New Zealand employers have time to prepare for the Employment Leave Act 2026. The decisions they make during that period will determine whether the transition produces dependable payroll outcomes or carries unresolved problems into a new system.
The headline changes are substantial: annual and sick leave will accrue in hours from day one, additional and casual hours will attract leave compensation payments, and leave payment rules will change. But an employer cannot implement those changes accurately without understanding its workforce, employment agreements and payroll data.
Premium Payroll Solutions’ view is that Employment Leave Act readiness should be judged by evidence of correct employee outcomes. A software release date, a completed configuration checklist or a successful payroll run cannot provide that evidence on its own.
This article explains the main changes and the practical questions employers should resolve before implementation.
When does the Employment Leave Act start?
The Employment Leave Act received Royal assent on 6 August 2026. It will replace the Holidays Act on 6 August 2028. For existing employees, the new rules apply from the beginning of their first pay period starting on or after that date. Employers cannot adopt the new rules early and must continue complying with the Holidays Act until the new rules apply. [1]
That distinction matters when planning a payroll cutover. The project needs to identify the relevant pay periods for each payroll group, rather than assume every employee moves to the new calculation rules on the same processing date.
What changes under the Employment Leave Act?
The following is a summary of selected changes, rather than a complete statement of every entitlement or exception.
The operational consequence is that employers need reliable information about hours and remuneration before payroll can apply the new rules reliably.
Start with the hours, before choosing the calculation
Under the new framework, standard, additional and casual hours have different consequences for leave. Standard hours broadly concern hours the employee may be required to work and the employer must pay for, excluding availability provisions. Additional hours involve work beyond standard hours for which an additional payment must be made. Casual hours concern arrangements where neither offering nor accepting work is required. [1]
Those categories need to be established from the applicable rules and the employment arrangement. A pay code called “overtime” or an employee record labelled “casual” is not sufficient evidence of the correct classification.
Consider an illustrative employee whose agreement refers to 30 hours a week but whose roster regularly shows 38. Before configuring the extra eight hours, the employer should investigate what the agreement requires, whether it has been varied, what the employer must make available, and how the work is paid.
That investigation may involve HR, payroll, operational managers and employment advisers. Payroll should not be left to infer contractual obligations from a timesheet.
PPS recommends documenting each workforce group’s hours classification, the evidence supporting it, and who approved the decision. This creates a basis for configuration and a reference when an employee’s working arrangement changes.
Why 12.5% LCP needs more than a new pay code
Leave Compensation Payment, or LCP, will apply to additional and casual hours in place of annual and sick leave accrual on those hours. MBIE identifies a rate of 12.5%. [1]
For employers, the practical work includes identifying the qualifying hours and applying the statutory payment basis correctly. It also includes explaining the payment so employees can understand why some hours build a leave balance and others generate compensation.
An implementation should be tested for several possible errors: qualifying hours missed by an interface, LCP applied to the wrong earnings basis, leave accrued on the same hours incorrectly, or a change of working arrangement that fails to update the calculation.
These are useful test cases because a system can produce a plausible total while applying the wrong rule to part of an employee’s work.
A finance team also needs a workforce-level cost model. A single percentage applied to total wages will not reveal which groups experience changes in leave accrual, compensation payments or operational availability. Model the different employment arrangements separately, then reconcile the results to an overall view.
Treat leave balance conversion as a decision that needs evidence
The Act includes specific transitional provisions for previous annual holidays, sick leave and alternative holidays. The annual holiday conversion provisions distinguish different types of previous entitlement. [2][3]
For project planning, this means “convert everything to hours” is an incomplete instruction.
Before migration, an employer should establish what each recorded balance represents, which conversion rule applies and whether the source record is dependable. A number displayed in the current system may be a convenience for administration rather than a complete explanation of the underlying entitlement.
Take an illustrative employee whose weekly hours have changed several times. The right project question is not simply which multiplier to use. It is whether the employer has the employment history and entitlement information needed to apply the relevant transitional rule.
PPS recommends keeping a conversion record for each employee: the original balance, its source, the rule applied, relevant inputs, the converted result and any unresolved exception. This makes it possible to explain the opening balance later without reconstructing the entire migration.
