Workplace Relations and Safety Minister Brooke van Velden has today announced that the outdated and complex Holidays Act 2003 will be repealed and replaced with a new Employment Leave Act. The new Act will completely overhaul the current regime, with the most fundamental changes being a move to leave accrual in hours rather than days and weeks, and a single simple calculation for all types of leave.

These are changes that Simpson Grierson has long been advocating for. While such large-scale change will inevitably come with some upfront challenges, we are hopeful that the new Act will ultimately bring some much needed simplicity and clarity for employers and employees.

What’s wrong with the current legislation?

A repeal of the Holidays Act has been overwhelmingly the top priority for our employer clients in our last four pre-election surveys.

The current Act poses challenges for both employers and employees. Employers frequently find it difficult to interpret and implement the Act properly, while employees are often unclear about their entitlements. Its provisions are complex, challenging to adapt to various working arrangements, and difficult to integrate into payroll systems. As a result, non-compliance is widespread, leading to substantial remediation costs across both the public and private sectors.

Key changes under the proposed Employment Leave Act

Annual leave based on hours worked: Employees will earn (and be able to take) leave from day one, directly in proportion to the hours they work. This contrasts with the current Act, which provides that employees’ annual leave entitlements do not crystallise until they have completed 12 months’ employment. Annual leave will accrue at a fixed rate per contracted hour, which should make it much simpler to calculate.

Sick leave based on hours worked: Sick leave will also accrue from day one, in proportion to hours worked. Sick leave accrual will still be subject to a cap at a rate equivalent to the status quo (which is 20 days). Employees will have the ability to take leave in hours rather than full days.

Payment for leave: A simplified hourly leave pay rate will be used for all types of leave (gone will be the days of OWP v AWP and RDP v ADP). In what is likely to be one of the more contentious changes, it is proposed that payment will reflect salary and wages, but will not include variable components of pay such as bonuses, commission payments, or variable allowances. Our experience is that holiday pay on bonuses has been inconsistently applied or understood and so this change would be appropriate. However, holiday pay could be significantly less for some employees that we see on arrangements like minimum wage with substantial commission arrangements.

Leave during unworked periods: Annual and sick leave will accrue during paid leave, parental leave, jury duty, and volunteer leave. It will not accrue when an employee is on unpaid leave or receiving accident compensation. Currently annual leave accrues while employees are on ACC and the Minister has taken into account feedback that this can result in a significant financial liability, particularly for small employers, if an employee is off work for a long period of time.

Changes in work hours: Leave balances will reflect hours worked, rather than scaling automatically when work patterns change. This contrasts with the current position, whereby leave balances need to be amended up or down when employees change their working hours. This is an aspect of the current Act which is complex and difficult to get right.

Using leave: Employees will be able to take leave in hours (annual or sick) against their contracted hours, or a ‘notional roster’ if days/hours aren’t specified in their agreement. Additionally, annual leave will be capable of being ‘cashed up’ in relation to 25% of an employee’s total leave balance each year.

Working extra hours: Any hours worked beyond contracted hours will attract a leave compensation payment (of 12.5% of ordinary pay) instead of accruing leave. This applies to both waged and salaried workers, with slight differences depending on the employment agreement.

Casual employees: Casual employees will receive leave compensation payments from day one to account for sick and annual leave. Specifically, they will be paid a loading of 12.5% on each hour worked to acknowledge annual leave, sick leave and in recognition of the insecurity of their work. Currently, casual employees receive a loading of 8%, but also have the ability to accrue sick leave, creating an element of complexity for employers. In addition, casual employees will have access to bereavement and family violence leave.

Parental leave: The current ‘parental leave override’ will no longer apply. This means that returning parents will receive full pay when taking annual leave in the 12 months following their return. In proposing this change, the Minister has noted that there are competing views of what is considered ‘fair’ but has concluded that, on balance, the benefit outweighs the cost placed on employers in this instance given the overall savings to employers due to a simpler and more workable leave system.

Bereavement / family violence leave: Employees will have access to this leave from day one, removing the current 6-month ‘stand down’ period for accessing these entitlements. These will also remain a daily entitlement, reflecting the events-based nature of these leave types

Public holidays: New rules make it simpler to determine whether an employee would have worked on a public holiday. Specifically, the test for whether a day is ‘otherwise a working day’ will include a 50% test, calculating whether the employee has worked that day (or been on leave) in 7 of the previous 13 weeks.

Pay statements: Employers will be required to provide clear, itemised pay statements each pay period, showing pay and leave entitlements in a transparent and easy-to-understand way.

Transition to the new legislation

There will be a 24-month implementation period after the Bill is passed, giving payroll providers and employers time to update systems and processes. MBIE will provide guidance and support once the Bill is available.

The legislation will not have retrospective effect. Therefore, until the new Act comes into force, employers will remain obliged to provide correct entitlements and to remediate any underpayments.

Next steps

The bill is still being drafted and stakeholders will have the chance to provide input at the Select Committee stage. We will provide submissions on behalf of our clients, so please get in touch with one of our team if you have any feedback you would like us to consider as part of our submissions. Alternatively, if there are key considerations relevant to your individual business, we encourage you to make your own submissions and we would be happy to assist with that process.

We also note that for those with collective agreements, it will be important to be reviewing agreements and updating bargaining strategies in light of the 24-month transition period.

Special thanks to Mathew Barnett for his assistance in writing this article.