What Was Announced

The Cabinet has confirmed several key pillars of the proposed Employment Leave Act (The Beehive):

• Annual leave will accrue in hours from day one, at 0.0769 of each contracted hour worked (4/52).
• Leave will be “banked” in hours, with no adjustments if contracted hours later change.
• Employees will be able to cash up 25% of their total annual leave balance each year.
• Sick leave will also accrue in hours from day one at 0.0385 of each contracted hour (2/52).
• Bereavement leave and family violence leave will remain measured in days but available from day one.
• A new Otherwise Working Day (OWD) test will help determine whether a public holiday falls on an employee’s expected working day.
• Alternative holidays will accrue in hours, on a one-for-one basis, with each public holiday hour worked.
• All leave will be paid at an hourly leave pay rate, based on base wages.
• Fixed allowances will be paid in full during leave. 
• Annual leave taken after parental leave will be paid as normal, removing the need for a 52-week averaging test.
• Casual workers and employees working additional hours will be entitled to a 12.5% leave compensation payment on top of wages, rather than accruing additional leave.

The Minister has confirmed the goal to pass the Act within this parliamentary term remains on track, with a 24-month implementation period after passage (The Beehive).

Where Things Stand

We are currently at the post-Cabinet policy decision stage. The Bill has not yet been introduced to Parliament. MBIE’s update confirms Cabinet’s decisions and notes the Bill will now be drafted and then introduced, triggering the official Select Committee process (MBIE).

1. First reading
2. Select Committee review (typically six months, with opportunities for public submissions)
3. Second reading
4. Committee of the Whole House
5. Third reading
6. Royal assent

If introduced in the coming months and given a normal Select Committee timeframe, mid–late 2026 is the earliest realistic passage date (The Beehive, MBIE). The Act would then have a 24-month implementation window, meaning practical go-live for most sectors in 2028.

The schooling sector will have up to 10 years to transition, given the complexity of its centralised payroll system (The Beehive).

Why This Matters

Replacing the Holidays Act isn’t just a technical change,  it will reshape how businesses manage leave and how employees access their entitlements.

Employers and payroll providers have long struggled with the Holidays Act, particularly with variable-hour and casual workers. These complexities have led to widespread remediation programmes, with many businesses still correcting errors today.

The proposed hours-based system aims to:

• Make entitlements easier to calculate and administer
• Reduce payroll disputes
• Ensure greater fairness for employees
• Simplify compliance for employers

Some of the main risks for employers include:

• The need to adapt payroll systems to handle new accrual rules
• Possible increase in liabilities and costs
• Updating employment agreements
• Re-training payroll and HR teams

The Government has signaled a 24-month implementation period to give organisations time to adapt (The Beehive).

Will the Employment Leave Act really happen?

It’s natural to be sceptical. Past reviews, including one in 2023–2024, failed to deliver change. But this time momentum looks stronger:

• The Bill is Government-backed and supported by the coalition (The Beehive).
• The governing parties hold a working majority in Parliament, making passage highly likely.
• The Act’s simplification focus makes it easier to defend politically.

That said, risks remain:

• Select Committee scrutiny could alter details.
• Timing is tight – failure to pass before the next election could stall progress.
• Future Governments may amend or reprioritise.

Initial reporting suggests debate will centre on issues like hours-based sick leave and the 12.5% compensation payment (NZ Herald). But overall, the core direction is Government-led and positioned as simplification.

What Business Should Do Now

The Holidays Act 2003 remains in force. Nothing has legally changed yet, and no new rules apply until the proposed Employment Leave Act is introduced, debated, passed, and then given effect after a transition period. That process will take time, and final details may still shift.

However, employers should stay proactive so they’re not caught off guard. The following steps can help organisations prepare in the coming months:

1. Monitor official updates

• Keep an eye on the Legislation website for the introduction of the Employment Leave Bill.
• The Bill’s introduction will trigger the official Select Committee process with public submissions.
• MBIE will also publish guidance and timelines. In the meantime, review the Cabinet paper and explanatory material, which outline proposed hourly accrual rates and transition plans.

2. Assess payroll system capability

• Most payroll software will need updates to handle hourly leave accrual and the proposed 12.5% Leave Compensation Payment.
• Ask your provider what development plans they have and when updates may be available.
• Consider whether a future system change or upgrade might be required if your current platform is already under strain.

3. Analyse your workforce profile

• Identify the number of staff on casual, variable, or part-time arrangements.
• This will help you model potential impacts of the proposed compensation payment and accrual method.
• Use this data to anticipate payroll cost shifts and budget accordingly.

4. Begin employee engagement planning

• Even though no changes are in force, early communication builds trust.
• Plan how you’ll explain the reforms once details are clearer.
• Reassure staff that entitlements are secure under the current law, and that the business is preparing for a smooth transition when new rules apply.

