Source: New Zealand Government
Good afternoon everyone, thank you for that warm introduction, and as always, it is a pleasure to be here.
I know many of you are juggling busy schedules, so I appreciate you making the time to join us.
As you all know too well, the Holidays Act 2003 has become synonymous with complexity, confusion, and compliance headaches. Too many employers have found themselves caught out by its calculations – even the Ministry for Business, Innovation and Employment.
I understand how important these changes are to help restore business certainty. I acknowledge that there are a lot of businesses doing it tough at the moment, and particularly small businesses.
That flows through to how confident workers feel about keeping their jobs or getting a pay rise this year. And it’s felt by Kiwis across the country who are struggling with the cost of living.
This Government is well aware of your need to not just hear about our intentions for change, but to see those changes in action.
In December last year, I announced my decision to change the direction of Holidays Act reform, with a focus on simplicity, workability and reducing compliance costs.
That decision was made following targeted consultation on a draft Bill to test whether the previous Government’s work was hitting the mark. The feedback indicated it wasn’t, and that more fundamental change was needed to better address the issues.
The message I’ve been receiving across the country has been consistent: the status quo is holding the economy back, and patchwork fixes just won’t do. Businesses need certainty. Employees need confidence that their entitlements are correct. And above all else, we need a system that works for everyone.
Over the past year, I’ve listened carefully to feedback from those who work directly with the Holidays Act, including EMA members, lawyers, and accountants. My MBIE officials have also been working hard behind the scenes to develop policy and unwind the incredibly technical and complex web of Holidays Act legislation.
Today, I am delighted to share with you that under this Government, the Holidays Act will be repealed and replaced with a simpler, more workable alternative: what will be known as the Employment Leave Act.
Allow me to walk you through the key decisions Cabinet has made, and what they mean for you.
Before getting into the detail though, here is a short summary: So far as it was possible, the new system should reflect current entitlements. For many people, leave entitlements will stay the same – what will change is how it is calculated. Most people won’t notice a difference.
There will be areas where employers are likely to benefit most, and areas where employees are likely to benefit most. On average though, I expect these changes to be cost-neutral for employers.
Cabinet has agreed to move to an hours-based accrual system for both annual leave and sick leave. This means that leave will be earned, taken and paid in hours.
From day one, employees will earn both annual and sick leave in direct proportion to their contracted hours of work. No more wrestling with weeks and days, adjusting balances when hours of work change, or trying to define what constitutes a ‘working week’ for a staff member with a variable schedule. It also means no more waiting for six months to access sick leave, or twelve months to access annual leave.
I know this is a change that most employers will welcome, but I expect workers will also welcome the flexibility of being able to take a few hours annual or sick leave rather than a full day. Whether it’s to attend a medical appointment or a school theatre production, workers will no longer have to take a full day off work when they only need a few hours off work.
The hourly accrual rate for annual leave is set to provide the equivalent of four weeks’ annual leave for employees who work the same number of contracted hours all year, or the equivalence of the status quo.
For most people, leave entitlements will stay the same – what will change is how it is calculated. For example, an employee working 40 hours per week will earn the same amount of leave but it will be expressed as 160 hours rather than 4 weeks.
Many of you will know that at the moment, annual leave balances automatically “scale” to match the working week of the employee when they reduce or increase their hours. For example, if an employee increases their standard weekly hours of work, they effectively receive an increase in leave balance immediately without having to ‘earn’ it, and if they reduce their hours, they effectively receive a reduction in leave balance.
Under the new system, accrued hours will be ‘banked’, meaning leave balances will reflect hours actually worked in the past rather than scaling when work pattern changes.
And finally, gone are the days of multiple, confusing calculations for leave payments. Under the new system, the same hourly leave pay rate will be used for all leave types. It will be based on an employee’s base wage for the day of leave.
For those on piece rates, where an employee is paid for the number of units completed like the number of buckets of apples picked, an average hourly rate will be used.
In addition to the hourly leave pay rate, fixed allowances such as an accommodation allowance will be paid in full during leave, like normal. Other components of pay, like bonuses, commissions and variable allowances such as for ad hoc special duties, will not be included in the hourly leave pay rate.
The aim here is simplicity: employers and employees alike will know exactly what their minimum entitlements are.
As for the sick leave system, the sick leave accrual rate will provide the hourly equivalent of ten days sick leave per year for an employee who works 5 days a week and the same hours every day.
Unused sick leave can still be carried over, up to a cap of 160 hours which is the equivalent of the current 20 days.
Of course, adopting hours-based accrual for sick leave will be a change for employees who work less than 5 days per week. No longer will a part-time employee receive the same amount of sick leave as someone working full-time. Instead, all employees will receive sick leave hours proportionate to their contracted hours. This change delivers on Cabinet’s agreement to introduce pro-rata sick leave.
Pro-rata sick leave is not only fairer by being more proportionate, it should ensure workers have access to the amount of sick leave they work for. For example, a person working one day a week who is sick for a week will only need to use one day of sick leave. By comparison, a fulltime worker working five days a week would need to use five days of sick leave if they are sick for a week.
I know this is a change that a lot of businesses have been asking for, and I know this will be a relief for businesses who are doing it tough at the moment.
The next big shift that is happening is the introduction of a Leave Compensation Payment system.
The current Holidays Act attempts to provide one core system for all working arrangements, which has resulted in a lack of clarity for employers and payroll providers about which rules apply in which situations.
