Annual leave in New Zealand: Entitlements, accrual, and how to calculate holiday pay correctly

New Zealand’s holiday-pay framework remains one of the country’s largest payroll compliance pressure points. Large-scale remediation programmes across the public and private sectors have repeatedly traced back to the same issue: employers simplifying calculations that the Holidays Act 2003 treats as formula-dependent. Annual holidays must be paid at the greater of Ordinary Weekly Pay (OWP) or Average Weekly Earnings (AWE), while other leave types rely on different calculation methods again.

Although the Employment Leave Bill began moving through Parliament in 2026, the current Holidays Act framework still governs payroll operations throughout 2026 and likely beyond. Employers, therefore, still need to manage leave accrual, public holidays, termination pay, and variable-hours calculations through the existing OWP, AWE, Relevant Daily Pay (RDP), and Average Daily Pay (ADP) structure.

For foreign employers and EOR providers running New Zealand payroll, the compliance risk is rarely the entitlement itself. It is how payroll systems classify work patterns, calculate gross earnings, and apply the correct formula across variable pay, commissions, allowances, and irregular hours over time.

The reform timeline puts payroll teams in the same position they have been in for several years: aware that the law is changing, but bound by the existing statute throughout the planning year. The chronology is well-documented and the operative status is unambiguous.

The Holidays Act Taskforce reported in February 2021 with 22 jointly-agreed recommendations from union and employer representatives. The previous government accepted them all but did not introduce legislation before the October 2023 election. The new coalition resumed the project in 2024-2025 and Cabinet took policy decisions in August 2025. The Employment Leave Bill was introduced to Parliament on 9 March 2026, passed its first reading on 12 March 2026, and was referred to the Education and Workforce Select Committee with a report-back deadline of 13 July 2026.

If enacted, the Bill would replace the Holidays Act 2003 with an hours-based regime: annual leave accruing from day one at 0.0769 hours per standard hour worked, leave taken in hours rather than days, sick leave accruing pro rata from day one, a flat 12.5 % Leave Compensation Payment replacing the current 8 % PAYG for genuinely casual or additional hours, and a 25 % cash-up cap. After Royal Assent there is a 24-month transition (10 years for the state schooling sector). MBIE’s Holidays Act reform page confirms that until the Bill becomes law and commences, the 2003 Act applies in full.

Two practical conclusions follow for 2026 payroll teams.

• First, employers still need to operate against the Holidays Act 2003 rather than the proposed framework.
• Second, payroll systems and leave balances should not be converted ahead of commencement, because key parts of the Employment Leave Bill may still change during the select-committee process, including the proposed 12.5 % Leave Compensation Payment, sick-leave accrual limits, leave-balance conversion rules, and the revised “otherwise working day” test.

The Holidays Act uses four calculations that map to different leave types and work patterns. Picking the right one is the foundation of compliance.

The single load-bearing rule sits in section 21 of the Holidays Act 2003: annual holidays must be paid at the greater of Ordinary Weekly Pay (OWP) or Average Weekly Earnings (AWE). Calculating only one of the two is non-compliant.

The single biggest driver of holiday-pay remediation in New Zealand is misapplication of section 14 gross earnings. The definition is broader than many payroll systems and foreign employers expect, because it includes all payments the employer is required to make under the employment agreement during the assessment period.

Section 14 gross earnings generally includes:

• Wages and salary
• Overtime
• Commissions and piece rates
• Productivity and performance bonuses where payment is contractually required
• Regular incentive payments
• Non-reimbursing allowances
• The cash value of board or lodging
• The first week of ACC employer compensation

Exclusions are comparatively narrow and include:

• Genuine expense reimbursements
• ACC weekly compensation beyond the first week
• Leave from volunteer military service
• Cashed-up annual holidays
• Genuinely discretionary one-off bonuses

Whether a payment is truly discretionary depends on substance rather than label alone. If the employer is contractually required to make the payment, even where the amount varies, it will usually fall within gross earnings.

Foreign employers commonly apply narrower overseas payroll concepts that exclude payments New Zealand law still treats as gross earnings. Sales commissions, regular on-call allowances, shift allowances, supervisory allowances, and cash vehicle or tool allowances are common failure points. Calculating annual holiday pay on base salary alone remains one of the most common causes of large-scale remediation exposure.

New Zealand has 11 national statutory public holidays plus one regional anniversary day. The 2026 dates and Mondayisation status are:

Two public holidays are Mondayised in 2026: ANZAC Day and Boxing Day. Under sections 45A-45B of the Holidays Act 2003, Mondayisation applies only to employees who do not normally work weekends. Employees rostered to work weekends receive the entitlement on the actual calendar date instead. For variable-hours workers, entitlement depends on the section 12 “otherwise working day” (OWD) test, which remains one of the most disputed areas of public-holiday compliance.

