Annual leave in New Zealand, explained

Annual leave looks like the easy part of New Zealand leave law. Four weeks a year, everyone knows that. Then someone asks what four weeks means for a person who works three long days one week and five short ones the next, or why the payslip for a week off is a different number from a normal week, or whether the 8% "holiday pay" on a casual's payslip was ever legal. That is where the underpayments live, and they are the single biggest source of Holidays Act remediation in the country.

This guide is the annual leave chapter of our plain-English series on NZ employment leave. Same approach as the public holidays guide: we say exactly what the Act requires, cite the section, and where the Act says "agree" or "genuinely" we give you the rule we use ourselves so you have something concrete to follow.

Quick answers

Who is entitled, and from when

Every employee becomes entitled to not less than 4 weeks' paid annual holidays at the end of each completed 12 months of continuous employment (s 16(1)). There is no pro-rata legal entitlement to take before the anniversary. Employers commonly let people take leave "in advance" before then, and that is allowed (s 20), but it is a favour, not a right.

The word that does the work is continuous. Section 16(2) says the 12 months includes time on:

• any paid holidays or leave under the Act (annual, public, alternative, sick, bereavement, family violence);
• parental leave under the Parental Leave and Employment Protection Act 1987;
• volunteers leave, and time receiving ACC weekly compensation;
• unpaid sick, bereavement or family violence leave;
• any other unpaid leave of no more than one week.

Any other unpaid leave longer than a week is not counted unless you agree otherwise, which means the anniversary date can move. That interaction has its own guide: leave without pay in New Zealand, explained.

What "4 weeks" actually means

The Act deliberately gives leave in weeks, not days or hours. The employer and employee are to agree how the 4 weeks is met "based on what genuinely constitutes a working week for the employee" (s 17(1)). If they can't agree, a Labour Inspector can decide (s 17(2)).

For most people this is trivial. Someone who works five 8-hour days has a 40-hour, 5-day week, so 4 weeks is 20 days or 160 hours. Someone on three days a week gets 12 of their days. The trouble starts with people whose week changes.

Two traps. First, converting weeks to hours at the start and never revisiting it: an employee who moves from 20 to 40 hours a week is still entitled to 4 weeks, which are now 160 hours, not the 80 you banked. Second, deducting variable-hour employees' leave in hours worked while paying in weeks. Keep the unit consistent with the agreement.

Taking annual leave

• Within 12 months. The employer must allow the employee to take the holidays within 12 months of the entitlement arising (s 18(1)). You can't sit on requests indefinitely.
• Two weeks together. If the employee wants it, at least 2 weeks of the entitlement must be available as one continuous block (s 18(2)).
• By agreement, not unreasonably refused. Timing is agreed between the parties, and the employer must not unreasonably withhold consent (s 18(3)–(4)).
• Employer can direct with 14 days' notice. If you genuinely can't agree, or during a closedown, the employer can require leave to be taken with at least 14 days' notice (s 19).
• In advance is fine, by agreement. An employer may let an employee take an agreed portion of leave before the anniversary (s 20). It is paid under s 22, explained below.
• It never lapses. The entitlement remains in force until taken or paid out (s 16(4)). "Use it or lose it" clauses have no effect (s 6(3)).

How annual leave is paid

This is where the money goes wrong. Annual holiday pay is calculated for the agreed portion of leave at a rate based on the greater of (s 21(2)):

1. the employee's ordinary weekly pay (OWP) as at the beginning of the holiday; and
2. the employee's average weekly earnings (AWE) for the 12 months before the end of the last pay period before the holiday.

Ordinary weekly pay (s 8)

OWP is what the employee receives under their agreement for an ordinary working week. The Act is specific about what is in and out:

If it isn't possible to work out OWP from the agreement, for example because hours or commission genuinely fluctuate week to week, s 8(2) gives a formula: gross earnings for the 4 calendar weeks before the end of the last pay period, minus the irregular and one-off payments listed above, divided by 4. An agreement can also fix a special OWP rate, but only if it is equal to or higher than the calculated figure (s 8(3)).

Average weekly earnings (s 5)

AWE is 1/52 of the employee's gross earnings for the 52 weeks before the end of the last pay period before the holiday. Gross earnings (s 14) means everything the employer is required to pay under the agreement: wages, salary, taxable allowances, commission, overtime, payments for all types of leave taken during the period, board and lodgings, and first-week ACC compensation paid by the employer. It excludes discretionary payments, reimbursements, ACC weekly compensation, employer superannuation contributions and, importantly, any annual leave that was cashed up (s 14(c)(iv)).

Because AWE looks back a full year, it catches people whose earnings have dropped recently (they get the higher historical average) and people whose earnings have risen recently (OWP wins). That is the point of the two-number test.

When it is paid (s 27)

The default is that annual holiday pay is paid before the holiday starts. Most employers instead pay it in the normal pay run covering the leave, which is allowed if the employee agrees. Put that agreement in the employment agreement so it isn't a question later.

Leave taken in advance (s 22)

Leave taken before the anniversary is paid the same way, greater of OWP and AWE, except that for someone employed less than 12 months the AWE is worked out over the period actually employed, with the divisor reduced from 52 to the number of weeks worked (s 22(3)). If the employee then leaves before the entitlement arises, the advance is deducted from the 8% termination payment (s 23(2)(a)). Recovering more than that from a final pay needs the employee's written consent under the Wages Protection Act 1983.

Pay-as-you-go: the 8% rule (s 28)

Instead of providing 4 weeks' leave, an employer may pay annual holiday pay with the employee's regular pay, but only if all four of these are true:

1. the employee is either on a genuine fixed-term agreement for less than 12 months, or works on a basis "so intermittent or irregular that it is impracticable" to provide 4 weeks' annual holidays; and
2. the employee agrees in their employment agreement; and
3. the holiday pay is shown as an identifiable component of pay (its own line on the payslip); and
4. it is at least 8% of gross earnings.

