Reviewed by Chris Mar, August 2026. Last updated September 2026.

This page is general information about a law change, not legal advice. Your own employment agreements and circumstances will affect how the new rules apply to you — if you are unsure, talk to your employment adviser.

The Employment Leave Act 2026 has passed into law and will replace the Holidays Act 2003. It changes how annual leave and sick leave are earned, how leave is paid, and how leave balances are recorded. The main rules come into force on 6 August 2028, and nothing changes in your pay runs before then.

The short answer to "what should I do?" is on this page in section 8, and it is not about software. It is about making sure the records you already hold — employment agreements, contracted hours, employee classifications — are accurate, because every calculation under the new Act reads from them.

The short version

• Leave will be measured in hours, not weeks or days. Annual leave and sick leave will build up in proportion to each employee's standard hours.
• Annual leave and sick leave accrue from the start of employment for employees with standard hours. Casual hours and additional hours are treated differently: they attract the Leave Compensation Payment rather than annual and sick leave accrual.
• Leave is paid using a statutory hourly-rate framework, rather than the Holidays Act's average weekly earnings / ordinary weekly pay comparison. The Act still has specific rules for fixed allowances, piece work, and minimum wage floors.
• Casual and additional hours will attract a Leave Compensation Payment of 12.5% instead of accruing annual and sick leave on those hours. This replaces the current 8% pay-as-you-go holiday pay model for casual employees.
• Existing leave balances will be converted from weeks and days into hours when the new rules commence, with different transitional treatment for employees who work casual hours.
• There is a two-year implementation period before the main rules take effect.

In hours, from the start of employment, in proportion to the employee's standard hours.

Under the Holidays Act 2003, an employee becomes entitled to four weeks of annual leave after twelve months, and ten days of sick leave after six months. Under the Employment Leave Act, annual leave and sick leave accrue in hours against every standard hour, or part of a standard hour.

The entitlement is not shrinking. For a full-time employee, 160 hours of annual leave is the same four weeks they get today, counted in a different unit. The change is in how it is measured and when it starts, not in how much it is.

For part-time and variable-hours employees the change is more meaningful, because leave now builds in direct proportion to standard hours rather than being worked back from a notional week.

Annual leave and sick leave do not accrue on casual hours or additional hours. They also do not accrue on unpaid leave, ACC periods, and certain leave or absence hours where the employee and employer agree that accrual does not apply. If an employee is receiving accident compensation, they can still accrue leave on standard hours they work, or on paid leave they take to top up ACC.

A payment of 12.5% of ordinary hourly rate, made on casual and additional hours as they are worked, instead of annual and sick leave accruing on those hours.

This is the biggest structural change in the Act, and the one most likely to prompt questions from your team.

Today, casual employees typically receive 8% of their gross earnings as pay-as-you-go holiday pay. Under the new Act, that becomes a Leave Compensation Payment of 12.5% of ordinary hourly rate, and it appears as its own line rather than being folded into the hourly rate.

It applies to two kinds of hours:

• Casual hours — where an employee has no standard hours at all, every hour attracts the payment.
• Additional hours — hours worked above an employee's standard hours, where those hours meet the Act's definition of additional hours.

Extra hours are not automatically LCP hours. If an employee's agreement provides that extra hours are covered by salary and no additional payment is due, those hours may sit outside the additional-hours LCP treatment.

What this means in practice: many casual employees may see a higher separate leave-related payment than under the current 8% pay-as-you-go model. The exact impact depends on the employee's rate structure, because the LCP is calculated on ordinary hourly rate, not necessarily every component of pay.

Using a statutory hourly-rate framework, rather than the Holidays Act's average weekly earnings / ordinary weekly pay comparison.

Most Holidays Act compliance problems came from a single source: employers having to calculate leave two ways — average weekly earnings and ordinary weekly pay — and pay the greater of the two. That comparison disappears.

Under the Employment Leave Act, leave payment is calculated using the Act's hourly-rate rules. In many cases this should be simpler, but the Act still has specific rules for fixed allowances, piece work, and minimum wage floors.

