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The Employment Leave Act 2026 has now received Royal assent, beginning the two-year transition away from the Holidays Act 2003. For the whole act itself, You could read the full contents from here below:
For many employers, this will feel like the end of a long and difficult chapter. The Holidays Act has been associated with wide spread uncertainty, costly remediation programmes and years of disagreement over how leave should be calculated for employees with changing or irregular working patterns.
A new, hours-based framework promises greater clarity. However, replacing the legislation does not automatically remove the conditions that caused so many payroll failures under the old Act.
This was the central issue explored in a recent discussion between BusinessNZ Policy Expert Paul Mackay, Premium Payroll Solutions Director Sue Hancock and Remediation and Data Manager Mike Pullar.
Between them, they brought decades of experience across employment relations policy, payroll operations, payroll remediation, data analysis and legislative interpretation. The discussion went beyond what the new Act says. It focused on the much harder question:
What happens if New Zealand introduces a new leave framework but relies on the same capability, systems, decision-making and governance practices that struggled to implement the previous one?
Was the Holidays Act always the real problem?
The Holidays Act is widely described as excessively complex. There is truth in that criticism, particularly when the legislation is applied to variable hours, allowances, bonuses, shift work and employment patterns that do not fit a conventional Monday-to-Friday working week. The Act had a tendencyto not be explicit in its requirements – with an over reliance oninterpretation. However, the legislation was only one part of the problem.
Many of the payroll failures identified through remediation did not begin with overly difficult formulas – the mathematics largely madesense. They originated with how organisations interpreted employment agreements, classified employees, configured their payroll system or how they passed payroll knowledge from one person to another.
Premium Payroll Solutions continues to see this pattern across organisations: payroll practitioners often learn from someone who learned from someone else. A particular interpretation or workaround is passed between employees and then carried from one organisation onto the next. Over time, the practice becomes accepted as “how payroll works”, even when nobody has returned to the legislation, the employment agreement or the original internal policy to validate it.
This phenomenon helps explain how two organisations, using the same payroll software, on similar sets of employees ,can produce two very different compliance outcomes. It also explains why simply replacing payroll software has frequently failed to resolve an organisation’s underlying payroll problems.
A system processes the rules, data and configurations it is given. It does not independently determine whether those rules are legally correct, contractually supported or appropriate for the employee’s actual working pattern.
For example, the often misunderstood history of Average Daily Pay (ADP) offers an important warning. Prior to its introduction in 2011,the Act only outlined Relevant Daily Pay (RDP). When it was introduced many employers saw this as an easier, calculatable rate, that could simply be universally assigned to your entire workforce. However, this ignored the fact that the Act clearly said ADP should only be applied when RDP cannot be determined. What should have been at the end of the decision-making process, in many cases became the default calculation for employers
The impacts of this are often subtle at the time – averages appear fair until they’re not. If someone is consistent, they appear a perfect fit –however if someone starts varying up shift lengths the logic begins to fail. On the other hand, assuming you can determine it, Relevant Daily Pay should always be a fair rate.
The issue was not that Average Daily Pay was inherently unreasonable. The problem was that, in practice, its apparent ease of calculation and configuration gradually allowed it to move from being the finalalternative to becoming the default approach.
PPS believes this history provides an important warning for the future implementation of the Employment Leave Act: operational convenience cannot replace an understanding of the legislation’s order of application and underlying policy intent.
Even if the new framework is clearer, it cannot prevent employers, payroll practitioners or software providers from instinctively selecting the approach that is easiest to configure, explain and process at scale. If decisions are driven primarily by system convenience rather than employees’ actual working patterns, employment agreements and the purpose of the legislation, New Zealand may repeat the same problems under a new framework.
Contracted hours and additional hours will become a critical decision
Under the new framework, qualifying additional and casual hours will receive a 12.5% Leave Compensation Payment rather than generating annual and sick leave accrual. This creates a significant connection between the employee’s employment agreement, their guaranteed hours, their actual working pattern and the eventual payroll outcome.
Consider an extreme example, where a variable employee is currently working around 20-40 hours each week. Not wanting to over-guarantee hours to the employee, an employer may consider changing that arrangement to minimum of 20 contracted hours, with the remaining 20 hours treated as additional hours and paid with the 12.5% Leave Compensation Payment (LCP).
