An employee starts work in July and asks for a week off over Christmas. Their payroll screen shows an “accrued” balance. Their manager approves the request. Is that week already earned, or is it annual holidays in advance?
Today, that question is answered under the Holidays Act 2003. From 6 August 2028, most employers will answer it under the Employment Leave Act 2026 (ELA). The difference is much more than changing a leave balance from weeks to hours.
We think this is one of the best scenarios for testing ELA readiness. It forces an organisation to connect its employment agreements, roster data, manager approvals, leave records, payment calculations and final pay. A system can produce a perfectly consistent number while still being fed the wrong definition of “accrued”.
Part one:
Annual holidays in advance under the Holidays Act 2003
When does the employee become entitled to annual holidays?
Section 16 of the Holidays Act gives an employee at least four weeks of paid annual holidays after 12 months of continuous employment, and after each subsequent 12 months. During the period before the anniversary, many payroll systems display an “accrued”, “estimated” or “available” figure. This is usually an administrative estimate of the next entitlement, rather than an annual holidays entitlement that has already arisen under the Act.
That distinction is easy to miss. A person six months into their first year may see a figure roughly equivalent to two weeks. It can help the employer decide whether to approve a request, but it does not mean the person has already become entitled to those two weeks of statutory annual holidays. The same issue can arise after an anniversary when the employee has exhausted their existing entitlement and the system shows an estimate building toward the next one.
Payroll should be able to distinguish three things: untaken holidays already entitled, holidays approved in advance of the next entitlement, and an indicative system accrual. They have different meanings at approval and at termination.
Does the employer have to approve annual holidays in advance?
No. Section 20 says the employer may allow the employee to take an agreed portion of their annual holidays entitlement in advance. The employee can request it; the employer decides whether to agree and how much to advance. A reasonable policy might set a normal limit or require a particular approval level, but the system's indicative accrued figure is not a statutory approval rule.
For example, a six-month employee may have an indicative balance of two weeks. The employer might agree to advance one week, decline a request for three weeks, or consider an exception. Limiting advances to the indicative amount is a practical way to manage exposure, not a legal maximum. Work patterns and pay can change, so even that limit does not eliminate risk.
The approval should say clearly that the specified portion is annual holidays in advance. A manager ticking “approved leave” without identifying the advance arrangement leaves payroll to infer what was agreed.
How must annual holidays in advance be paid?
Section 22 requires the employer to pay the greater of ordinary weekly pay at the beginning of the holiday and average weekly earnings. For a person employed for less than 12 months, average weekly earnings are calculated over their actual period of employment using the relevant whole or part weeks, rather than automatically dividing by 52.
Suppose ordinary weekly pay is $1,000 and the applicable average weekly earnings figure is $1,120. One week of annual holidays in advance is paid at $1,120. The fact that the employee has not reached their first anniversary does not allow payroll to default to the $1,000 weekly salary.
When the next entitlement anniversary arrives, the advance portion is accounted for against the entitlement. The $1,120 already paid is a historical payment for leave already taken; the employer does not calculate and pay the same week a second time merely because the anniversary has arrived. Accurate records need to show both the time taken and the amount paid at the time.
What if employment ends before the first anniversary?
Section 23 generally requires a holiday-pay calculation of 8% of gross earnings since employment began, less applicable payments already made for annual holidays in advance and any applicable pay-as-you-go holiday payments.
A simplified illustration shows the difference between accounting for an advance and recovering a debt:
- If the relevant gross earnings are $20,000, the starting 8% figure is $1,600.
- If $1,000 has already been paid for annual holidays in advance, the remaining holiday payment under this simplified calculation is $600.
- If $1,800 has already been paid in advance, the 8% calculation produces no additional holiday payment. The extra $200 does not automatically become a permitted deduction from wages.
The real calculation must use the correct statutory gross earnings and applicable payments. A negative leave balance is not, on its own, written authority to take money from salary, wages or other final-pay components. Any proposed further recovery must be assessed separately under the Wages Protection Act.
What if employment ends after an anniversary?
Two calculations may be needed. Under section 24, the employer pays any untaken entitled annual holidays at the greater of ordinary weekly pay at termination and the relevant average weekly earnings. Those holidays are treated as if taken immediately after the employee's last day, so payroll must also check for public holidays falling within the notional extended period.
Section 25 then addresses the incomplete year since the last entitlement anniversary: broadly, 8% of gross earnings for that period, less applicable annual holidays in advance payments and pay-as-you-go amounts. Section 26 affects what counts as gross earnings for that calculation, including payment for untaken entitled holidays under section 24.
A system that simply multiplies a displayed “accrued hours” balance by a current hourly rate can miss both calculations and the public holiday check. This is why final pay is such a revealing test of whether advance holidays were correctly classified in the first place.
Part two:
What changes under the Employment Leave Act 2026?
The ELA is law, but the Holidays Act remains the operative law until 6 August 2028 for most employers. The new rules cannot be applied early. The following explains what the process will need to do when the ELA applies.
