Annual leave is the most fundamental entitlement under New Zealand’s Holidays Act 2003. Every employer must provide a minimum of 4 weeks per year, and calculating and paying annual leave correctly is essential for compliance.
However, many NZ employers make mistakes with annual leave calculations, particularly around Ordinary Weekly Pay (OWP) and pro-rata payments for part-time employees. This guide covers everything you need to know about annual leave in New Zealand.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Consult an employment lawyer for guidance specific to your organization.
How Much Annual Leave Are Employees Entitled To?
Under the Holidays Act 2003, all employees are entitled to a minimum of 4 weeks of annual leave per year.
However, this is a minimum. Many enterprise agreements and awards provide more (e.g., 5 or 6 weeks). Check your agreement with employees.
After 10 Years of Service
The Holidays Act was amended to provide:
- 5 weeks of annual leave after 10 years of continuous service
(Note: There was discussion of increasing this to 6 weeks, but as of 2026, it remains 5 weeks after 10 years.)
Part-Time and Casual Employees
Part-time and casual employees are entitled to the same proportion of leave as full-time employees, based on hours worked.
Example: A part-time employee working 20 hours/week for a full-time 40-hour week is entitled to:
- 4 weeks × (20 ÷ 40) = 2 weeks of annual leave
Accrual of Annual Leave
Annual leave accrues on a week-by-week basis from the first day of employment.
Accrual Rate for Full-Time Employees
4 weeks ÷ 52 weeks = 0.077 weeks per week
For a 40-hour work week:
- 0.077 weeks × 40 hours = 3.08 hours per week
- Or: 24.62 hours per month (3.08 × 8)
Accrual for Part-Time Employees
Annual leave accrues at the same proportion as ordinary hours.
Example: A part-time employee working 20 hours/week:
- 0.077 weeks × 20 hours = 1.54 hours per week
- Or: 12.31 hours per month
Timing of Accrual
Leave accrues day-by-day or week-by-week. You should update employees’ leave balances:
- Weekly (most common in payroll systems)
- Or monthly for simpler administration
Annual leave accrues even if the employee:
- Is on unpaid leave
- Is sick
- Is on parental leave
- Is in probation
Payment Rate for Annual Leave
This is where many NZ employers make mistakes. Annual leave is paid at the employee’s Ordinary Weekly Pay (OWP).
What Is Ordinary Weekly Pay (OWP)?
OWP is the regular, ordinary amount an employee earns in an ordinary week of work. It includes:
- Base salary or hourly rate
- Regular allowances (e.g., shift allowances, tools allowances)
- Regular bonuses (if they recur weekly)
OWP does NOT include:
- Irregular bonuses or one-off payments
- Overtime
- Penalty rates
- Redundancy payments
- Termination payments
Calculating OWP
For a Salaried Employee:
- Annual salary ÷ 52 weeks = OWP
Example: $50,000 annual salary:
- OWP = $50,000 ÷ 52 = $961.54/week
For an Hourly Employee:
- Hourly rate × ordinary weekly hours = OWP
Example: $24/hour, 40-hour week:
- OWP = $24 × 40 = $960/week
With Regular Allowances:
- (Base salary + allowances) ÷ 52 = OWP
Example: $50,000 salary + $5,200 shift allowance:
- OWP = ($50,000 + $5,200) ÷ 52 = $1,058/week
Payment Calculation
For each week of annual leave taken:
- Payment = OWP × weeks of leave taken
Example: Employee with OWP of $1,000/week takes 2 weeks:
- Payment = $1,000 × 2 = $2,000
When Can Employees Take Annual Leave?
Timing by Agreement
Annual leave is typically taken by mutual agreement between employer and employee. The process is:
- Employee requests leave on specific dates
- Employer agrees or proposes alternative dates
- Documented in payroll system
If You Can’t Agree
If there’s a dispute about timing:
- The employee has a right to take leave
- The employer cannot refuse unreasonably
- The Employment Relations Authority can resolve disputes
- Typically, employee preferences are given weight (especially for holiday periods)
Directive Power
Employers can direct employees to take annual leave if:
- Business operational requirements require it (e.g., annual shutdown)
- Reasonable notice is given (typically 4 weeks)
- The employee has leave available to take
- The directive is not unreasonable
Example: A manufacturing company requires all staff to take 1 week of annual leave during the December shutdown.
