Leave without pay in New Zealand, explained

Leave without pay sounds like the simplest arrangement in employment: you don't work, we don't pay you, see you in a month. The problems appear later and quietly. Six months on, the payroll system shows an annual leave anniversary nobody agreed to move. A year on, the employee's holiday pay is lower than expected because the average included a month of zeros. A public holiday fell in the middle and someone paid it, or didn't, without checking. None of this is dramatic, and all of it is avoidable if you decide the consequences at the time you agree the leave.

This guide lists every place the Holidays Act cares about unpaid leave, what each one does, and the two decisions to make before the employee goes. It is part of our plain-English series on NZ employment leave.

What "leave without pay" is, legally

The Holidays Act never defines it. Apart from specific unpaid leaves granted by other Acts (parental leave, volunteers leave, jury service, and the Holidays Act's own unpaid sick, bereavement and family violence leave when the paid entitlement is exhausted), leave without pay is a matter of agreement. An employee has no general right to it and an employer has no general right to impose it. The employment relationship continues throughout; the employee is not resigning and is not being suspended. Because it is an agreement, it should be in writing, with a start date, an end date, and the answers to the two questions below.

Quick reference: where unpaid leave touches the Act

Effect 1: the annual leave anniversary (s 16(2)–(3))

An employee becomes entitled to 4 weeks' annual holidays after each completed 12 months of continuous employment (s 16(1)). Section 16(2) says that 12 months:

• includes unpaid leave "for any other reason for a period of no more than 1 week" (s 16(2)(a)(vi)); and
• unless otherwise agreed, does not include any other unpaid leave (s 16(2)(b)).

So the first week of any unpaid leave is free. Beyond that, the default is that the extra time doesn't count, and the employee's anniversary is pushed out by that amount.

The alternative in s 16(3): the employer and employee agree that the unpaid leave counts, the anniversary stays where it was, and in exchange the divisor of 52 used to calculate average weekly earnings is reduced by the number of whole or part weeks beyond the first that the employee was on unpaid leave. In Liam's case, agree to count the leave, keep 1 March, and calculate his AWE for the next year as gross earnings ÷ 48 instead of ÷ 52. The reduction applies for as long as the unpaid weeks fall inside the 52-week lookback, then it naturally falls away.

Whichever route you take, the annual leave the employee has already become entitled to is untouched. Unpaid leave doesn't consume or reduce an existing balance.

Effect 2: average weekly earnings, and therefore holiday pay (ss 5, 14, 21)

Annual holiday pay is the greater of ordinary weekly pay and average weekly earnings (s 21). AWE is 1/52 of gross earnings for the previous 52 weeks. Weeks on unpaid leave earn nothing, so AWE drops in proportion. OWP is unaffected because it is what the employee gets for an ordinary working week under their agreement (s 8).

• Steady full-timer: OWP wins anyway, so the reduced AWE makes no difference to their holiday pay. This is most employees.
• Employee whose earnings have been falling, or whose pay includes irregular overtime and commission that only AWE captures: the reduced AWE can mean less holiday pay. The s 16(3) divisor adjustment fixes exactly this, which is another reason to prefer it.

Effect 3: average daily pay is not affected (s 9A)

ADP, used for public holidays and sick, bereavement, family violence and alternative holiday pay where RDP can't be determined, divides 52 weeks' gross earnings by "the number of whole or part days during which the employee earned those gross earnings, including any day on which the employee was on a paid holiday or paid leave; but excluding any other day on which the employee did not actually work" (s 9A(2)). Unpaid leave days are excluded from the divisor. Zero earnings over zero days: ADP is unchanged. No adjustment is needed and none is available.

Effect 4: public holidays during the leave (s 12)

A public holiday is only paid if it would otherwise have been a working day for the employee, judged from the employment agreement, work patterns, rosters and the reasonable expectations of both parties (s 12(3)). An employee on agreed unpaid leave for the month of April would not have worked on Anzac Day. It is not an otherwise working day, and it is not paid. Nor does it earn an alternative holiday.

The exception is unpaid leave that is really a closedown. Section 12(3A) says that for a public holiday inside a closedown period you assess the otherwise working day question as if the closedown were not happening, which is why Christmas Day inside a closedown is still paid for Monday-to-Friday staff.

Effect 5: sick, bereavement and family violence leave

These entitlements require 6 months' current continuous employment (ss 63, 72D). The Act does not say agreed unpaid leave breaks it, and the employment relationship plainly continues (the person is still an employee; s 16(2)(b) treats unpaid leave as a non-counting period of employment, not as a gap in employment). The accepted position, which we follow, is that the 6-month qualifying period and the subsequent 12-month entitlement years keep running through unpaid leave. Nothing is deducted or paid for unpaid days, because a day of sick leave is only paid when it would otherwise have been a working day (ss 71, 72I).

