Leave is probably the most talked-about area of payroll, and it's where I spend most of my time helping clients.
On the surface, you'd expect it to be straightforward. But as you've probably come to appreciate, anything payroll-related gets complicated the moment real employees are involved.
In this article I explore what annual holiday leave is, the different stages of leave, and how to make sense of leave balances in your payroll software.
What is annual holiday leave?
Annual holiday leave allows employees to take paid time off work.
Under the Holidays Act, all employees (except in limited circumstances) are entitled to 4 weeks of annual holiday leave per year – this is referred to as entitled leave.
For employees with a regular working pattern, calculating this leave is relatively straightforward. For those with varied hours or patterns, it gets more complex.
If you have employees with variable work patterns, I'd strongly recommend engaging a payroll specialist to make sure your system is set up correctly. Not all payroll systems handle these situations well.
Note: In limited circumstances – such as casual or fixed-term employment – employees may be paid holiday pay at a rate of not less than 8% of their gross earnings with each regular pay, instead of receiving 4 weeks of annual holidays each year.
How does accrued leave work?
Leave accrues each pay period based on what the employee has worked. At the end of each 12-month period, the total accrued leave transfers to the employee's 4-week minimum entitlement, and the accrual balance resets to zero for the next 12 months.
The Holidays Act doesn't define how leave should be accrued. Payroll systems do this to track leave liability and to allow employees to request leave in advance.
One common method is to accrue in hours each pay period. Here's an example:
John works 40-hour weeks, so he'll be entitled to 160 hours (4 × 40) of annual leave after each 12 months of employment.
To work out his weekly accrual:
160 hours ÷ 52 weeks = 3.08 hours per week
Tip: This calculation doesn't work for employees with a varied work pattern. If an employee's hours change during the 12-month period, it's important to understand how your software transfers accrued leave to entitled leave.
Note: When an employee resigns, the Holidays Act requires any accrued leave to be paid out at 8% of gross earnings since the employee last became entitled to annual holidays.
What is advanced leave?
It's common practice in New Zealand for employers to let employees take annual leave before they've completed their first 12 months and become entitled to the full 4 weeks.
When holidays are taken in advance, the entitlement is reduced by the amount taken. Here's how that looks in practice:
John has worked 40-hour weeks for 6 months. He'll be entitled to 160 hours (4 × 40) of annual leave when he reaches 12 months. At the 6-month mark he has accrued 80 hours and is approved to take 1 week of annual leave.
When John reaches his 12-month anniversary, he'll receive only 120 hours (160 − 40 = 120), because he's already taken 1 week (40 hours) in advance.
Understanding leave balances in your payroll system
Getting your head around entitled, accrued, and advanced leave is one thing. Understanding how those balances are displayed in your payroll system is another.
Different systems use different terminology like annual leave, holiday pay, holiday pay entitlement – which can add to the confusion.
Things get particularly tricky once an employee has been with you for more than 12 months.
Take John again: after 18 months, he's received his 4-week entitlement at the 12-month mark and has since accrued another 2 weeks.
A clear system will show these separately:
Entitled annual holiday leave = 4 weeks
Accrued leave = 2 weeks
Some systems, however, combine them and display a single balance: Annual holiday leave = 6 weeks.
If your system displays them together, it's worth contacting your software provider to ask whether there's a setting to show them separately. A combined balance can cause real confusion for employees trying to understand what they actually have available.
Need more help understanding annual leave?
If you want to feel confident answering your employees’ leave questions, or get really clear on how your payroll system is managing leave, book a free consultation to chat about how I can help.
Updated April 2026 | Originally published November 2021
About the author
Karyn Campbell is a New Zealand payroll consultant and founder of Payroll Consult. With 5+ years running her own consultancy and a background in payroll software – including roles across client support, onboarding, and partnership management at a leading NZ payroll provider – Karyn brings a rare combination of technical knowledge and real-world compliance experience. She works with business owners, bookkeepers, and payroll teams across New Zealand, specialising in payroll audits, system reviews, and fixing complex payroll issues for teams that don’t work a typical 9-5.