Carryover of Unused Annual Leave
Default Rule
Unused annual leave carries over to the next year. The Act doesn’t impose a limit on carryover.
However, if an employee has excessive leave (e.g., 10+ weeks accumulated), the employer can require the employee to take leave or negotiate a reduction.
Managing Excessive Leave
If an employee has accumulated excessive leave:
- Encourage the employee to take leave
- Negotiate a reduction or payment
- Require the employee to take leave with reasonable notice
- In extreme cases, seek legal advice about options
Payout of Carryover
If an employee leaves or at the end of a contract, all unused annual leave must be paid out at the ordinary rate.
Payment on Termination
When an employment relationship ends, the employer must pay out all accrued, unused annual leave at the employee’s OWP.
This is mandatory and cannot be waived.
Example: Employee leaving with 3.5 weeks of unused annual leave, OWP $1,000/week:
- Payout = 3.5 weeks × $1,000 = $3,500
This must be paid on or before the employee’s final day.
Pro-Rata Annual Leave (Part-Time and Short-Term Employees)
Part-Time Employees
Part-time employees earn annual leave on a pro-rata basis based on hours worked.
Calculation:
- 4 weeks × (ordinary hours per week ÷ 40 hours) = annual leave entitlement
Example: Part-time employee working 25 hours/week:
- 4 weeks × (25 ÷ 40) = 2.5 weeks of annual leave per year
Short-Term Employees (Less Than 1 Year)
If an employee leaves before completing 1 year of service, they are entitled to:
- Annual leave on a pro-rata basis
Calculation:
- 4 weeks × (weeks worked ÷ 52 weeks) = pro-rata annual leave
Example: Employee works for 6 months (26 weeks):
- 4 weeks × (26 ÷ 52) = 2 weeks of annual leave earned
- On leaving, entitled to: 2 weeks × OWP
Flexible Annual Leave
Some employers and employees negotiate flexible annual leave arrangements:
- Taking leave in shorter periods (e.g., 1 day per week for a month)
- Taking leave unpaid
- Combining paid leave with unpaid leave
Any flexible arrangements must be documented and agreed in writing.
Annual Shutdown and Directed Leave
Many organizations operate annual shutdowns (e.g., December closures) and require employees to take annual leave.
This is allowed, but:
- Reasonable notice must be given (typically 4 weeks)
- The employee must have sufficient leave available
- The directive must be reasonable (e.g., can’t require more leave than the employee has)
- The employee is paid at OWP
Example: Company shutdown 20 December - 3 January (2 weeks). All staff must take annual leave.
- Staff with 2+ weeks available: Take the 2 weeks as directed
- Staff with <2 weeks available: Take what they have + unpaid leave (if agreed)
Common Mistakes
1. Using the Wrong Pay Calculation
❌ Wrong: Paying annual leave at hourly rate + penalties ✅ Right: Paying annual leave at Ordinary Weekly Pay (OWP) only
2. Not Including Regular Allowances in OWP
❌ Wrong: OWP = base salary only ✅ Right: OWP = base salary + shift allowance + other regular allowances
3. Denying Annual Leave Requests
Employees have a right to take annual leave. You cannot refuse without valid operational reasons. Disputes can be resolved by the ERA.
4. Not Paying Out on Termination
All accrued leave must be paid out on termination. It cannot be forfeited.
5. Incorrectly Calculating Pro-Rata Leave
❌ Wrong: Part-time employee gets 4 weeks (same as full-time) ✅ Right: Part-time employee gets 4 weeks × (hours worked ÷ 40)
Record Keeping
You must keep records of:
- Each employee’s annual leave balance
- Leave taken and dates
- OWP for each employee
- Amounts paid for leave
- Pro-rata calculations for part-time employees
Retain records for at least 6 years.
Key Takeaways
- All employees are entitled to a minimum of 4 weeks of annual leave per year
- After 10 years of service, entitlement increases to 5 weeks
- Annual leave is paid at Ordinary Weekly Pay (OWP)
- OWP includes base salary + regular allowances (NOT overtime or bonuses)
- Part-time employees earn leave on a pro-rata basis
- Unused leave carries over and must be paid out on termination
- Employees have a right to take leave; unreasonable refusal breaches the Act
- Keep detailed records for at least 6 years
Getting annual leave calculations right is essential for compliance with the Holidays Act. A leave management system automates OWP calculations and accrual tracking.
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