The reverse case matters more in practice: an employee who has exhausted their paid sick leave and is off sick on unpaid leave is on "unpaid sick leave", which s 16(2)(a)(v) counts as continuous employment for annual holidays without the one-week limit. The same goes for unpaid bereavement and family violence leave. Record it as unpaid sick leave, not as generic leave without pay, or the anniversary logic above will be applied to it wrongly.

Effect 6: the unpaid leaves that always count (s 16(2)(a))

Several kinds of unpaid absence are counted as continuous employment for annual holidays regardless of their length:

• Parental leave under the Parental Leave and Employment Protection Act 1987 (see our parental leave guide, including the rule that annual leave arising during or within 12 months after it is paid at AWE only);
• Volunteers leave under the Volunteers Employment Protection Act 1973 (Defence Force service);
• time receiving ACC weekly compensation, whether or not the employer also pays;
• unpaid sick, bereavement or family violence leave.

Jury service is not on the list. Time off for jury service is protected by the Juries Act 1981 but, for the Holidays Act, unpaid jury service beyond one week falls under the general rule unless you agree to count it. Most employers agree.

Effect 7: closedowns are not leave without pay (ss 32–35)

An employer can require employees to stop work during an annual closedown (s 32), but it cannot turn that into unpaid leave for people who haven't yet earned annual holidays. Those employees must be paid 8% of their gross earnings since they started or since their last anniversary (s 34), and their anniversary resets to the closedown date (s 35). Employees who are entitled take annual holidays. Only where an employee has agreed to take the period as unpaid leave, on top of those rules, is it leave without pay. Details are in the annual leave guide.

Effect 8: other things that keep running, or don't

• KiwiSaver and other deductions stop because there is no pay to deduct from. Employees can make voluntary contributions directly.
• Notice periods and minimum wage aren't engaged; nothing is being paid.
• Alternative holidays already earned are unaffected and can be taken after the leave; they can't be taken during it (the day must be an otherwise working day, s 57(1)(b)).
• Cash-up of annual leave during unpaid leave is possible on request; it is paid at the s 21 rate, and the AWE side of that comparison is subject to Effect 2.
• Records: s 81 requires the hours worked each day and the pay for them. For unpaid leave that is zero and zero, but the dates must be there so the anniversary and AWE calculations can be reconstructed.

The two decisions to make before the leave starts

Put both answers in the written agreement. A one-paragraph letter is enough.

The mistakes we see most

1. Moving the anniversary without agreement being recorded, or moving it by the whole period instead of the period beyond one week.
2. Using the s 16(3) divisor reduction while also moving the anniversary. It is one or the other.
3. Coding exhausted sick leave as generic leave without pay, and then shifting the anniversary for what should have counted in full.
4. Paying a public holiday that fell in the middle of a month of unpaid leave, or, worse, deducting annual leave for it.
5. Pressuring employees into unpaid leave during quiet periods. Without agreement it is an unlawful deduction from wages the employee is ready and willing to earn.
6. Forgetting to unwind the reduced divisor once the unpaid weeks have dropped out of the 52-week window.

What changes on 6 August 2028

The Employment Leave Act 2026 removes the anniversary problem by removing anniversaries as the basis for entitlement. As passed:

• Leave accrues per standard hour worked or on paid leave. Hours on unpaid leave do not accrue annual or sick leave (ELA ss 24(1)(b), 74(1)(a)), except unpaid leave under other legislation such as parental leave, volunteers leave and jury service, which continues to accrue on the employee's standard hours (ELA s 6(1)(b)(iv), (4)). Nothing needs adjusting afterwards.
• No more AWE, so no divisor to reduce; leave is paid at an hourly leave payment rate based on the ordinary hourly rate.
• A public holiday during unpaid leave is expressly not an otherwise working day (ELA s 16(1)(d)), except unpaid leave during an annual closedown or agreed closure, which doesn't remove the public holiday (ELA s 16(2)).
• Unpaid leave days count as worked days in the 13-week, 50% otherwise working day test (ELA s 13(1)).
• Closedowns: an employer may require unpaid leave during an annual closedown where accrued leave, agreed advance leave and other arrangements won't cover it, with 21 days' written notice (ELA ss 47–48). This is the one situation in which unpaid leave can be imposed.
• Sick and bereavement leave no longer have a 6-month qualifying period, so the continuity question disappears.

Frequently asked questions

Sources