Understanding leave without pay in New Zealand

Leave without pay (LWOP) is a critical flexibility tool for your staff but it’s not a formal entitlement. We’ve put together a guide to understanding leave without pay, including why an employee might want to take it, how you can track leave without pay requests and tips for ensuring compliance around the process.

What is leave without pay?

According to Employment NZ, leave without pay is “time an employee can spend off work without being paid.” Rather than being provided as an entitlement, it is instead an agreement between yourself as the employer, and your employee.

Employment NZ adds, “Typically, the employee will return to the same position with the same terms and conditions unless the employee and employer agree otherwise. Leave without pay can affect annual holidays payment and entitlement in some situations.” We’ll dive deeper into how LWOP can affect annual holiday entitlements later in this guide.

Why might an employee want to take unpaid leave?

There are a range of reasons why your employees may want to take unpaid leave. Some reasons include:

• They’re travelling for an extended period of time but don’t have enough annual leave
• They need to attend to personal responsibilities 
• They’re looking to complete studies
• They’re sick or injured but don’t have enough sick leave to cover the entire period
• They’re taking care of health-related matters for a loved one, but can’t take parental leave or negotiated carer leave

It is important to note that employees cannot take unpaid leave without your agreement – this is considered unauthorised leave.

Why should employers offer unpaid leave?

Offering unpaid leave can help boost your employer brand and attract top talent. There are a few benefits to offering unpaid leave, including keeping valued staff around, as they don’t need to resign in order to take extended leave. It also gives your employees more flexibility and can support staff wellbeing, as they know they have options if issues arise. 

How does unpaid leave affect annual leave entitlements?

Unpaid leave affects an employee’s anniversary date if they take more than one week of leave without pay. Their anniversary date affects when they receive their annual leave entitlements each year. 

Their anniversary date might shift forward. For example, if they take three weeks of leave without pay, their anniversary date for receiving their annual holiday entitlements would then shift forward by two weeks. 

Alternatively, if you agree to not shift their anniversary date, then the divisor for their Average Weekly Earnings will be reduced. For example, if someone takes four weeks of leave without pay, their average weekly earnings would then be calculated by dividing their gross earnings over the last 12 months by 49 weeks (reduced by 3 weeks from the standard 52 weeks). 

AWE is used when determining annual holiday pay, as employees are paid the greater of their ordinary weekly pay (OWP) or their AWE. For more information on calculating leave pay, check out our factsheet.

What is the process for agreeing to unpaid leave?

If you’re offering unpaid leave, then there are a few steps you could take when handling a request, to ensure everything is checked and documented. These include:

• Creating a pathway for unpaid leave requests through either manual submission or your leave management software
• Reviewing your business needs to determine whether to accept or reject the request
• If you’re agreeing, documenting your agreement with the employee, including details around length, date they go on leave and date they’re returning from leave

Having a robust unpaid leave request process in place can make it easier to stay compliant in cases of disputes or audits.

Do I have to offer unpaid leave?

As an employer, you don’t have to offer unpaid leave. Unpaid leave depends on mutual agreement and is entirely at your discretion.

Do I have to agree to unpaid leave requests?

While you may choose to offer unpaid leave, that does not mean you have to agree to every unpaid leave request. If there is a genuine business need for an employee to work through, then you can decline their unpaid leave request.

What are employees entitled to during LWOP?

As the name states, employees are not typically entitled to pay during leave without pay. However, they may be entitled to public holiday pay, if a public holiday falls within their LWOP and they’re taking unpaid leave because they’ve run out of sick, bereavement or family violence leave. 

As an employer, you may also opt to continue making KiwiSaver contributions on behalf of your employee (for example, if they’re on unpaid parental leave). However, this is not mandatory.

How LWOP interacts with other types of leave

Employees might not always take leave without pay exclusively. Instead, they may use LWOP to add onto paid leave that they’ve already accrued to give themselves extra time. Here’s how each type of leave can interact with LWOP.

LWOP and sick leave

An employee may have an extended injury or illness that requires more time off than they’ve accrued. To help their recovery, they may take LWOP after using up their sick leave entitlement, until they’re ready to return to work. It’s also worth noting that this is when it’s most likely that an employee may receive public holiday pay, as highlighted in the example above.

LWOP and parental leave

There are four types of parental leave in New Zealand:

Primary carer leave: Eligible employees can take up to 26 weeks leave if they are they primary carer of a newborn, or adopting a child under six

Partner’s leave: Eligible employees can take one or two weeks unpaid leave to support their spouse or partner who’s just given birth, or their spouse or partner is adopting a child under six

Extended leave: Eligible employees can take up to a year off, unpaid, to spend with their child. Employees can start their extended leave:

• at any time after their primary carer leave ends
• at any time after their partner’s leave ends
• on any date agreed with you. This allows them to return to work after their primary carer leave ends, and then take their extended leave later.

Negotiated carer leave: Employees can negotiate with you to take unpaid leave if they don’t qualify for primary carer leave

Typically, employees will look to take their LWOP as extended leave directly after their primary carer leave ends. However, this leave may be paid, depending on your employment agreements and what you choose to offer as an employer.

LWOP and family violence or bereavement leave

Employees may transition to LWOP if they need time off beyond the 10 days they’re entitled each year for family violence leave. The same goes for additional leave beyond the bereavement leave they’re entitled to, based on the bereavement they’ve experienced. 

What are the main compliance rules around leave without pay?

There are a couple of compliance guidelines that Employment New Zealand advises when it comes to leave without pay. Firstly, record-keeping is important. It’s recommended to put the employee’s agreement to take leave without pay in writing. This way, if you get audited, you can easily produce proof of your agreement with the employee around their leave without pay.

Public holiday calculations should also be taken into consideration. While employees on unpaid leave don’t typically get paid for public holidays, if they’re on unpaid leave because they’ve run out of sick, bereavement or family violence leave, they may be entitled to public holiday leave in specific circumstances.

The employee is also entitled to public holiday pay if, during their first week of their unpaid sick, bereavement or family violence leave without pay, a public holiday falls on a day the employee would otherwise have worked that day. 

For example, take an employee that works Monday, Wednesdays, and Fridays part-time each week. If they take a week of unpaid leave, and during that week, there’s a public holiday on Wednesday, then they may be entitled to public holiday pay for that day. However, if they’re taking more than one week, then following that first week they won’t receive any public holiday pay, regardless of if they would have otherwise worked that day.

What are the risks of mishandling leave without pay?

It’s important to be consistent when handling leave without pay. You should be aware of your legal obligations but also ensure that any approach to this type of leave is applied uniformly across the team. 

If you don’t do this, then there are a few potential consequences. These include:

• Employee grievances, especially in instances where the employee feels leave without pay was not the right course of action
• ERA claims, if the employee believed they are owed wages as a result of leave without pay
• Payroll audits, if authorities believe you are executing leave without pay agreements incorrectly
• Discontent in your team, as employees may not agree with your leave without pay rulings

How can leave management software help?

Leave management software, like Employment Hero, can help you better manage leave without pay requests. Employees can easily submit their own leave requests through the Employment Hero Work app. And, with accurate tracking and less manual data entry, our software can help you reduce the risk of compliance errors.

Ready to discover how the right leave management software can transform the way you track leave requests? Book a demo today and see how you could save time each week!