Employees who work on an OWD public holiday receive time-and-a-half plus an alternative holiday. Where the public holiday is not an OWD, time-and-a-half still applies but no alternative holiday accrues.

• Sick leave under section 65 provides 10 days per year after six months of continuous employment, with a maximum carryover of 20 days.
• Bereavement leave under section 69 provides 3 days for immediate family bereavement and 1 day for other accepted bereavements after six months of service.
• Family-violence leave under section 72A provides 10 days per year after six months, separate from annual and sick leave, although the Employment Leave Bill proposes making the entitlement available from day one.

Section 81 of the Holidays Act 2003 and section 130 of the Employment Relations Act 2000 require employers to retain wages, time, holiday, and leave records for six years, including for former employees.

Records must capture:

• Days and hours worked
• Wages paid and calculation methods
• The cash value of board or lodging
• Leave balances
• The date and payment for leave taken, including annual, sick, bereavement, family-violence, alternative, and public holidays

Failure to produce these records during an MBIE Labour Inspectorate audit is often treated as a sign of wider payroll non-compliance. Common failure points include:

• Annual leave calculated without comparing OWP and AWE
• ADP incorrectly used for annual leave
• Allowances, commissions, and regular bonuses excluded from gross earnings
• Incorrect 8 % closedown calculations
• Variable-hours workers incorrectly classified as casual employees for PAYG holiday-pay purposes

Penalties under the Holidays Act 2003 can reach NZD 10,000 per breach for individuals and NZD 20,000 per breach for body corporates. Penalties under the Employment Relations Act 2000 can apply separately, including compensation, costs, and additional penalties. Company officers involved in the breach can also face personal liability.

The remediation history explains the level of enforcement focus. Large-scale remediation programmes across Health NZ, the education sector, NZ Police, and other employers have collectively resulted in hundreds of millions of dollars in historical payroll corrections.

On termination, the employer must pay outstanding wages to the last day of employment, the value of any unused annual leave entitlement (the four-week balance from the last anniversary, paid at the greater of OWP or AWE), an additional 8 % of gross earnings for the period since that last anniversary (less any holidays taken in advance or PAYG already paid), unused alternative holidays at RDP or ADP, and any contractual obligations such as notice or redundancy. Foreign employers routinely pay only the unused-leave component and miss the 8 % residual, a structural error that a Labour Inspectorate audit will catch.

The 8 % rate derives from 4 weeks divided by 52 weeks (7.692 %) rounded up. For an employee who has not yet reached 12 months at termination, the entire annual-leave payout is 8 % of gross earnings since commencement.

Lump-sum holiday pay on termination is taxed using the IRD lump-sum (annualised income) method rather than ordinary PAYE. The annualised income base for end-of-employment lump sums uses the two most recent pay periods.

A small group of payroll mistakes accounts for most remediation exposure for foreign employers operating in New Zealand. The issues are usually operational rather than intentional, but they routinely lead to large-scale underpayment reviews.

• Applying 8 % PAYG holiday pay across the workforce instead of limiting it to genuinely eligible fixed-term or irregular workers
• Failing to compare OWP and AWE for annual leave calculations, despite section 21 requiring the greater of the two
• Excluding regular commissions, allowances, and productivity bonuses from gross earnings
• Treating bonus schemes as “discretionary” even where employees have a contractual or performance-based expectation of payment
• Ignoring Mondayisation rules for public holidays such as ANZAC Day and Boxing Day in 2026
• Using ADP for annual leave instead of OWP or AWE
• Treating four weeks of leave as a fixed 20-day entitlement regardless of the employee’s actual work pattern
• Missing the additional 8 % residual payment on termination
• Failing to retain payroll and leave records for the required six-year period
• Missing the 1 April 2026 KiwiSaver employer-contribution increase to 3.5 %

Most large remediation programmes in New Zealand payroll have ultimately traced back to one or more of these calculation, classification, or recordkeeping failures.

A foreign company directly employing New Zealand-resident workers without a local entity can create permanent establishment (PE) exposure under section YD 4 of the Income Tax Act 2007 and Article 5 of New Zealand’s double-tax agreements. Common indicators include employees working primarily from New Zealand, authority to conclude contracts on behalf of the foreign company, and activities that form part of the company’s core business operations.

The 2026 remote-work amendments for non-resident visitors staying up to 275 days do not remove PE risk for New Zealand-resident employees.