1. An accrued balance becomes real, not merely indicative
Under ELA section 24, annual leave accrues at not less than 0.0769 hours for each eligible standard hour or part-hour. Accrual starts from the relevant hours rather than waiting for a four-week entitlement to appear on an anniversary. Section 29 separately allows the employer to approve annual leave before it has accrued.
Imagine the employee has 30 hours in their ELA annual leave balance and requests 40 hours of leave. The first 30 hours can draw from accrued leave. The other 10 hours require an advance decision. The absence may look like one week in the calendar, but it contains two different transactions in the leave record.
This reverses a common Holidays Act assumption. Under the current Act, a pre-anniversary “accrued” display is generally a forecast of a future entitlement. Under the ELA, the correctly calculated accrued annual leave balance is itself a statutory balance. Calling every pre-anniversary absence “leave in advance” would be wrong.
2. The source of the hours matters
The ELA distinguishes standard, additional and casual hours. Annual leave accrual is tied to qualifying standard hours. Additional and casual hours can be subject to leave compensation payment (LCP) rather than building the annual leave balance in the same way.
Suppose an employee works their standard hours plus frequent extra shifts. A manager may reasonably think the extra work has created more annual leave to take. That conclusion cannot be made from total hours alone. Payroll must first classify the hours correctly and determine the leave or LCP treatment that follows. If roster data mislabels additional hours as standard hours, a seemingly healthy annual leave balance could be overstated.
The advance-leave question is therefore downstream of the hours question: what did the employee actually accrue before the request was approved?
3. The holiday-pay rate is replaced by an ELA leave payment calculation
The Holidays Act section 22 comparison of ordinary weekly pay and average weekly earnings does not carry across as the ELA payment method. ELA sections 118 to 120 set out the relevant leave payment framework and hourly rate calculation. The employer needs to identify the leave hours and calculate the payment required when they are taken.
This is a specific system test, not a change of label. A leave transaction should show which hours were accrued, which were advanced, the rate used at the time and the payment produced. Where pay arrangements are more complex, the rate calculation must be tested against the actual agreement and pay data.
4. There is no simple anniversary “reset” for new ELA accrual
Under the Holidays Act, the next four-week entitlement anniversary is central to how an advance is applied. Under the ELA, leave accrues progressively. Payroll will need to track how later accrual affects a balance already reduced by advance leave and preserve the original approval and payment record. It should not simply create four new weeks on an anniversary or re-pay hours previously taken.
This is also why changing standard hours matters. The amount accrued depends on the qualifying hours, while the hours already taken remain part of the employee's history. The system should be able to explain the balance after a roster or agreement change, rather than silently rewriting the past.
5. Final pay and transitional balances must be handled separately
ELA section 123 deals with payment for remaining annual leave when employment ends. The old sections 23 to 26 and their incomplete-year 8% method should not be used as the calculation for new ELA annual leave. If leave was taken in advance and the balance is negative at departure, payroll must assess the leave position and any proposed recovery carefully; the negative number is not blanket authority to deduct from other wages under the Wages Protection Act.
The transition itself also matters. Schedule 1 contains rules for previous annual holidays, including how certain balances are converted into hours and recorded. An employee may therefore have a history of Holidays Act entitlements and advances as well as ELA accrual. Migration should retain enough detail to identify the origin and treatment of each balance. Combining everything into one unexplained “annual leave” number makes later questions much harder to answer.
What should an employer actually test?
Rather than asking whether the vendor's ELA module is ready, give the system and the payroll team the same employee story and compare their answers. At minimum, test:
- A new starter requesting Christmas leave before the first Holidays Act anniversary, and the equivalent scenario after ELA commencement.
- An employee with untaken entitled holidays, an indicative current-year accrual and a separate advance under the Holidays Act.
- An ELA employee with 30 accrued hours requesting 40 hours, with the 10-hour advance expressly approved.
- A change in standard hours after an advance has been taken.
- A mix of standard and additional hours feeding from a roster into payroll.
- Termination before the first anniversary, after an anniversary, and after transition, including cases where advance payments are less than or greater than the applicable holiday-pay amount.
For each test, inspect the agreement, hours classification, approval, balance, leave payment, leave record and final pay. Make someone explain the result without relying on the screen label alone.
Our view: annual holidays in advance are a small transaction with a long audit trail. Under the Holidays Act, the main trap is mistaking indicative accrual for an entitlement and letting the negative balance drive final pay. Under the ELA, the trap shifts to incorrectly classified hours, unclear boundaries between accrued and advanced leave, and a migration that loses the history. In both regimes, the software can calculate the wrong answer perfectly if the underlying decisions and data are wrong.
Premium Payroll Solutions helps employers test payroll rules against real employee scenarios, including leave balances, roster data, transition and final pay. If you are reviewing your current Holidays Act controls or planning for the ELA, we can help establish what each balance means before it becomes a payment problem.
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