5. Line up expert support

• If you are an NZPPA member, we recommend attending the briefing on the 8th of October 2025 
• The transition will be complex and may involve contract reviews, policy updates, payroll system reconfiguration, and balance conversions.
• Begin conversations with payroll and HR specialists, legal advisors, or industry groups now so you have trusted guidance ready when the law is enacted.

Bottom line: Stay the course under the current Holidays Act, but start preparing quietly in the background. This ensures that when the Employment Leave Act does come into effect—most likely several years away—you’ll be ready to implement with minimal disruption.

How Alxemy Can Help

At Alxemy, we help organisations navigate payroll, workforce, and compliance change with confidence. While the Employment Leave Act is not yet law, aligning your foundations now will make the eventual transition smoother. Our services most relevant to this context include:

• Payroll Remediation & Compliance
  Many businesses are still working through Holidays Act compliance issues. Fixing these now reduces risk and places your organisation in a stronger position for any future transition.

• System Health Checks
  Our fixed-price health checks identify whether your current payroll and HR systems are equipped to handle potential reforms—such as hourly accruals, compensation payments, or new leave categories—while also uncovering inefficiencies and compliance gaps.

• Strategic Systems Advice
  We guide you on whether to enhance your current platform or plan for a longer-term shift. This includes reviewing vendor roadmaps, integration options, and scalability for future requirements.

• Managed Payroll & Systems Administration
  For organisations looking to reduce risk and overhead, we provide fully managed services that combine payroll processing with system administration, ensuring updates, compliance changes, and employee queries are handled seamlessly.

• Implementation & Change Support
  If the new Act is passed, employers will face policy, system, and process changes. Our consulting team is experienced in delivering large-scale implementations, staff training, and change management to minimise disruption.

We help organisations balance compliance today with preparedness for tomorrow.

Frequently Asked Questions

1. When will the Employment Leave Act take effect?
The Bill hasn’t been introduced yet. If passed this term, the earliest practical start for most sectors is 2028 after a 24-month implementation window.

2. What happens to the Holidays Act in the meantime?
The Holidays Act 2003 remains in force until the new law is fully passed and implemented.

3. How will annual leave be calculated under the new Act?
Annual leave will accrue in hours from day one at 0.0769 per contracted hour (4/52). Leave is banked in hours.

4. Can employees cash up their leave?
Yes. Employees will be able to cash up 25% of their total annual leave balance each year.

5. How does the new law affect casual workers and additional hours?
Casual workers and employees working additional hours will receive a 12.5% leave compensation payment on top of wages, rather than accruing additional leave.

6. How will sick leave accrue?
Sick leave will accrue in hours from day one at 0.0385 per contracted hour (2/52).

7. How are public holidays handled?
A new Otherwise Working Day test will determine if a public holiday falls on an expected working day. Alternative holidays will accrue hour-for-hour with each public holiday hour worked.

8. How will leave be paid?
All leave will be paid at an hourly leave pay rate based on base wages; fixed allowances will be paid per normal while employees are on leave.

9. What should employers do now?
Employers must continue to follow the Holidays Act 2003 as nothing has changed yet. It’s sensible to stay informed by monitoring the Bill’s progress and upcoming Select Committee process, but avoid making changes until the law is confirmed. In the meantime, you can start quietly assessing payroll system readiness for hourly accrual, reviewing how your workforce profile might be affected, and planning future communication and training so you’re prepared if and when the Employment Leave Act becomes law.

The Bottom Line

The replacement of the Holidays Act with the Employment Leave Act is one of the most significant workplace law reforms in recent memory. If passed, it promises to simplify payroll compliance, ensure entitlements are clearer and fairer, and reduce the errors that have plagued employers for decades.

But the change won’t happen overnight. With the Bill yet to be introduced, an implementation period of two years, and carve-outs for specific sectors, we’re looking at a 2028 start date for most businesses.

Until then, the Holidays Act 2003 remains the law of the land. Employers should continue to comply with its requirements, while keeping a close eye on developments in Parliament.

Preparation today will pay dividends tomorrow. By understanding the proposed reforms and planning early, organisations can ensure they’re ready for the Employment Leave Act – whenever it arrives.

Why Training and Testing Are Critical

Training and testing aren’t “end of project” tasks. They are core delivery workstreams that start well before go-live. 

They ensure that:

• Administrators understand the system deeply enough to support it
• Managers and champions can validate real business processes
• End users can adopt the system quickly with minimal disruption
• Payroll-critical functionality complies with NZ legislation (e.g. Holidays Act)

Business stakeholders can confidently sign off readiness. This builds directly on the foundation explained in the previous article, Provisioning, build and vendor testing (part 4), where your system is stabilised and handed to the business for the first time. Without that preparation, effective training and testing cannot happen.

