The new Employment Leave Act 2026 received Royal assent on 5 August 2026 and will replace the Holidays Act 2003. The aim of the new Act is to make leave entitlements simpler and clearer for both employers and employees.
Although the new Act has now been passed, most of it will not take effect until 6 August 2028. This gives employers two years to update their employment agreements, workplace policies and payroll systems. Until then, employers must continue to provide and calculate leave under the Holidays Act 2003. It is important to note:
- The new Act will apply to each employee from the start of their first pay period after 6 August 2028.
- Employers will have until 6 August 2029 to make sure their existing employment agreements comply with the new Act.
Below is a summary of some of the key changes.
Hours-based leave accrual
From the employee’s first day of employment annual leave and sick leave entitlements will accrue and can be taken on the basis of “hours worked”. This differs from the existing model which is based on “days” and “weeks” and in respect of annual leave and is generally not available until an employee has completed 12 months’ continuous employment, while sick leave is generally not available until the employee has completed six months’ employment. The accrual rate is as follows:
- Annual leave will accrue at a minimum rate of 0.0769 hours per contracted hour worked.
- Sick leave will accrue at a minimum rate of 0.00385 per contracted hour worked up to a maximum of 160 hours. The 160-hour cap is equivalent to the current maximum accumulation of 20 sick days.
Employees will be able to take their leave in hourly amounts, which will make it easier to take part-days off.
If an employee works extra hours beyond their contracted hours, those extra hours will not accrue annual leave. Instead, the employee will receive a leave compensation payment (LCP) equal to 12.5% of their ordinary hourly rate for the extra hours worked. This does not apply to salaried employees if their employment agreement says their salary covers extra hours worked.
Leave balances will be recorded when they are earned, so they will not be affected if the employee’s work pattern changes later.
Calculating leave rate
The way leave is calculated and paid will be simpler. All types of leave will be paid using the same hourly leave pay rate. This rate will be based on remuneration plus fixed allowances only.
Cashing-up leave
Employees will be able to cash up a maximum of 25% of their total annual leave balance in each 12-month period. This replaces the current limit of one week of annual leave.
Casual Workers
Casual workers will receive the LCP for every hour worked instead of building up annual leave and sick leave.
If an employee is wrongly paid LCP instead of being allowed to build up leave, the employer must fix the mistake within eight weeks of being told about it. In that case, the employee can also keep the LCP that was already paid.
Public Holiday Test
Public holiday entitlements will be decided using an “otherwise working day” test. If an employee’s work days are not set out in their employment agreement, a day will count as an “otherwise working day” if, over the previous 13 weeks, the employee worked on that weekday — or was on paid or unpaid leave on that weekday — at least 50% of the time.
Parental Leave
If an employee takes annual leave after returning from parental leave, that leave will be paid at the employee’s current leave pay rate. This replaces the current rules which can result in a reduced rate being paid for a period of time. It is important to note that this change will come into effect on 1 July 2027, before the rest of the Act.
Transfer of leave entitlements on the sale of a business
The new Act changes Part 6A of the Employment Relations Act 2000 so that an employee’s employment may be treated as continuous, and accrued leave balances transferred to a new employer, on the sale of a business. While this has previously been achieved by agreement between parties in the sale of business context it is now expressly provided for through the enactment of the new Act.
What employers need to do?
As noted above, most of the provisions in the Employment Leave Act 2026 do not come into force until 6 August 2028. This gives employers and payroll providers time to update their payroll systems so they comply with the Act.
In the meantime, we recommend that employers use the time provided to:
- learn about the changes;
- make sure their payroll system will be able to meet the new requirements;
- prepare updated employment agreements; and
- think about when and how they will talk to staff about the upcoming changes.
If you have any questions about the Employment Leave Act or need guidance on how they the changes may impact your business, please don’t hesitate to contact one of our team at Harmans Lawyers.