Software testing needs an independently established expected result
When a payroll system processes a run without an error message, that establishes that it processed the data. It does not establish that the employee’s entitlement is correct.
The strongest tests begin with a representative employment scenario and a documented expected result. The system output is then compared with that result.
Employers should build their test cases around their own workforce. Useful cases may include:
- A worker with standard hours who also works separately paid additional hours.
- A part-time employee whose working hours change.
- A casual employee who moves into a different employment arrangement.
- An employee returning from parental leave.
- A worker with multiple rates or allowances.
- An employee taking part of a rostered shift as leave.
- A public holiday affecting a variable roster.
- An employee leaving shortly after the transition.
These examples identify areas to investigate; the expected result must reflect the actual agreement, applicable provisions and relevant exceptions.
Check more than net pay. Examine accrual, deductions, compensation payments, opening and closing balances, employee records, integration outputs and finance postings.
A parallel run can expose differences between systems. Those differences still need interpretation: under a changed legal framework, matching the old system is not necessarily the right outcome.
PPS’s recommended acceptance standard is that each material difference has an explanation, supporting evidence and an approved resolution.
Keep historical Holidays Act obligations visible
The change in legislation does not remove an employer’s obligation to address historical underpayments under the Holidays Act. MBIE explicitly confirms that those obligations continue. [1]
An employer should therefore keep a clear connection between its remediation work and transition planning. For example, corrected employment history may affect the reliability of migration inputs. A remediation finding may also reveal an interface or process issue that needs to be fixed before implementation.
Our recommendation is to record unresolved historical issues alongside the transition plan, with an owner and a decision about their effect on migration. Copying a disputed balance into a new platform does not resolve the dispute.
How PPS recommends organising the transition
Premium Payroll Solutions provides payroll advisory, data and remediation services, and managed payroll support in New Zealand. Our Employment Leave Readiness Framework follows six stages: Discover, Assess, Design, Prepare, Test and Assure. [4][5]
For employers applying that framework, the following deliverables make progress assessable:
The evidence should be proportionate to the organisation. A small employer may have a short decision register and a focused test set. A large employer with collective agreements, multiple roles and complex rosters will need greater depth.
Either way, the project should leave the employer able to answer a practical question: “Can we explain how this employee’s leave was earned, taken and paid?”
Frequently asked questions about Employment Leave Act readiness
Can employers use the new leave rules before August 2028?
No. Employers must follow the Holidays Act until the new rules apply. Preparatory work can begin now, including agreement reviews, data checks, system planning and testing.
Will a payroll software update be enough?
A software update is one part of implementation. PPS recommends separately checking the inputs, employment arrangements, configuration, integrations and employee outcomes. The software cannot settle an unresolved question about what an employment agreement requires.
Should every employer replace its payroll system?
PPS recommends assessing the current system before deciding. Ask the provider what it will support, when it will be available and how it can be tested against your workforce. A replacement decision should follow evidence about capability and business requirements.
Where should an employer start?
Identify the workforce groups and compare their agreements with actual working arrangements. Then assess the quality of hours, earnings and leave records. This gives the system project a more dependable starting point.
How can Premium Payroll Solutions help?
Premium Payroll Solutions supports Employment Leave Act readiness through its six-stage framework, including assessment of agreements and payroll data, preparation, scenario testing and implementation assurance. Employers can request a review through the PPS Employment Leave Act readiness page. [4]
Get an evidence-based view of your payroll readiness
Start with a review of how the reform affects your workforce and the information your payroll relies on. That review should identify what can proceed, what needs a decision and what must be corrected before implementation.
Explore Employment Leave Act readiness with Premium Payroll Solutions, or contact PPS to discuss your organisation’s circumstances.
Sources
- MBIE — Holidays Act reform: Employment Leave Act. Current overview, including links to the Explainer and Technical FAQ.
- Employment Leave Act 2026. Including annual and sick leave accrual provisions and Schedule 1 transitional provisions.
- Schedule 1, clause 12 — Converting previous annual holidays to annual leave hours.
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