In New Zealand, employees are entitled to a minimum of 4 weeks of paid annual leave after completing one year of continuous service with an employer. The entitlement is stipulated under the Holidays Act 2003.
For full-time employees, 4 weeks of paid annual leave means 20 working days of paid time-off. For part-time employees or employees who do not have set hours, the employer can decide with the employee what 4 weeks of leave means. For example, if an employee works three eight-hour days per week, then they get 3 days x 4 weeks = 12 working days of annual leave.
New Zealand holiday policies can be quite different from that in other countries. There are complexities and nuances in the law regarding leave entitlements, calculations, and employer obligations that go beyond the usual framework, especially in the area of calculating unused leave, and annual closedown periods, so it is important to familiarise yourself and seek independent legal advice when in doubt.
Eligibility and Accrual of Annual Leave in New Zealand
Employees in New Zealand become eligible for paid annual leave after completing 12 continuous months of service with their employer. Once this one-year milestone is reached, employees are entitled to 4 weeks of paid leave, and the employer has 2 options for providing this leave:
Granting all leave at once: Employers can choose to give the employee all four weeks of annual leave at the beginning of the year.
Accrual as the employee works: Alternatively, employers may allow employees to accrue their leave progressively over the year. This means that for each pay period, the employee accumulates part of their total leave entitlement.
Taking Annual Leave
Employees are encouraged to take their leave at times that suit both them and their employer. Employers must allow employees to take at least 2 weeks of their annual leave consecutively within the year. In New Zealand, workplaces can arrange one annual closedown period in the employment contracts and by giving at least 14 days’ notice to their employees, such as for Christmas and New Years, in which employees may be required to use their annual leave.
If the employer agrees, employees may take their annual leave in advance, before they have fully accrued it.
Cash Payment for Annual Leave
Under certain circumstances, employees may request to receive a portion of their annual leave as a cash pay-out:
One week of leave per year: Employees can request to have up to 1 week of their 4 week annual leave entitlement paid out in cash.
Fixed-term contracts and irregular hours: Employees who have a fixed-term contract of less than 12 months or work in roles with highly irregular hours may be paid annual leave on a pay-as-you-go basis, making it more practical for the employer to handle.
Annual Leave Payment Calculation
In New Zealand, employers must ensure employees taking annual leave are paid at least the higher of two calculations:
Ordinary Weekly Pay (OWP):
This is the employee's regular weekly income as at the start of the annual holiday.
Average Weekly Earnings (AWE):
This is calculated based on the employee's gross earnings over the 12 months immediately preceding the last pay period before the leave is taken.
Gross Earnings
For both OWP and AWE calculations, gross earnings include all payments the employer is obligated to pay the employee under their employment agreement during the relevant period.
By comparing these two amounts, the greater value is used to determine the employee’s annual holiday pay, ensuring fair and accurate compensation.
Annual Leave and Employment Termination
If an employee's job ends before they are able to take their annual leave, the employer is required to pay the employee for the outstanding leave at a rate of 8% of the employee’s total earnings before tax. This ensures that employees are compensated for their entitled leave even if they leave the company before using it.
Implications for New Zealander Employers
Employers must adhere to New Zealand’s statutory requirements regarding annual leave entitlements to avoid potential penalties or disputes. This includes granting 4 weeks of annual leave to eligible employees after 12 months of continuous service and ensuring leave calculations comply with regulations, especially when determining pay rates for annual leave.
While annual leave policies in New Zealand are governed by strict regulations, companies globally are exploring more flexible leave options, such as Unlimited Paid Time Off (UPTO). As discussed in the article What is Unlimited Paid Time Off and Could it Work for Your Company?, UPTO offers employees freedom to take leave as needed without traditional accrual limits.