We’re introducing a financial compensation system for casual workers, rather than introducing a system for accruing and storing leave.
By definition, casual employees do not have to accept any work offered under their employment agreement, and employers are not required to make any work available to them. The notion of stored leave entitlements and the ability to use these is therefore difficult to reconcile with the nature of casual work.
The current Holidays Act allows ‘intermittent and irregular’ employees to be paid an 8% Pay As You Go loading instead of receiving annual leave, but does not require it. For sick leave, the Act provides an eligibility test whereby many casuals do, technically, become entitled to sick leave – although they are unlikely to benefit from this entitlement in practice due to impracticality and compliance issues.
The new Employment Leave legislation introduces a Leave Compensation Payment, which will be set at 12.5% of an employee’s ordinary hourly wage rate and will be paid in each pay period. Think of it as an expansion and simplification of Pay As You Go – except the payment covers sick leave, not just annual leave.
For businesses, this removes the complexity of tracking and calculating leave and leave pay for variable hours, and avoids the complex eligibility criteria and reviews of the old Pay As You Go system.
For employees, the change means they will receive an immediate financial benefit in lieu of accruing leave on relevant hours or the payment being reflected in leave pay like it is now. Employees will still be compensated for leave on every hour of work; it is the timing of the payment that will change for some.
Leave Compensation Payment for additional hours
The Leave Compensation Payment will also apply to the additional hours worked by permanent employees, that are outside the employee’s contracted hours.
Under the current Holidays Act, an employee’s annual leave pay reflects all payments (including for additional hours or overtime rates) that they would have received if they had been at work or, if it is greater, in an average week over the previous year. If they take a week of leave, the employee might therefore earn more on leave than they would have if they had worked in that specific week, and different leave pay each time they take leave.
This system is complex and it can be difficult for employees to understand their leave payments, and for employers to get it right.
If employees earned leave on all hours of work, including additional hours, this would also result in larger leave liabilities for some employers. For example, part-time employees who work more at certain times of the year could end up with large annual leave balances, which might become difficult for employers to manage when the worker’s hours return to their normal pattern.
Cabinet has agreed that all additional hours worked by employees over and above their contractual hours would earn monetary compensation in the form of the Leave Compensation Payment.
The last significant change I want to flag with you all has to do with those returning from parental leave.
Currently, annual leave continues to be earned while employees are on parental leave, but they may receive much less pay than usual depending on when they take their leave after returning from parental leave.
That’s because of a current parental leave ‘override’ which means annual holidays are calculated at the rate of average weekly earnings for the preceding 12 months. This calculation does not include government parental leave payments, which means the calculated income while on parental leave is likely to be very low. This can result in parents receiving less than they normally would do for annual leave when they return.
Under the new system, employees will earn annual leave throughout their parental leave just like they do now. When they return and take leave, however, it will be paid like any other leave would be – not at a reduced figure.
This change removes a long-standing source of frustration and disadvantage for parents re-entering the workforce. It also avoids replicating the complex and confusing annual leave payment rules after parental leave.
It would be ambitious of me to try and cover all the changes in the new Employment Leave Bill. But here are a few others that may be of interest to this audience:
- Access to bereavement leave and family violence leave will begin from the first day of employment — removing uncertainty and unnecessary waiting periods. The level of entitlement will remain the same.
- Public holidays will stay the same but there will be a new clear test for determining whether an employee would have worked on the day and public holiday entitlements apply.
- Hours-based accrual will also be adopted for alternative holidays, with accrual at a rate of one hour for every hour worked, rather than as a whole day. Employees will still also receive time and half for the hours they actually work on a public holiday.
- The rules for annual closedowns will be easier to follow. Since leave will keep building up, employers won’t have to pay out leave or reset anniversary dates when staff haven’t become entitled yet. Also, the notice period for a closedown will increase to 21 days.
- Finally, employers will be required to provide clear pay statements each pay period, itemising pay and leave in a way that’s transparent and easy to understand.
I know the shift to the new system will involve a lot of change. Payroll providers and employers will need time to change their payroll settings and agree changes with their employees.
Cabinet has agreed to a 24-month transition period to provide time for changes to be made to pay and business systems.
Cabinet has also agreed to some key transition requirements which will provide clarity on how the transition should happen, for example how to convert existing leave balances to hours.
Cabinet’s decisions are a clear signal of our commitment to prioritising simplicity, clarity, and workability in our employment laws. We are cutting through red tape, setting aside the patchwork of past fixes, and building a leave system that is fit for modern New Zealand.
I hope my comments today have made clear the many advantages the new system will offer. I am especially proud that we’re delivering a better deal for parents – in particular mums – returning to work after parental leave.
I’m also proud that we’re ensuring casual employees – who can often miss out on employment benefits – will in future receive full compensation for sick leave and annual leave.
These changes will be a win for workers and employers alike, because I want this legislation to be enduring. I understand the uncertainty and disruption businesses face whenever there is a change of government, which is why I have intentionally made policy decisions that I hope will be supported across the board.
I want to thank everyone who contributed feedback through consultation—your insights have been invaluable in shaping a system that works for the real world.
The new legislation is currently being drafted, and will then be considered by a Select Committee.
I encourage you all to begin engaging with the details now in preparation for submitting at that stage. We need the new law to be technically workable – so we need to hear your suggestions.
Thank you once again for your time and for the vital work you do.
Enjoy the rest of your day — and, as always, please don’t hesitate to reach out with your questions or ideas. Thank you again for having me here and I welcome your feedback and questions.