The Employment Leave Bill is now set to become law. In March 2026, we reported on the Bill, which replaces the Holidays Act 2003 with a new, hours-based way of working out leave. The Bill has now passed its third and final reading meaning it will come into law in its current form. Below, we explain what changed along the way and what these changes to the Holidays Act mean for you.
Purpose of annual leave: rest and recreation reinstated
The original Bill described annual leave only as paid time away from work, dropping the Holidays Act's reference to rest and recreation. After concerns from submitters, the Bill restores this: annual leave is now recognised as being for both purposes.
Notional rosters made more workable
Annual leave is now accrued on the basis of an employee's contractual hours. If an employment agreement does not set out an employee's contractual hours, the employer and employee must agree a "notional roster" in writing, used to work out how much leave the employee builds up and can take. Two changes aim to make this easier to apply in practice:
The notional roster must reflect the employee's actual working pattern as closely as possible
Employers with changeable rosters can now agree a method for working out standard hours and days, rather than having to fix them in advance.
Multiple roles with one employer: more flexibility
Under the original Bill, an employee with two or more roles for the same employer would automatically have a separate leave balance for each role. Employers and employees can now instead agree in writing to treat the roles together, with separate balances only applying if they do not reach an agreement. This change responds to concerns that mandatory separate balances would make it harder for employees to take longer blocks of leave, and could be more difficult for employers to administer.
The otherwise working day test: a gap closed
We flagged the new "otherwise working day" (OWD) test in our earlier article. This is the test to determine whether a public holiday falls on a day that the employee would otherwise be expected to work. Where an agreement does not specify working days, a fallback test applies: did the employee work, or take paid or unpaid leave, on 50% or more of the corresponding days over the preceding 13 weeks? Originally, this fallback only applied where an agreement set out no working days at all. The Bill now also extends the fallback to employees who have some set days but regularly work extra ones – and employers only need to formally notify OWD status where the fallback test applies.
Correcting leave compensation payment errors
The Bill provides for a 12.5% Leave Compensation Payment (LCP) for each hour the employee works in addition to their standard hours. If the employer incorrectly records the employee as accruing annual and sick leave on hours that should instead attract the LCP, the Bill allows the employee to cash up the incorrectly accrued annual leave, and any incorrectly accrued sick leave simply becomes ordinary sick leave. The Bill now also adds a top-up when cashing up: an extra 0.92% of the leave payment rate per hour, which is the remainder of the 12.5% LCP rate after the annual leave (7.69%) and sick leave (3.89%) portions are deducted.
Remediation framework
The Bill provides that employers can use an optional remediation process to fix historic non-compliance with the current Holidays Act. The scope of the remediation process applies to the six years immediately prior to the Holidays Act ceasing to be in force. While an employer is following the remediation process, their obligations and liabilities under the Holidays Act will be suspended, and new Holidays Act claims cannot be commenced. In some circumstances existing proceedings will also be paused by an employer's election to utilise the remediation framework.
When will the changes take effect?
The timeline has not changed: most of the Bill takes effect from 6 August 2028 (two years after Royal Assent) (with an exception for state schools, who have ten years). Employers then have a further year to bring their employment agreements into line, after which the Act's minimum terms will apply regardless of what the agreement says.
A gap in the safety net: commission-based earners
Something worth watching: the Bill excludes commission and other incentive payments from the "leave hourly rate" and "ordinary hourly rate" used to calculate leave, LCP, and public holiday pay. If an employee is paid partly or wholly by commission, their leave must be paid at the greater of their leave hourly rate (if any) and the minimum wage – commission itself is never added in. In practice, this means an employee on a low base wage who earns most of their income through commission could have their leave paid close to minimum wage, even though their actual take-home pay is much higher. The change will mean more certainty for employers about the cost of leave liability (the value of their employee's accrued leave). This hourly rate could be addressed by employers and employees agreeing on a specific rate for leave and recording that in the employment agreement.
What should employers do now?
Employers now have a two-year window (ten years for state schools) to review their employment agreements, payroll systems, and rostering practices against the new rules – the notional roster and multiple-role changes in particular are more flexible, but will need careful documentation.
The timing of employment agreement updates relative to the Act will need to be managed carefully, with the following time periods in mind:
An agreement entered into before commencement of the Act will be expected to be updated so that the employment agreement aligns with the new Act upon commencement.
However, there will be a one-year grace period following commencement, during which time the more favourable of the employment agreement's terms or the Act applies. After that grace period ends, the agreement itself must comply with the Act's leave provisions, or the Act's minimum terms will override it.For agreements entered into after commencement (or still not updated to comply with the Act by commencement), but before the end of the grace period, the Bill provides that the employer must comply with both the terms of the employment agreement and the Act.
However, where there is a conflict between the employment agreement and the Act, the terms of the employment agreement will prevail if they are more favourable to the employee. Where possible, we recommend that new employment agreements be compliant with the Act if they are entered into during the grace period; however, we see this as being of assistance to parties who may enter into an employment agreement or collective agreement shortly after commencement of the Act.After the end of the grace period, all employers must ensure that their employment agreements comply with the Act.
If employment agreements do not comply with the Act at this time, then the minimum entitlements under the Act will prevail where there are inconsistencies. The Bill does not provide that the minimum entitlements only prevail where the Act is more favourable, which means the override will apply to all inconsistent terms in the employment agreement – even those that may be more generous than the minimum entitlements under the Act. MBIE guidance states that the purpose of this approach is partly to incentivise all stakeholders to update employment agreements within the transition window.
We will keep track of implementation and will update you as more detail becomes available. If you have questions about what these changes mean for you, please get in touch with a member of our employment team.