Cashing up: up to one week a year (ss 28A–28F)

Only entitled leave can be cashed up, not accrued-but-not-yet-entitled leave, and the cashed-up amount is excluded from gross earnings so it doesn't inflate later averages.

Closedowns (ss 29–35)

A closedown is a period when an employer customarily closes all or part of the business and requires staff to take annual holidays, Christmas being the obvious one. The rules:

• Once per 12 months, though different parts of the business can have different closedowns (ss 30, 31).
• 14 days' notice of the requirement to take leave or stop work (s 32(3)).
• Employees who are entitled to annual holidays must take them for the closedown, whether they agree or not (s 32(1)). If their balance doesn't cover the whole period, the rest can be taken in advance by agreement (s 33(3)).
• Employees not yet entitled (under 12 months, or in a new year since their anniversary) must stop work if required. They are paid 8% of gross earnings since they started or since their last anniversary, less any leave already taken in advance or paid under s 28 (s 34(2)). Alternatively, by agreement, they take the period as leave in advance (s 34(4)).

Public holidays, sickness and bereavement during annual leave

• Public holidays. A public holiday during annual holidays is a public holiday, not annual leave, provided it would otherwise have been a working day (s 40(1)). Don't deduct annual leave for Labour Day.
• Sickness or injury. If the employee (or their partner or dependant) gets sick during annual leave, the employer may agree to convert those days to sick leave (s 36). It is discretionary. Our practice is to allow it with the same proof rules as normal sick leave.
• Bereavement. The employer must allow a bereavement during annual leave to be taken as bereavement leave (s 37).
• Family violence leave. Same as bereavement: must be allowed (s 37A).

Annual leave after parental leave: the pay rule people don't expect

This one lives in a different Act. Section 42(2) of the Parental Leave and Employment Protection Act 1987 says that if an employee becomes entitled to annual holidays during parental leave, or during the 12 months after returning, those holidays are paid at average weekly earnings only, not the greater of OWP and AWE. Because AWE looks back over a year that included unpaid parental leave, the rate can be much lower than a normal week's pay. Leave the employee was already entitled to before going on parental leave is unaffected and is paid normally.

This rule is repealed on 6 August 2028 by the Employment Leave Act 2026 (s 184 of that Act), after which annual leave following parental leave is paid like any other annual leave. Until then it applies. The full picture is in our parental leave guide.

When employment ends (ss 23–27, 40)

Three separate calculations can apply to one final pay, and they stack (s 26).

If the employee has been there less than 12 months there is no step 1: it is 8% of gross earnings since the start date, less advances (s 23). All of it goes in the final pay (s 27(2)).

The records you must keep (s 81)

For annual holidays specifically: the start date; the current entitlement; the date the employee last became entitled; the dates leave was taken and what was paid; any portion cashed up with the date and amount; hours worked each day and pay for them (needed for AWE and ADP); and on termination, the date and the holiday pay paid. Keep it for 6 years (s 81(4)). If you can't produce these, you can't prove the calculation, and the Labour Inspectorate will assume the worst.

The mistakes we see most

1. Paying only OWP or only AWE instead of comparing both each time (s 21).
2. Treating regular overtime or commission as excluded from OWP because it "isn't base pay" (s 8(1)(b)).
3. Pay-as-you-go for people with a pattern, then discovering s 28(4).
4. Freezing weeks into hours when the employee's hours later change.
5. Forgetting the 8% on the termination leave payment (s 26(a)) and the post-termination public holiday (s 40(3)).
6. Not resetting the anniversary after a closedown for not-yet-entitled staff (s 35).
7. Deducting annual leave for a public holiday that falls inside the leave (s 40(1)).
8. Paying annual leave after parental leave at the normal rate when the Act says AWE only, or the reverse: applying the AWE-only rule to leave that was entitled before the parental leave started.

What changes on 6 August 2028

The Employment Leave Act 2026 rewrites annual leave. As passed:

• Hours, accrued from day one. Annual leave accrues at not less than 0.0769 hours for every standard hour worked or on paid leave, from the first day (ELA s 23). For a 40-hour week that is about 3.08 hours a week, or roughly 160 hours a year, the equivalent of 4 weeks. Balances are held in hours and don't rescale if hours change.
• No 12-month wait to be entitled, but employers still control timing by agreement and must allow the balance to be taken in the following 12 months.
• Cash-up becomes 25% of the balance held at each start-date anniversary, per year, still on the employee's written request, with the employer to respond within 14 days and able to decline (ELA s 33).
• Pay-as-you-go is replaced by a leave compensation payment of at least 12.5% of the ordinary hourly rate on casual hours and qualifying additional hours, paid every pay period instead of accruing annual and sick leave on those hours.
• One pay rate for all leave, an hourly "leave payment rate" based on the employee's ordinary hourly rate (for waged staff, the lowest hourly rate payable for that day), plus any fixed allowances. The OWP/AWE comparison disappears (ELA ss 121–123).
• Closedowns need 21 days' written notice, are limited to one starting per calendar year per employee, and employers may require unpaid leave where accrued leave and advances don't cover the period (ELA ss 45–48).
• Annual leave after parental leave is paid like any other annual leave, and leave keeps accruing during parental leave based on the employee's standard hours before they left (ELA ss 23(3), 184).

Nothing changes before then and you cannot adopt the new rules early. Our guide to the whole new Act, Employment Leave Act 2026: what changes on 6 August 2028, is in this category.

Frequently asked questions

Sources