The employee may receive more cash in each pay period for the additional hours, but they will accrue proportionately less annual and sick leave. On the employer’s end they reduce their leave liability while increasing immediate wage costs. The employee may also lose some security in their income and leave certainty – with it now only being associated with their guaranteed hours.
Whether the employee or employer is financially better off cannot be answered by looking simply at the 12.5% payment. Their overall employment needs to be taken into account, with the value of the lowered leave accrual, reduced income security vs employee flexibility and the volume (excess/shortage) of additional hours that will be offered all being important factors. The current setup of the LCP essentially values leave taken vs leave compensated for asessentially equal. In reality, different parties value these different aspectsunequally. With employment contract and agreed upon rosters take a more centralrole in the future legislation, negotiation here will become far moreprominent.
There is also a more fundamental question.
If an employee regularly works 40 hours every week, is itreally appropriate to describe only 20 of those hours as contracted and the remainder as additional? And for how long?
The Employment Leave Act may create different treatment for categories for notional rosters, but employers still need to apply those categories in good faith and in a manner that reflects the reality of the employment relationship. There are provisions made in the legislation for the Labour Inspectorate to step in when things get out of hand – but how far will things have to pushed before this happens? Will this be actively monitored by businesses and government? Or will it – much like the historic Holidays Act issues – be dependent on employees first taking the initiative to complain?
This is why businesses, alongside their employees, need to geta handle on how things will work before the legislation changes over. Before the transition, almost every employment agreement in New Zealand is going to need to be updated. Employers need to truly understand not only whether a particular calculation can actually be processed by their payroll system, but how it affects employee remuneration, leave entitlements, employment certainty, retention, workforce flexibility and total employment cost.
PPS and Business NZ agree that the communication between government organisations and businesses needs to be far better this time around. The better the legislation is explained, and the better that employer expectations are outlined, the fewer issues we’ll have down the line. There appears to be some promising work coming in this area – including from government itself. Both of our organisations are committed to doing everything we can to ensure the transition is as smooth as possible.
The notional roster could support fairness, but only if employers understand it
A good part of the workforce is always going to have variability in their work patterns. The Holidays Act compensated for this variability by modifying the leave rates, while the Employment Leave Bill instead hopes to better determine the employees’ standard hours, in order to pay a flat rate. In essence, how a week is defined is far more important to the new legislation than it ever was before.
A properly designed notional roster setup, where an employee’s work pattern is allowed to regularly change, would likely be the best solution for variable workers under the new Act. Being flexible in nature, this should allow employers to better reflect the employee’s genuine working arrangement at any given time. Far more so than a simple contract that guarantees only minimum hours and treats all other work as additional.
However, a notional roster is almost definitely going to require more work. Accurate records and logging of mutual agreements, as well as greater operational discipline and a clearer understanding of how employees actually work will be essential. All of that makes this a potentially a less attractive solution than a simpler system configuration – particularly as far as payroll software vendors are concerned. This is where implementation quality and standards will matter. If employers and software providers consistently move towards the easiest method, the temptation will be to overlook the more representative and fairer options.
The risk is not necessarily that employers will deliberatelyseek to reduce employee entitlements. Most employers want to comply and treat their people fairly. The greater risk is that they will adopt a model withoutfully understanding its consequences, simply because it appeared to be the easiestsolution at the time. This is essentially how all the historical Holidays Act problems began.
The new Act may turn payroll problems into contract problems
Many existing employment agreements provide for specific leave entitlements that may be more generous than the minimum position underthe new Act. Those that don’t often still mention the Holidays Act as the methodology of calculation. The nature of the Employment Leave Bill is that itattempts to offer up outright minimum requirements on leave rather than tryingto replicate the Holidays Act’s continuity of pay basis. This means for thevast majority of employees, the new legislation is at best equivalent, and inmany cases less advantageous than the Holidays Act. Only a few very nichescenarios (e.g. after Parental Leave) provide for increased entitlements.
Contracted entitlements that are in excess of the new legislation do not just disappear when the legislation changes. If they form part of the employment agreement, the employer may remain legally required to provide them unless the agreement is lawfully varied.
In an ideal world, employers will begin new contract negotiations as soon as possible in anticipation of these issues. In reality, this is going to be the single most difficult step in the implementation of the new laws. Without the carrot of increased leave entitlements to offer employees, we predict there will be some genuine difficulties reaching agreements –particularly where collective bargaining is involved. The result of this will be some employers having to operate and maintain two leave frame works simultaneously.
