NZ Employers Face Big Changes As Sick Leave, Holiday Pay Set For Overhaul

New Zealand’s long-awaited Holidays Act reform is set to radically shift how sick leave and time off are calculated and paid, with significant implications for small businesses.

New Zealand’s complex leave laws are finally getting a shake-up, and for thousands of small business owners, it’s about time.

The government’s long-promised overhaul of the Holidays Act, which has confused employers and frustrated employees for years, is now expected to land in Parliament by the end of 2025. If passed, it will force a sweeping recalibration of how Kiwis take sick leave and how employers calculate entitlements like holiday pay.

According to Employment Hero’s Employment Counsel Sanam Ahmadzadeh Salmani, the reform will mark a significant improvement in clarity and fairness, but it won’t be an easy adjustment. “The current system is incredibly complicated and often overwhelming especially for small businesses that don’t have an in-house HR or payroll expert to navigate the legal minefield. Even well-meaning employers can get tripped up by the confusing formulas and inconsistent rules.” Salman explains.

The biggest overhaul? A move away from the notorious “gross earnings” formula and toward a more straightforward weekly earnings model. Right now, calculating holiday pay can involve two or more averaging methods, often leading to confusion, disputes, and payroll errors. The new approach aims to simplify this with a fixed weekly pay calculation that better reflects a worker’s usual income.

And it’s not just holiday pay that’s changing. Under the proposed law, sick leave, bereavement leave, and family violence leave will be calculated and paid based on actual days worked, rather than a notional or averaged amount. It’s a big win for workers with variable hours, but one that may leave some SMEs scrambling to adjust their payroll systems.

One particularly thorny issue being addressed is the so-called “parental leave penalty,” where employees returning from parental leave currently lose their annual leave pay entitlement. The proposed changes will fix this, allowing returning parents to retain their full leave entitlements.

So what should business owners do now?

Salman advises employers to start by reviewing their payroll processes and checking whether their systems can handle the more detailed data input the new law will require. For many SMEs using legacy systems or manual calculations, this will be a critical first step.

While the law is still being finalised, the Ministry of Business, Innovation and Employment (MBIE) is expected to provide a 12 to 18-month lead-in period to give businesses time to adjust. Even so, it won’t be a plug-and-play fix.

“Think about how this impacts your business, now’s the time,” Ahmadzadeh Salmani says.”These changes go beyond technical adjustments. Employers will need to understand who is managing their payroll and how this is being done. It’s about interpreting the legislation correctly and understanding the nuances between employment law and payroll.”

For employers who’ve been burned by payroll audits or compliance confusion in the past, the reforms may feel like both a blessing and a burden. But the end goal is a simpler, fairer system for everyone and for SMEs, that’s an opportunity to build trust and transparency into how they manage their people.

Key changes SMEs need to know:

• A lead-in period of 12–18 months expected for implementation
• Leave entitlements (including sick and bereavement leave) to be paid based on actual hours worked
• The “parental leave penalty” to be removed, preserving leave entitlements for returning parents
• A lead-in period of 12–18 months expected for implementation