The Holidays Act 2003 (in brief)

It's often a bit of a hurdle for employers and their staff unfamiliar with the Holidays Act, especially when moving from a non-compliant payroll (and that's most payrolls), so we've put together this brief guide to the absolute basics of how it is all supposed to work according to the Holidays Act 2003.

The Holidays Act (and goPayroll) works like this:

Accruing, consuming and valuing Annual Leave

  1. For each whole year of service, 4 weeks is accrued (once per year, not per pay or in hours or by $value). The balance of these accruals is the employee's Entitlement.
  2. When leave is consumed it is valued according to the following rules:
  • If the employee is consuming leave that accrued whilst on parental leave or in it's shadow ending 12 months following return to work:
    • each week is valued at 1/52 of earnings for the immediate last 52 weeks
  • otherwise, each week is valued at the best of:
    • contract rate (per contract settings, or if irregular then average for the last 4 weeks)
    • average for the last 52 weeks
    • agreed weekly value
  • Any portion of a week is similarly valued.
    • For example, 2 hours @ ordinary pay rate is measured against the best rate above and that determines exactly how much leave has actually been consumed (in weeks), or 1 day would typically be 1/5th of the best value, and so on.
  • Any advance leave is entirely at the employer's discretion.
  • An employee may request a cash-up of up to 1 week of annual leave remaining in their Entitlement in each year of service.
Any payroll system that accrues annual leave other than in weeks is non-compliant (illegal, breaking the law) and generally serves to deny the employee their correct leave payments (on average $500 per year of service, though not every non-compliant payroll underpays - some overpay!)

Note: Hours and estimated leave balances have absolutely nothing to do with the employee's Entitlement to annual leave!

The Government have accepted the recommendations of the Holidays Act Taskforce (much to everyone's displeasure, because it hasn't made anything simpler)
However, SmoothPay clients in particular will be pleased to see there's not really much change.
Annual Leave and the Act are basically the same, with accruals once per year in weeks, a slight shift in valuation methods (e.g. ex-gratia payments will not be included in the calculations! And a 13-week averaging period comes into play).
Click here for a brief summary.

Compulsory Closedown

  • If you have a compulsory shutdown, then goPayroll provides a simple solution: enter the shutdown date in Settings and in the pay containing that date (it needs to be before staff go on leave, so your shutdown date needs to be in the last pay period before the shutdown or within 42 days prior), then use Payrun..Import..Compulsory shutdown option to generate the required entries and adjust employee anniversary dates automatically.
More info about Compulsory Closedowns is available here

Leave paid over multiple consecutive periods

We generally advise customers to pay out all leave being taken prior to staff going on leave (e.g. 1.2 weeks plus 4 public holidays, or 2.2 weeks, or 3.2 weeks and so on) as per s27(1) of the Act and to override the number of pay periods so that tax and period allowances and deductions get calculated correctly.

However, by agreement, employers can continue to pay the leave in separate consecutive pay periods as usual per s27(1)(a).

If you agree to that then you need to be aware that the same rate used for a bulk pay including annual leave must be used for the consecutive leave pay periods.

goPayroll provides an option in the Leave Assistant to mark continuous leave (this is the only place this can be accessed).

If you forget, or use an import or API method to load leave then you need to make sure the rate used is at least the same or better than the initial leave rate and top it up as Backpay if necessary.

Annual leave that accrued whilst on Parental Leave

Employee's continue to accrue 4 weeks annual leave on each anniversary that occurs between the leave start date and 12 months following return to work.

Note that failure to return is regarded as abandonment and any accruals that occur in that period are forfeit.

Valuation rules for such accruals are subject to the Parental Leave Act, not the Holidays Act, and are valued using the 52-week average value (and none of the other Holidays Act rules).

More info about Parental Leave is available here

Sick leave

is accrued at 10 days per year, with the first accrual occurring after 6 months service then every 12 months after that (incl casual working more than 10 hours per week over 6 months - which means you should probably reassess casual contracts periodically).

When daily leave types, including sick, public etc. are consumed you must use relevant daily pay rules:
  • If you know how much the employee would have earned (e.g. 8 hours @ $27) then pay that amount (you must include any likely allowances, overtime, bonus/commission etc. paid regularly), otherwise
  • you must pay average daily pay (based on earnings for last 52 weeks / days paid - which you must ensure have been recorded correctly per pay)

goPayroll complies with the provisions of the Holidays Act

As far as we know and as far as humanly possible, goPayroll is the only commercially available Holidays Act (and Parental Leave) compliant payroll. We've migrated data from almost every payroll imaginable and have yet to see any that comply. One possible exception is PayHero who publicise a clear and concise compliance statement (though our last migration from that payroll held leave in hours still). Others appear to be moving towards compliance (nearly 2 decades late) but we hold little hope of them succeeding until they grasp that annual leave must be held in weeks rather than hours and ditch the concept of "current accrued" (which isn't even mentioned in the Act). We really do want other payrolls to comply - it will make our lives in support so much easier if everyone does it correctly.

These resources should be used to provide employers and staff with additional information about how leave is supposed to be done (per Holidays Act, and per goPayroll):
  • Guide to NZ Leave Rules (in a nutshell): Easy to read guide about actual leave rules, published by SmoothPay
  • MBIE's Guide to Leave: MBIE's official view of how leave should be managed and interpreted
  • Holidays Act 2003: The actual law that employers, payroll companies and MBIE are supposed to follow
  • Compulsory closedowns: New staff are entitled to 8% of their earnings paid out before the company anniversary date and any additional leave offered would be in advance of their next entitlement (and at the employer's discretion).
  • Holidays Act review: the government have accepted the recommendations of the Holidays Act Taskforce and this is likely to become law in 2022
Once the concepts above have been understood then it's easy to apply the correct rules for leave balances, values and terminations.