Some employees will want to retain historical orgrandfathered entitlements, while others move onto arrangements based on the new legislation. Payroll systems will not only need to distinguish between the differentgroups, they will need to correctly determine the correct minimum entitlements for both of the different methods of leave calculation.
For organisations with long-serving employees, collective agreements or historically generous leave provisions, this could become extremely complex. A law intended to simplify statutory leave calculations may therefore create a new layer of contractual complexity if employers do not begin reviewing agreements early. A collective agreement negotiated today may still be operating when the new Act takes effect. Two years may sound generous when viewed as a software implementation period. It is much shorter when viewed through the lifecycle of employment contracts, collective bargaining, consultation, system design, testing and workforce change.
Existing leave balances could become a cash-flow and productivity issue
The transition is not only about future leave. Leavebalances that employees have now also transition into the new system.
Some employers already carry substantial leave balances,including balances created or increased through historical remediation. Thosebalances represent both a financial liability as well as actual time thatemployees may be entitled to take away from work.
As the transition date approaches, employees may pay closer attention to the value and treatment of their existing entitlements. For any employee who works variable hours, large amounts of overtime, or who earn a large proportion of their leave from allowances or commissions – there will be a clear incentive to take the leave before the law changes. The rate calculations that the Holidays Act implements will be far higher than the base rate they would be paid should they let the leave transition into the new legislation. It will be in many employee’s interest to empty their balances out as much as possible over the next two years. We expect employers will see increased requests to take or cash up leave before the new system commences.
For organisations with large accumulated balances, the impact could be significant. Not only would a rapid uptake in leave usage create immediate cash-flow pressure. A concentration of employees taking leave concurrently could create workforce capacity and productivity challenges. In sectors already experiencing staffing shortages, the operational effect may be just asimportant as the accounting liability.
Employers that begin reviewing balances now will have more opportunity to validate the data, understand the financial exposure and manage leave in a planned way. Those that wait until the end of the transition may discover that the legal, financial and operational issues all need to be addressed at the same time.
Payroll software cannot carry the employer’s responsibility
Software providers will play a critical role in the transition, but employers need to understand where a vendor’s responsibility ends.
A payroll vendor may be able to say that its system is capable of processing the Employment Leave Act. That does not mean the employer’s individual configuration, employee classifications, employment agreements, payroll inputs or operating processes are compliant.
Software cannot decide whether an allowance has been correctly designed. It cannot determine whether guaranteed hours reflect the employee’s actual work. It will not be able to determine the most effective ways to structure your contracts. Most importantly, software cannot take over the accountability of directors and employers.
Employers need to know what to ask of their vendors. They need to understand how the system will distinguish different categories of hours, how historical balances will be managed, what daily-level of information must be retained and how the organisation will test the system against real employment scenarios.
A vendor saying “compliance remains the employer’s responsibility” may be legally accurate, but that statement does not help an employer understand what must be configured, tested and governed.
This is where payroll assurance becomes essential. The question is not simply whether the software contains the new calculations. The question is whether the entire arrangement, from the employment agreement through to the payslip, produces the intended and compliant outcome.
New legislation cannot compensate for missing payroll capability
Payroll is often positioned as an administrative function, but competent payroll practice requires a difficult combination of employment law, mathematics, logic, critical thinking, data, technology, tax, finance and operational knowledge.
Despite this complexity, there is no single form a professional pathway that consistently prepares people for every aspect of the role. Much of New Zealand’s payroll knowledge continues to be learned on the job.
That does not mean payroll practitioners are always the problem. It means organisations often place enormous legal and financial responsibility on individuals without providing the education, governance, documentation or independent support they need. The Employment Leave Act does not remove this capability gap.
If payroll professionals, HR teams, managers and vendors do not understand why a particular treatment applies, they may continue to rely on inherited practices and system defaults. The calculations may be new, but the decision-making weaknesses will remain.
A successful transition therefore requires more than technical training on new system fields. Employers need to strengthen payroll overnance, clarify decision ownership, document interpretations and ensure that payroll, HR, finance, legal and operations are working from the same understanding. Currently, everyone only really understands the new legislation at a surface level. As we delve deeper into the actual configurations required and the real scenarios that will play out, we will continue to develop our understanding. Shortcomings, blind spots and loopholes will exist in the legislation – it’s important we encourage employers not to try and exploitthem.