Training: Building Capability in Stages

Training should be delivered in phases, not crammed into a one-off workshop. Each phase builds capability at the right time, for the right people.

Administrator Training (Pre-Scenario Testing)

Train administrators (typically Payroll and HR specialists) first so they can lead testing. Go beyond navigation. Cover:

• Rules engine configuration
• Workflow design and escalation
• Reporting and data extracts
• Handling complex NZ requirements (like Holidays Act compliance)

Well-trained admins become your first line of support and your first testers, validating business-critical logic before involving wider audiences.

Champion & Manager Training (Pre-UAT)

Once the system passes initial scenario testing, train business unit champions, people managers, and operational leads. They’ll help design and execute UAT, so they must understand:

• Day-to-day business processes.
• Data entry, approvals, and reporting flows.
• Known pain points in the legacy system.

Early involvement builds ownership and advocacy, reducing resistance during rollout.

End-User Training (Closer to Go-Live)

End-user training happens last, just before parallel runs and go-live, so it reflects the final configuration. 

It should cover:

• Accessing portals, kiosks, or mobile apps.
• Submitting timesheets and leave.
• Viewing payslips and personal information.

Where possible, have champions or managers deliver this training. Familiar faces improve trust and adoption.

Scenario Testing: Proving the System Under Pressure

Scenario testing validates that the system works as designed across every business situation, from the routine to the highly unusual.

It is led by the client project team with vendor support, and should be treated as a full-scale operational rehearsal.

Scope of Testing: 

• Everyday processes – standard pay runs, leave requests, timesheets, onboarding and terminations.
• Complex allowances and deductions – overtime, shift allowances, industry-specific pay rules.
• Edge cases – For example, when Christmas and Boxing Day fall on a weekend and are Mondayised and Tuesdayised under NZ law.
• Volume and breadth – hundreds of cases across contracts, patterns, and employee types.

Scenario testing is where confidence is built, but only if it’s structured, documented, and exhaustive. Many organisations undercook this phase. Our article When scenario testing takes a backseat shows what happens when testing is rushed or deprioritised: confidence collapses, defects surface late, and go-live becomes a gamble. Treat scenario testing as a rehearsal, not an afterthought.

User Acceptance Testing (UAT) – Business Validation

UAT is where the business signs off that the system is ready for live use.
Unlike scenario testing (which is theoretical), UAT validates real-world business operations.

Typical UAT Activities:

• Selected stores or branches clock staff in both legacy and new systems.
• Managers submit leave approvals in the new system..
• Payroll teams process their regular tasks through the platform.

The goal is not only accuracy, it’s verifying that the system supports how the business actually operates.

Building a Structured Testing Framework

To avoid chaos, testing must be methodical and measurable. Best practices include:

Entry and Exit Gates

Define clear prerequisites to start a phase (e.g. data loaded, system stable) and conditions to close it (e.g. no payroll-critical defects open).

Test Cases as User Stories

Write test cases in plain business language and include expected results to avoid subjectivity:

“As a store manager, I want to approve annual leave so the roster updates correctly.”

Issues Register and Retesting

• Log all defects with severity, category, and owner.
• Retest and close every issue.
• Maintain audit trails for compliance and risk reviews.

Progress Tracking

• Maintain test execution dashboards.
• Show what’s complete, what’s blocked, and where issues cluster.
• Keep stakeholders informed at all times.

Data Refresh – Creating a Realistic UAT Environment

Before UAT begins, refresh data to reflect current real-world conditions so results are accurate and compliant.

Key Elements to Refresh

• Current leave balances and entitlements.
• 52-week earnings history (critical for Holidays Act calculations).
• Employee master data (contracts, job classifications, personal details).

Before UAT begins, refresh data to reflect current real-world conditions so results are accurate and compliant. This step links back to Project initiation, scope and design (part 3), where decisions about data migration, employee records, and Holidays Act rules first take shape. Good design at the start makes UAT data refresh far smoother later on.

Best Practices for Training and Testing

• Communicate constantly: keep vendors, admins, and managers aligned.
• Engage stakeholders early: prevent resistance and rework.
• Document everything: training plans, test cases, sign-offs, defect logs.
• Build feedback loops: refine based on results, not assumptions.
• Prioritise risk areas: payroll-critical processes should be tested first.

This ensures training and testing deliver capability, confidence, and control.

Preparing for Go-Live

Once UAT is complete and all payroll-critical defects are resolved, attention shifts to preparing for parallel runs and final cutover – the bridge between testing and live operation.

This phase is about readiness, not speed. It ensures your system, processes, and people perform as expected under real-world conditions before go-live. Parallel runs, the focus of our next article, simulate live payrolls and operations, validating that everything functions accurately at scale.