A "salary" agreement offers no protection from the provisions of the Holidays Act.

For example:
  • 1 week of annual leave must still be paid at the greater of the weekly values (see above). It could be that the employee took a salary reduction, or earned extra in the previous 12 months, so the 52-week average would likely be higher than the current salary. Payment for that in turn would cause the the averages to remain higher for the following 52 weeks...and so on until such time as the current contract value exceeds the average.

However, despite the Act, it is possible to maintain standard values per pay period by recording leave consumed as follows:
  • for annual leave (recorded in weeks), record leave taken in hours, e.g. 8 hours instead of 0.2 weeks. This may have the effect of reducing the employee's annual leave balance by slightly more or less than 0.2 weeks if the average earnings are higher than the current salary value (because they're being paid less than 0.2 weeks of annual leave by value).
  • for daily leave types (sick, bereavement, public holiday, etc.) respond to the question "Do you know how much the employee would have earned?" by answering Yes. This will use the contract settings for each day being consumed, again preserving the normal pay value.

NOTE: It is NOT correct to record a salary pay as 1 unit @ salary value: Employers must comply with S4(b)(1) of the Employment Relations Act which requires correct recording of hours. However, again, SmoothPay offers an option of setting the employee up as a piece-worker and recording Total Hours Worked if preferred (this ensures the employee receives any additional topups if their salary / THW is less than the minimum hourly rate, because again, this is not catered for by a "salary").

What do the various balances on my payslip mean?

Your legal entitlement is...
Annual leave accrues at a rate of 4 weeks, once per year, on your anniversary of service.

The only pertinent value, accurate in every case, is the balance remaining from all your annually accrued leave (
in weeks). This is your legal entitlement.

You do NOT have any entitlement to take leave in advance without your employer's consent, though if you have a compulsory annual closedown it is likely that your employer will pay you some or all of the time off in advance.

What about my estimated leave balance?
An estimate is NOT an entitlement - it's just an educated guess based on a variety of factors.

Anything other than your legal entitlement is subject to you understanding what the estimated balance means and how it was calculated.

You don't need a maths degree, but you do need to carefully follow the logical steps used in determining your estimated balance.

Here is an example from a payslip:
[Leave Balances are as at the START of this pay period]
Annual leave accrued: 3.000 Weeks, next accrual of 4 Weeks is due 02-Dec-2018 [this is your legal entitlement at the start of this pay period]
Estimated annual leave to date 58.976 hours, Estimated annual leave value to date $1415.43: THIS IS NOT AN ENTITLEMENT visit for more information
Estimated annual leave to date 5.696 weeks or 11.392 days: THIS IS NOT AN ENTITLEMENT and taking leave in advance is solely at the discretion of your employer

Leave balances are as at the START of this pay period...
This might not seem correct or logical, but think for a moment - if you were to ask your employer what your leave balance is at any point in time they will tell you your current balance. Any leave you take will come off that balance. If they look up your balance it will tell them your current balance. It makes perfect sense to show the leave balance as at the start of the pay period. If, when your pay period has been completed, you used or accrued some leave then your current balance and your next payslip will show the updated balance.

Annual leave accrued...
This shows you your legal entitlement as at the start of the pay period and when your next accrual of 4 weeks will occur.

Anything other than this is just an estimate (
and is therefore meaningless other than as an estimate).

Estimated annual leave to date in hours...
This is calculated as follows:
Of course this is NOT an entitlement to anything unless you leave. It is just an estimate.

It is important to note that termination values are re-calculated every time they are presented, and are subject to change every week. This is most especially true where you have an irregular hours contract, as Ordinary weekly earnings are deemed to be the average for the last 4 weeks, and compared against the 52-week average (the best of these is used). A regular employee uses their contract values for OWE vs AWE52. Fluctuations in 4-week averages are common and obviously have an effect on termination value calculations.

The "hours" are calculated by dividing the employee's contract hourly rate into the Termination value - nothing more or less. This is NOT an entitlement and it's not really leave at all - it's just an indicator. These values are estimates at best. The only factual data is the balance in weeks and the termination value (
excludes current pay, but is included in a real termination).

Estimated annual leave to date in weeks and days...
This is calculated as follows:
  • Balance of leave remaining from last anniversary (your legal entitlement)
  • Plus a pro-rata portion of 4 weeks, calculated daily, since your last anniversary
  • Produces estimated weeks
  • Divided by your nominal days per week
  • Produces estimated days
Of course this is NOT an entitlement to anything. It is just an estimate.

Why show estimates then?
Because people demand to see these balances in hours and/or days (which doesn't make it right), even though they don't really mean anything at all. This continues to be perpetuated by systems that didn't change from the Australian point of view that leave accrues in hours based on productive time worked (which, frankly, it should)...but it's NOT what the Act intends and well short of employee rights.

Systems that actually calculate leave in hours or days are negligent and have caused millions of dollars worth of underpayments to staff over the years - yes, that's most other payroll systems available in NZ.

SmoothPay continues to be the leader in compliance (no thanks to MBIE) and will continue to do so, regardless of what other payrolls might do.