For leave payments, the Act uses an hourly rate based on the lowest hourly rate payable for the shift leave is taken and requires employers to continue paying fixed allowances where the allowance would be paid regardless of the employee being on leave. Variable or conditional allowances are treated differently and should be checked against the Act's definitions.

They will be converted from weeks and days into hours when the new rules commence, with transitional rules for different employee types.

Every balance you currently hold — annual leave, sick leave, alternative holidays — will be translated into hours at the point the Act takes effect. This is a one-off conversion, and it will be done using whatever is recorded in your payroll system on that day.

This is the single most important reason to keep your records accurate between now and then. A conversion is only as good as the data going into it, and errors introduced at conversion are difficult to unpick afterwards.

For employees who work standard hours, previous annual holidays, sick leave and alternative holidays convert to hours under the Act's transitional rules. Employees who work casual hours are treated differently, so their position should be checked against the transitional provisions.

Bereavement leave and family violence leave from day one. Both become available from an employee's start date, and both can be taken in part-days.

Annual leave cash-up. Employees will be able to request to cash up to 25% of their annual leave balance each year, calculated against their balance as at the end of the day before their start date anniversary.

A remediation framework. The Act includes a formal process allowing employers to resolve outstanding Holidays Act underpayment liabilities as part of the transition. If you have a known historic issue, this is the mechanism for settling it.

Public holidays. For employees without a fixed day pattern, the Act uses a 13-week test: a public holiday is generally an otherwise working day if the employee worked, or was on paid or unpaid leave, for 50% or more of the corresponding weekdays in the relevant 13-week period. Alternative leave accrues in hours for public holiday work, generally one hour for each hour worked, subject to the Act's maximums.

Pay statements and leave records. Employers must keep detailed leave records and provide a pay statement for each pay period. These records include hours worked, itemised payments, LCP hours and amounts, leave balances, accruals, leave taken, and relevant public holiday and alternative leave information.

Closedowns. Employers will still be able to have an annual closedown, but they must give employees at least 21 days’ written notice—up from 14 days today. The notice must set out the dates, the leave employees will be required to take, and any other available leave arrangements. An employer may require accrued annual leave to be used and, if available leave is insufficient, may require unpaid leave.  The requirement to pay an employee who is not yet entitled to annual leave at the start of an annual closedown 8% of their gross earnings since the start of employment (or the last annual leave entitlement date) will not be necessary and will instead be paid according to normal leave payment rules.

No. The change lands differently depending on how people are employed, which is why getting your classifications right matters more than it might appear.

The Act passed into law on 6 August 2026. The new rules take effect on 6 August 2028. That gap is deliberate: employers, payroll providers and payroll software all need time to prepare.

A small number of provisions relating to the remediation process commence earlier.

In the meantime, nothing changes in how you run payroll today. Your obligations under the Holidays Act continue until the new rules commence.

This section is Smartly's recommendation, not a statement of the law. Everything above describes what the Act does; what follows is what we think is worth doing with the time available.

The new calculations will all read from your employee records. Accrual is based on standard hours. Whether someone accrues leave or receives the Leave Compensation Payment depends on how they are classified and how their hours are treated. And your existing balances convert using whatever is in your system on the day.

Which means the most useful thing you can do between now and then has nothing to do with new software. It is making sure the records you already hold are accurate, and keeping them that way.

None of this is work the Act invented. It is the work most businesses have been meaning to get to anyway. What changes is that it stops being tidy-up and becomes the input to a calculation.

We have been close to this reform since it was first proposed. We partnered with the EMA on their Holidays Act reform roadshow, taking the detail to employers at events around the upper North Island, and we are following MBIE's guidance for payroll providers as it is developed. That guidance is expected from late this year into early next, and it will shape what we build.

We will be working in the background to get Smartly ready and we will keep you informed along the way.

Whether you’re preparing for the Employment Leave Act or simply want an easier way to manage payroll, we’re here to help.

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Already with Smartly? Contact our team if you have questions about what’s ahead.