What’s Ahead? Proposed Payroll & Leave Changes for 2026

The Government has recently announced proposed changes to the current Holidays Act 2003, with the aim of creating simpler and more practical legislation for both employers and employees.

A key proposal is to move away from the current gross earnings formula toward a more straightforward calculation model. The proposed legislation would introduce several changes to how annual leave and sick leave are calculated and accrued. According to the review released by MBIE as part of the Holidays Reform programme, the proposed changes include:

• Sick leave will accrue continuously in hours from the first day of employment, rather than being granted as a lump sum after six months.

• Annual leave will also accrue continuously in hours from day one, instead of being tracked in days or weeks. Leave will be taken in hours, allowing employees to take partial days of leave more easily.

• Sick leave entitlements will be earned in direct proportion to the employee’s contracted hours.

• For casual employees, or staff who work additional hours beyond their contracted hours (unless these are covered by a salary arrangement in their employment agreement), a 12.5% holiday pay payment will be made upfront instead of accruing annual or sick leave.

Annual leave calculations are also expected to change, with a move toward a standard hourly leave pay rate that will apply across all types of leave. Fixed allowances will continue to be paid in full while an employee is on leave.

Another proposed change relates to parental leave. When annual leave is taken after a period of parental leave, it would be paid at the employee’s normal annual leave rate, rather than at the reduced rate that can currently apply.

Alternative holidays will also move to an hours-based accrual system, and public holiday entitlements will be determined using a simpler method to establish whether an employee would otherwise have worked that day.

Overall, these proposed reforms are intended to simplify leave calculations for both employers and employees. While the changes have been announced, they are not yet final. The legislation must still pass through Parliament, and once approved there will be a 24-month implementation period before the new rules take effect.

In the meantime, business owners should begin familiarising themselves with the proposed changes and ensure their payroll systems and processes will be ready to comply when the new legislation is introduced.

Feel free to reach out to Debbie, 027 498 9551