for employers
Impact on Casual and Part-Time Workers
One of the most significant improvements is the fairer treatment of casual and part-time employees. Under the Holidays Act 2003, many such workers were disadvantaged by complicated calculations or underpayment. The new system will allow leave to be accrued and taken more transparently, ensuring equitable treatment regardless of contract type.
This aligns with international labour standards and improves protections for vulnerable workers.
๐ How Does This Compare Internationally?
By adopting an hours-based system, New Zealand joins countries like Australia and Canada that already apply similar models. These systems are generally seen as fairer and easier to administer. Aligning with international standards could also enhance New Zealandโs reputation as an attractive destination for migrant workers and overseas businesses.
It also helps ensure compliance with global human rights and labour conventions, making the workplace more equitable.
Risks and Concerns Ahead
While the reform has been welcomed by unions and employer groups alike, challenges remain. Transitioning payroll systems will require significant updates, and businesses may incur costs in training and compliance. Employees will need to understand their new rights to avoid confusion.
Critics also warn that flexibility in cashing out leave could undermine work-life balance if not carefully managed. Employers will need clear policies to safeguard workersโ wellbeing.
Summary of Key Takeaways
- The Holidays Act 2003 will be replaced by the Employment Leave Act, expected in 2026.
- Annual leave and sick leave will now accrue on an hourly basis, improving fairness and flexibility.
- Part-time and casual workers will benefit from clearer entitlements.
- Employees can cash out up to 25% of unused annual leave each year.
- Businesses must prepare payroll systems and staff training for the transition.
FAQ: Employment Leave Act in New Zealand
Why is the Holidays Act being replaced?
It was overly complex, led to widespread payroll errors, and caused billions in back-pay corrections. The new Act aims to simplify entitlements.
When will the Employment Leave Act take effect?
The legislation is expected to pass in 2026, with a phased implementation timeline for employers to update systems.
How does the new system help part-time and casual workers?
Leave will accrue based on hours worked, ensuring fairer treatment and reducing underpayment risks for non-standard workers.
Can employees cash out unused leave?
Yes, workers will be allowed to cash out up to 25% of their unused annual leave each year, subject to employer agreement.
What do businesses need to do now?
Employers should begin reviewing payroll systems, training HR staff, and updating employment contracts to reflect the new requirements.