Ask anyone who has wrestled with holiday pay and they will tell you the hardest part is the amount of decisions. The current Holidays Act 2003 relies on a tangle of calculations, average weekly earnings, ordinary weekly pay, relevant daily pay and average daily pay, and endless comparisons between them. It is a big reason the current system trips so many employers up.

The Employment Leave Bill takes a very different approach. Here is what will change about how leave is paid, and the new payment employers will need to know about.

Quick reminder before we dive in: this is proposed legislation, expected to come into force around 2028. Until then, the current Holidays Act rules still apply.

One hourly leave rate, for every leave type

The headline change is simple. A single hourly leave rate will replace the current mix of calculations, and it will be used for every leave type: annual leave, sick leave, bereavement leave, family violence leave, non-worked public holidays and alternative leave.

How that rate is set will depend on how someone is paid. For a waged employee, it will be the lowest hourly rate payable under their agreement for the day the leave is taken. For a salaried employee, it will be the salary attributable to one standard hour of work. There are specific rules for averaged salary employees, piece rate workers and commission earners too, and a minimum wage floor so no one paid by piece work or commission ends up short.

Allowances get a common sense treatment. "Fixed" allowances, the ones that do not vary and that you are required to pay, will keep being paid in full during leave, on top of the leave rate. Allowances that only cover an expense someone incurs while actually working, like a mileage allowance, will not.

The upshot for employers: far fewer calculations, far fewer comparisons, and far less room for the kind of error that leads to remediation down the track.

The new Leave Compensation Payment (LCP)

The Bill also introduces a brand-new payment. For each casual hour, and each additional hour a permanent employee picks up on top of their standard hours, employers will pay a Leave Compensation Payment (LCP) of 12.5% of the employee's ordinary hourly rate, instead of that hour accruing annual and sick leave.

A few things worth knowing:

• It will be paid in the same pay period the hours are worked, and shown as its own separate line on the employee's pay statement and records.
• It stacks on top of other pay. If someone earns $30 per hour and is paid $60 for an overtime hour, they will still get that $60 plus a separate LCP of $3.75 (12.5% of $30).
• It applies to the ordinary hourly rate only, not commission, allowances or penal rates, with a minimum wage floor for lower earners.

In plain terms, casual and extra work will turn into a little more money now, and things like the minimum hours tests for sick leave entitlements for casuals can go away. 

A better deal for returning parents

Under the current rules, someone who takes annual leave soon after returning from parental leave can be paid at a very low rate, because of an override that uses their average earnings from a period when they were not really earning. The Bill removes that override. Annual leave taken after returning from parental leave will be paid like leave taken at any other time, and employees will keep accruing leave while they are on parental leave. Fairer all round.

We’ve spoken to Stuff previously about this: https://www.stuff.co.nz/money/350434576/parental-leave-quirk-could-catch-you-out 

What should employers do now?

No immediate action is required, because the current rules still apply until the new Act comes into force. The best preparation is making sure your pay information is accurate and up to date, since the new leave rate leans on getting an employee's hours and pay rates right. It is also worth getting familiar with how the LCP will work, because casual and additional hours will be treated quite differently from how they are today. We go through all of this in far more detail, including the rules for salaried, piece rate and commission workers, in our help centre.

More to come

This is very much a picture that will keep filling in. MBIE has said it will roll out further guidance and resources over the transition period, including technical guidance for payroll providers, which means more detail will land steadily between now and when the new rules take effect.

We will keep this content up to date as things firm up, and share more as we go, so you can expect the detail to arrive in manageable pieces rather than all at once right before the deadline. That is the job of a good payroll provider: to stay across every change and get the systems ready behind the scenes, so you are supported through the transition instead of left to decode legislation on your own.

Want to go deeper?

For the full detail, head to our Employment Leave Bill help centre. It covers the leave rate for every type of worker, the LCP, allowances, cashing up and more.

And if you are a PaySauce customer, you can go one better. Use the chat feature inside PaySauce to ask anything you like about the new leave rules. Just make it clear you are asking about the new leave entitlements or the Employment Leave Bill (for example, "how will holiday pay be calculated under the new leave rules?"), and you will get answers drawn specifically from our dedicated guidance on the changes, rather than the current rules. Ask away, that is what it is there for.

Leave payments FAQs

What is replacing the current holiday pay calculations?
A single hourly leave rate will replace average weekly earnings, ordinary weekly pay, relevant daily pay and average daily pay. The same rate will be used for all leave types, from annual leave to public holidays.

What is the Leave Compensation Payment (LCP)?
The LCP is a payment of 12.5% of an employee's ordinary hourly rate, paid on casual and additional hours instead of those hours accruing annual and sick leave. It is paid each pay period and shown as a separate component of pay.

Will fixed allowances still be paid during leave?
Yes. Fixed allowances, the ones you are required to pay that do not vary in value, will continue to be paid in full during leave, on top of the leave hourly rate. Allowances that only reimburse an expense incurred while working will not.

When will these changes take effect?
The Bill is expected to come into force around 2028, following a 24 month period after Royal assent. The current Holidays Act 2003 applies until then.