An overhaul of the Holidays Act, which would change how workers accumulate and take annual and sick leave, has been given the go-ahead by ministers.

Workplace Relations and Safety Minister Brooke van Velden labelled the Holidays Act, which has been in place since 2003, as “broken” and said the new proposal is a win for workers, businesses and New Zealand.

The act will be replaced with a new Employment Leave Act, which aims to be simpler and more understandable.

“We’re committed to fixing what matters. In this case, we’re taking care of a broken system that has been too complicated for businesses and workers to navigate effectively.

Workplace Relations and Safety Minister Brooke van Velden says the Government's proposed changes to the Holidays Act are "fixing what matters". Photo / Dean Purcell

“The problems with the act have been well canvassed over the years costing billions in large-scale remediation payments. Employers struggle to understand and apply the Holidays Act correctly, and employees struggle to understand their entitlements,” said van Velden.

If the bill is passed into law, a 24-month implementation period between the current systems and the new laws will allow for a smooth transition for employers and payroll providers, she said.

Notable changes

Annual leave

Under the new proposal, workers would begin to accumulate leave from their first day of employment as opposed to the current system, where workers are entitled to four weeks of annual leave after a year of “continuous employment”.

The leave would be accumulated at a rate of 0.0769 hours per hour of work, the equivalent of four weeks of leave a year.

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Van Velden said the change would give employees greater flexibility to take the hours they need off.

For example, if you only need a few hours off, you could use annual leave hours instead of taking an entire day.

Annual leave earned would be proportional to the number of hours worked.

Under the new system, workers will be able to request to cash 25% of their annual leave balance.

Those with larger leave balances will benefit the most from the change, as the current rules allow workers to cash one week of annual leave a year, 25% for workers with four weeks of leave, but less for people with more accumulated.

Sick leave

A similar change is proposed for sick leave, with a switch to hourly accumulation from the first day of employment rather than in a lump sum.

Currently, part-time and fulltime workers are eligible for 10 days of sick leave per year after six months of employment, with another 10 days being added each year.

The new system proposes sick leave to be gained at a rate of 0.0385 hours per hour worked, the equivalent of 10 days a year for a fulltime worker.

Part-time workers will get a large reduction in their entitlement under the new plan.

Someone working 20 hours a week would acquire 40 hours of sick leave a year.

Parental leave

Workers taking time off soon after they return from parental leave will be paid out at their full salary rate instead of a rate based on their earnings while they were on parental leave.

Workers will continue to earn leave during their time on parental leave.

Bereavement and family violence leave

Like sick and annual leave, bereavement and family violence leave will be accessible to workers from the first day of employment.

They will remain as days-based entitlements but workers will be able to take part days of leave.

Leave compensation payments

A “leave compensation payment” (LCP) of 12.5% of a worker’s base hourly wage is being introduced.

Under the changes, casual workers will receive the LCP on all hours worked instead of acquiring annual and sick leave.

Currently, casual workers can agree to receive 8% “pay-as-you-go” compensation instead of receiving paid annual leave, but sick leave is not included.

Fulltime unsalaried workers will receive the LCP for any additional hours worked instead of accruing sick or annual leave on those hours.

Commission or bonuses

Under the changes, annual leave payments will be based on base salary only. Any additional elements of pay, such as bonuses and commissions, will not be included in the hourly leave pay rate.