Changes to the Holidays Act 2003

06 June 2024

The Minister for Workplace Relations and Safety, Brooke van Velden, has announced that the Government will undertake an overhaul of the Holidays Act 2003.

For years many businesses, including Government Departments, have struggled to understand their statutory obligations, resulting in widespread non-compliance, costing many billions of dollars.  For example, 270,000 former and current employees of Te Whatu Ora are owed more than $2.1b in remediation payments. As of June 2020, 112 employers made remediation payments to nearly 230,000 employees, totalling $237.7 million (not including health or school sector employees).

In 2018, the last Government established a Task Force to undertake a comprehensive consultation process with various stakeholders about a new approach. However, the output of that process appeared to be more complex than the current system, partly because the design parameters required the task force to ensure no employee would be disadvantaged.  The Task Force report was produced in 2019 and, like a number of other plans, no legislative changes were made, despite the Government saying they agreed with the recommendations.   

Clearly there is a need for a fresh start, and hopefully with a clean slate.

What’s on the Agenda?

Right now, there is no draft Bill but one is expected in September, to be followed by a targeted consultation process. From announcements so far, the following changes are up for consideration:

• Pro-rating sick leave: Currently, all eligible employees (part-time, full-time and in some circumstances casual employees) receive 10 days of sick leave each entitlement year. A pro-rata approach would base an employee's sick leave entitlements on the amount of time worked. This will attract a lot of noise from some quarters, but why should an employee working two days per week get 10 days leave, effectively giving them the equivalent of 5 weeks sick leave, while a full-time employee working five days per week only gets the equivalent of 2 weeks sick leave.

• Moving from an Entitlement System to an accrual system: Currently, employees become entitled to annual holidays only after reaching their anniversary date and each 12-month period thereafter. In our view it will take much more than that to create a simple system employers can understand and apply.  However, if holiday pay is able to be taken progressively that may encourage employees to take as it accrues, rather than waiting a year to get a full entitlement.

• Simplifying methodologies for calculating leave: New methods would not require payroll systems to rely on data regarding an employee’s daily hours of work.

• Establishing “objective criteria” for using pay-as-you-go (PAYG) annual holidays: PAYG involves paying an employee 8% of their gross earnings along with their regular pay instead of providing an annual holiday entitlement. Currently, PAYG can only be applied in limited circumstances, such as for truly casual employees or those on fixed-term contracts of less than 12 months, subject to specific criteria.

• Clarifying that only “full pay periods” are to be included in a proposed new 13-week reference period: This period would be used to calculate “average weekly pay” for annual holiday calculations.

Australian System is simpler

Full-time and part-time employees get 4 weeks of annual leave for every 12 months worked. Leave begins accumulating from the first day the employee works and they can take leave as soon as they accumulate it.

A full-time employee accrues 2.923 hours of annual leave for each completed week of work (based on the standard 38 hours week), and a part time employee will accrue the relevant proportion of 2.923 hours annual leave for each completed week of work.

A so-called leave loading applies in many awards and agreement, which typically is a 17.5% loading on top of an employee's normal wage.

When an employee takes annual holidays, they get paid for the ordinary hours they would have worked, plus the leave loading if applicable. 

It’s a much simpler system.  Some may think the 17.5% loading is a bit too high, but at least everyone knows what should be paid, with the result there are far fewer problems with non-compliance.

Next Steps

MBIE is inviting members of the public to be part of the targeted consultation regarding the exposure draft of the Bill. In particular, MBIE encourages participation from those who:

•  Have expertise in implementing the Holidays Act in payroll and business systems; or
• Understand the impacts and outcomes of the Act for various groups of employers and employees.

If you are interested in being part of this consultation process, you can register your interest here. Parties must register their interest by 8 July 2024.

If you have any questions about the matters raised in this article, please get in touch with: Tony Teesdale 021 920 323, Justine O’Connell 021 920 410, Michelle Battersby 021 993 735, or Esther Cohen-Goh 021 178 4111