Key preparation activities include:

• Reconfirm success criteria and sign-offs
• Finalise user access and security settings
• Schedule hypercare support for the first pay cycles

This preparation lays the foundation for a confident transition into the final stage about parallel runs and go-live.

Conclusion

Training and testing are not peripheral activities – they are the proving ground of any payroll or HCM project.
Staged training builds capability at the right time, while scenario testing and UAT validate that the system performs under real-world pressure.

By applying structured testing methods, rigorous documentation, and accurate data, organisations create the confidence needed to move into Part 6: parallel runs and go-live – which we explore next in the concluding part of this series.

Frequently Asked Questions

Accelerate your HCM go-live with confidence.

Talk to Alxemy’s enterprise implementation experts today and make your training and testing phases seamless. Book a Consultation

Ordinary Weekly Pay (OWP)

At first glance, OWP looks straightforward. It is the employee’s “ordinary weekly pay” at the start of the holiday. But what exactly does that include?

• Is it just base salary?
• What about regular allowances?
• Does overtime count?
• What if the employee receives board and lodging?

The answer: yes, these can all be included.

This is where many businesses get caught. If you are paying a regular allowance, and your contract does not specifically say it stops during leave, that allowance continues to be paid on top of the leave payment. At the same time, it is also included in the OWP calculation. The result? The employee receives the allowance twice. Payroll professionals call this “double-dipping” and it often happens because payroll was not consulted when allowances were introduced.

What’s excluded from OWP?

The Act carves out certain types of payments:

• Irregular payments
• One-off payments
• Discretionary payments

But be cautious. What you think is discretionary may not meet the legal definition. A labour inspector could rule that a payment you assumed was discretionary is in fact regular, and therefore should be included. Section 8(c) of the Holidays Act provides the framework, but interpretation can be risky.

Calculating OWP when it’s unclear

If OWP cannot be determined because of excluded payments, a formula must be applied:

Gross earnings for the last 4 weeks, less excluded payments, divided by 4.

There is also provision for an employer and employee to agree on a special OWP rate, as long as that rate is equal to or greater than the statutory calculation. Importantly, you cannot simply use the base salary in the employment agreement unless it meets the definition.

And if all else fails, Section 11 of the Holidays Act allows a labour inspector to determine OWP. Most employers would prefer to avoid this outcome, as it suggests payroll processes are not compliant.

Key question: How is your system calculating OWP? And how does it handle fortnightly and monthly employees?

Average Weekly Earnings (AWE)

AWE is designed to capture fluctuations over time. The calculation is:

Gross earnings over the last 52 weeks ÷ 52.

This method smooths out irregularities, but raises another question: what counts as gross earnings?

• Are bonuses included?
• Are allowances included?
• Does a seasonal top-up or Christmas cash bonus fall into the calculation?

These decisions matter. Misclassifying payments can either short-change employees or overpay them. Both outcomes create risk, financial for the employer and compliance exposure if challenged by a labour inspector.

Another common issue arises with employees paid fortnightly or monthly. Payroll systems must be able to apply the same rules consistently, regardless of pay cycle. A system that averages incorrectly or overlooks certain earnings can cause significant underpayments.

Leave accrual and payments

This is where the Holidays Act leaves employers with less guidance. The Act does not define “leave accrual.” It only defines leave entitlement and leave taken in advance.

Most payroll systems show both entitlement and accrual balances, but many treat them the same way at payout. That can be problematic.

Here’s why:

• If leave is taken in advance, it must be paid at the greater of OWP or AWE.
• If the employee later resigns, the accrual time is ignored. Instead, the employer recalculates pay based on 8% of gross earnings since the last leave anniversary, less any leave in advance already paid.

This can lead to a deficit if the earlier advance payment was higher than the 8% calculation.

Best practice for accruals

• Treat accrual and entitlement as separate balances.
• Where possible, configure your payroll system to record gross earnings since the last anniversary, so the 8% calculation can be applied correctly. Few systems handle this well, but it is the most accurate approach.

Final reminders

Holiday pay is not just about calculation, timing matters too.

• Once you have determined the correct rate for an annual holiday, that rate must stay the same for the entire holiday period, even if it runs across multiple pay cycles. Payroll systems should not be recalculating it each pay run.
• Under Section 27 of the Holidays Act, holiday pay must be paid before the employee goes on holiday, unless there is a written agreement to process it in the usual pay run. This often gets overlooked but is a legal requirement.

Why this matters

Annual leave payments may seem straightforward on the surface, but the reality is complex. Missteps create compliance risk, employee disputes, and potential financial liability. Systems must be configured correctly, contracts must be clear, and payroll professionals must be involved when allowances or new payment types are introduced.

“The greater of” may sound simple, but applying it correctly is where most payroll mistakes happen. Ensuring your payroll system interprets them correctly is one of the most important steps in building a compliant, trusted workplace.

Written by: Dawn Grant