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A straightforward guide to understanding the government's proposed new formula for annual leave and sick pay

For years, calculating holiday pay and sick leave has been one of the most frustrating compliance headaches for New Zealand employers. Whether you're running a dairy farm with seasonal workers, managing a rural contracting business, or employing casual staff in your family enterprise, the current rules have been anything but simple.

But change is coming.

The government has proposed a new, remarkably straightforward formula for calculating leave entitlements. While this isn't law yet—so don't start applying these rules just yet—it's worth understanding what's on the horizon and how it could simplify your payroll processes.

Why the Change?

The current Holidays Act has been a compliance nightmare. Multiple reviews, court cases, and widespread confusion have shown that even well-intentioned employers struggle to get it right.

The proposed changes aim to strip away the complexity and replace it with a simple mathematical formula that anyone can apply.

For rural businesses in particular—where you might have contract milkers, relief workers, seasonal shearers, or casual packhouse staff—these changes could make life significantly easier.

The New Formula: How It Works

The proposed system uses multiplication factors based on actual hours worked. Here's the breakdown:

Annual Leave

Take the total hours your employee has worked and multiply by 0.0769. The result is the number of hours of annual leave they're entitled to.

Example: Let's say you employ Alice as a relief milker, and she's worked 200 hours over the qualifying period. Her annual leave entitlement would be 200 hours × 0.0769 = 15.38 hours of annual leave.

If Alice earns $28 per hour, her annual leave pay would be 15.38 hours × $28 = $430.64.

Sick Leave

The same principle applies, but you multiply by 0.0385 instead.

Using Alice again with her 200 hours worked: 200 hours × 0.0385 = 7.7 hours of sick leave entitlement.

At $28 per hour, that's 7.7 hours × $28 = $215.60 of sick leave pay.

Casual Workers: The 12.5% Rule

Here's where it gets even simpler for casual employees.

If you add the two factors together (0.0769 + 0.0385), you get 0.1154, or 11.54%. The proposal rounds this up to 12.5% for casual workers.

This means if you employ a casual worker, you can simply add 12.5% to their hourly rate to cover both annual leave and sick leave.

Example: If you're paying a casual fencer $30 per hour, you'd add $3.75 (12.5% of $30) to cover their leave entitlements, bringing their effective rate to $33.75 per hour.

What This Means for Rural Businesses

For farming operations and rural businesses, these changes could be transformative.

Seasonal Workers — If you employ shearers, harvest workers, or seasonal dairy staff, calculating their leave entitlements becomes straightforward. No more wrestling with "pay as you go" complexities or trying to work out averaging calculations.

Relief and Casual Staff — The 12.5% loading for casual workers is clear-cut. You know exactly what you're paying, and your workers know what they're entitled to. This transparency benefits everyone.

Part-Time and Irregular Hours — Many rural businesses have employees who work variable hours depending on seasonal demands. The hours-based formula means entitlements automatically adjust based on actual hours worked—no complicated calculations required.

Record Keeping — While you'll still need to track hours worked (which most farms already do for wages), the calculation becomes a simple multiplication. Your payroll system, or even a basic spreadsheet, can handle this easily.

Practical Examples from Rural Life

Let's look at a few realistic scenarios:

Example 1: The Contract Milker

Tom works as a milker during the season, putting in 800 hours over six months.

His annual leave entitlement is 800 × 0.0769 = 61.52 hours, and his sick leave is 800 × 0.0385 = 30.8 hours.

At $32 per hour, that works out to $1,968.64 in annual leave pay and $985.60 in sick leave pay.

Example 2: The Casual Farm Worker

Sarah works casually on your farm, doing general farm work at $26 per hour. She's worked 150 hours over the year.

Instead of complex calculations, you simply pay her 12.5% on top of her hourly rate: $26 × 1.125 = $29.25 per hour (inclusive of leave).

Over 150 hours, that comes to $4,387.50 total. You can also calculate it as $3,900 base pay plus $487.50 leave loading—same result.

Example 3: The Mixed Work Pattern

James is your permanent tractor driver but also does casual work during busy periods. For his permanent 30 hours per week, you use the standard formula. For any additional casual hours, you can apply the 12.5% loading.

The flexibility means you can adapt to different working arrangements with the same employee.

Important Reminders

These rules are NOT yet law. You cannot apply these calculations to your current payroll. Continue using the existing Holidays Act requirements until the new legislation is passed and comes into effect.

Check the transition rules. When the law changes, there will likely be specific guidance on how to transition from the old system to the new one. Don't make changes until you have clear direction from IRD or employment law advisors.

Keep good records. Even though the calculation is simpler, you still need accurate records of hours worked. This is the foundation of the entire system.

Talk to your advisor. At CMK Accountants, we're staying on top of these proposed changes. When the legislation passes, we'll help you understand exactly how to apply it to your specific situation.

Looking Ahead

The proposed simplified leave calculation system represents a genuine attempt to make compliance easier for New Zealand employers.

For rural businesses that have struggled with the complexity of the current rules—especially when dealing with seasonal, casual, and variable-hour workers—this change could be a breath of fresh air.

The beauty of the system is its scalability: whether your employee works 20 hours or 2,000 hours, the same simple formula applies. You multiply by the factor, and you have your answer.

While we wait for the legislation to pass, it's worth understanding how these rules work and considering how they might simplify your payroll processes. When the time comes to implement them, you'll be ready.

Need Help?

Employment law and payroll compliance can be complex, even with simplified rules. At CMK Accountants, we've been helping Taranaki farming families and rural businesses navigate these challenges for nearly 70 years.

If you have questions about the proposed changes or need help with your current payroll obligations, get in touch with our team.

Remember: continue with your current processes until the new rules become law, but start thinking about how these changes might simplify your business operations in the future.