AI may increase access to information, but not necessarily to the right knowledge
AI may increase access to information, but not necessarily to the right knowledge
Smaller employers that cannot afford specialist support may increasingly turn to AI for guidance.
AI can be very useful for summarising legislation, drafting procedures and helping users locate information. Especially so as legislation is not easy reading. However, it can only know as much as the source material it was trained upon. It is prone to hallucinate information, mixing and matching ideas from different sources that aren’t necessarily factual. It also tends to confirm our biases
Much of New Zealand’s historical employment framework, including older award-based arrangements, existed well before the world was computerised. This means a lot of history has not been comprehensively digitized, let alone ingested into AI models. AI may therefore answer a payroll question withoutaccess to the historical context that explains why a particular entitlement or practice exists.
It can provide overly confident answers to a questions thatrequires detailed understanding of not just an individual’s unique employmentagreement, but their real working pattern and their configuration within the payrollsystem. The danger is not simply that AI can be wrong. It is that the personusing it may not have prompted it with enough detail tot truly get an accurateanswer. AI will very rarely say that it doesn’t know something or that it can’tanswer – it’s designed to be helpful after all.
While we definitely think that AI can help support payrollprofessionals, it cannot replace professional judgement, legislativeinterpretation or governance. Ultimately, as good as it can be, it can’t beheld accountable when things go wrong. Employers should be especially cautious ingeneral when using any online information to make decisions that changeemployee entitlements or contractual terms.
The real opportunity of the two-year transition
The two-year transition should not be treated as a count down to a software deadline. It is an opportunity for employers to examine how their employment agreements, workforce models, payroll data, systems and governance currently work together. Before changing anything, employers should ask what would happen if the new Act were applied to their workforce today.
Would existing agreements support the new framework? Which employees would receive mostly leave accrual and how dependent on Leave Compensation Payments will your organization be? Would a notional roster better reflect the way variable employees work? Which contractual benefits would need to be preserved? What extra data do you need to collect in payroll compared tonow? Could the payroll system operate multiple entitlement methodologies ifrequired? What will happen to existing leave balances? How would each optionaffect employee earnings and total employment cost?
These questions cannot be answered by payroll, HR, finance,legal advisers or software vendors working independently. They require anintegrated workforce and payroll assessment.
Changing the law is only the beginning
The Employment Leave Act has the potential to create aclearer leave framework. The success of the reform will depend on how employersinterpret, design, configure and govern it. There are many issues thatemployers still need to learn to navigate, and that still require additional legislativeclarification.
If organisations treat the transition as a simple softwareupdate, they may carry the same weaknesses into the new system. If theyredesign contracts around the easiest calculation without modelling theconsequences, they may create new employment and cost risks. If they rely oninherited knowledge without validation, they may repeat the same cycle thatproduced years of Holidays Act remediation.
The legislation has changed. The people, contracts, systems and decision-making structures responsible for implementing it have not automatically changed with-it. That is where the real work must begin.
Premium Payroll Solutions will be working on supporting employers through Employment Leave Act impact assessments, workforce cost modelling, employment agreement analysis in collaboration with legal advisers, payroll data reviews, system-readiness assessments, implementation testing and independent payroll assurance. We know already that we have a lot to learn – so let us share our knowledge with you.
If you want to understand how the new legislation could affect your employees, payroll operations and employment costs, talk to us before changing your contracts or configuring your system.
Do not simply prepare your software for the new Act. Prepare your organisation.
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About Premium Payroll Solutions:
Premium Payroll Solutions is a New Zealand-owned payroll consultancy specialising in payroll governance, payroll assurance, payroll transformation and managed payroll services.
With decades of combined payroll leadership experience, our team has supported organisations across New Zealand in strengthening payroll compliance, managing complex payroll transformation programmes and delivering some of the country's most challenging payroll remediation projects.
We believe payroll is far more than an administrative function. It is a critical business capability that directly influences organisational governance, employee trust and compliance outcomes. Our approach combines experienced payroll professionals, robust governance frameworks and practical operational expertise to help organisations build payroll functions that are accurate, resilient and future-ready.
As technology continues to reshape the workplace, we help organisations adopt innovation—including AI—responsibly, ensuring efficiency is achieved without compromising payroll compliance or governance.
Learn more about our Payroll Governance, Payroll Assurance and Managed Payroll Services, or contact our team to discuss how we can support your organisation.
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