Author: David Jenkins, NZPPA CEO
Introduction
An employee moving from casual work to a regular position, reducing their hours, or becoming permanent after a fixed term can create several payroll changes at once. Payroll needs to understand what is changing, what has been agreed, when it takes effect, and how it affects the employee’s pay, service and leave.
Changes in employment status are a frequent topic raised through the NZPPA PayTech AdviceLine. The questions commonly centre on whether a final pay is required, whether the change should be documented through a new employment agreement or a variation, and what happens to existing leave balances. The starting point is to establish whether the employment relationship is continuing or genuinely ending.
In Part 1, I look at the employment arrangements payroll needs to confirm, the information that should be recorded, and the care needed when pay-as-you-go holiday pay starts or stops. The leave guidance is based on the current Holidays Act 2003. Payroll should be involved while the change is being considered, so the employer and employee understand its practical effects before agreeing to it.
Start with the actual working arrangement
The terms casual, part-time, full-time, and fixed-term do not all mean the same thing. Full-time and part-time describe the amount of work. Permanent and fixed-term describe whether employment is ongoing or has an agreed end. A fixed-term employee can work either full-time or part-time.
Casual work generally involves no guaranteed work, no regular pattern and no ongoing expectation of employment. Check the reality: an employee labelled casual who now works every Tuesday and Thursday may already have become a permanent part-time employee. The effective change may have occurred before anyone updated the agreement or payroll.
Ask the manager and HR to confirm:
- Who is the legal employer, and will that employer remain the same? A move between companies in a group needs a separate transfer assessment.
- Is employment continuing, genuinely ending, or moving into a temporary assignment within an ongoing job?
- What are the old and new guaranteed hours, working days, pay, duties and location? Does actual work match the paperwork?
- What date does the change take effect? Is there a review date or an agreed return to the previous arrangement?
Use the answers to decide the payroll treatment. Do not let a software requirement to “terminate and rehire” determine whether employment has legally ended.
Confirm whether a final pay is actually required
Where employment continues with the same employer, retain the employee’s service and leave history. A change between full-time and part-time work, or acceptance of another role, will usually be handled as a change to terms. A lower salary does not create a requirement to pay out annual holidays.
| Change | Usual payroll approach when employment continues |
|---|---|
| Full-time to part-time or the reverse | Apply the agreed hours and pay from the effective date. Preserve leave weeks and service dates; review the employee’s working week. |
| Casual to regular part-time or full-time | Identify when the actual arrangement changed. Review 8% holiday pay, annual holiday dates and existing eligibility for other leave. |
| Fixed-term to permanent or another fixed term | Confirm the extension or replacement terms before the existing end date. Review any pay-as-you-go arrangement separately. |
| Permanent to casual or fixed-term | Obtain clear HR confirmation of the legal basis. A new label cannot remove existing rights or make regular work casual. |
| Fixed-term to casual or casual to fixed-term | Check whether employment continues and whether the new arrangement is genuine. Neither description automatically establishes a termination. |
If employment genuinely ends, calculate final wages and contractual amounts, outstanding entitled annual holidays, applicable 8% holiday pay, and unused alternative holidays. Entitled annual holidays are paid at the greater of ordinary weekly pay or average weekly earnings. The part-year 8% calculation uses the correct gross earnings base, including relevant final payments, with only permitted reductions.
Also apply the public holiday rule: project unused entitled annual holidays forward from the end of employment and pay qualifying public holidays within that period. This does not extend the actual employment relationship. Unused sick leave, bereavement leave and family violence leave have no statutory termination payout; check for more generous contractual terms.
A short break or a final-pay transaction does not automatically establish a fresh period of service. Section 85 of the Holidays Act includes a presumption of continuity where an employee is dismissed and re-employed within one month, unless the employer proves it acted in good faith and was not trying to avoid its obligations under the Act. Escalate doubtful arrangements before resetting dates.
Put the agreed change in writing
A written variation is often suitable where only some terms change. A replacement employment agreement may be clearer where several terms change, particularly when replacing a casual arrangement with an ongoing role. Either approach should make continuing service explicit where employment continues. The document’s title does not decide whether there has been a termination.
For payroll, the document should identify the effective date, the terms being replaced, the terms continuing, the new pay and working pattern, and any temporary end or review date. Record how existing leave will be represented and any agreed benefit above the legal minimum. Obtain the agreed document and the employer’s authorised instruction before implementation.
Consultation means explaining the proposal, giving the employee a reasonable opportunity to consider it and seek advice, and genuinely considering their response. A proposed reduction in guaranteed hours or pay cannot simply be put through payroll because the manager has announced it. Where the change is part of a restructure, HR must complete the appropriate good-faith process, including consultation with affected employees and unions.
Check collective agreement coverage as well. An individual variation cannot simply displace applicable collective terms. Payroll should not be asked to decide an unresolved employment dispute or draft away statutory minimum rights.
Check the reason for any fixed term
A fixed term needs a genuine reason based on reasonable grounds, with the reason and how or when employment will end recorded in writing. It cannot be used to test someone’s suitability for permanent employment or to exclude Holidays Act rights. Each further fixed term needs its own valid basis.
A permanent employee covering another position for six months may be on a temporary assignment while their underlying permanent employment continues. Confirm whether they return to their substantive role; do not automatically insert an employment termination date.
Explain changes to take home pay
Show the employee the effect of changed hours, salary, allowances and deductions. If lawful 8% pay-as-you-go holiday pay stops, distinguish the base wage from that separately identified holiday payment. Confirm the new wage in the agreement; do not silently absorb, remove or relabel an amount that may actually be part of contractual base pay.
An existing employee cannot be put on a new statutory 90-day trial simply because their status or position changes. Any proposed probation arrangement is a separate HR issue and does not reset leave or service.
Treat the end of pay as you go holiday pay carefully
Pay-as-you-go (PAYG) annual holiday pay is permitted only in specific circumstances: genuine fixed-term employment of less than 12 months, or work so intermittent or irregular that providing four weeks of annual holidays is impracticable. It must be agreed in the employment agreement, paid at no less than 8% of gross earnings and identifiable separately. A casual label or employee preference is insufficient.
Fixed term followed by permanent employment
Where a qualifying fixed term under 12 months is followed by permanent employment with the same employer, count the fixed-term service towards the first annual holiday entitlement. For successive qualifying fixed terms paid on this basis, the relevant starting point is the start of the final fixed term before permanent employment. Stop the pay-as-you-go payment when the qualifying arrangement ends.
For example, a nine-month fixed term starts on 1 February 2026 and becomes permanent on 1 August 2026. Assume 8% was paid lawfully and stopped on 1 August. The first four-week entitlement falls on 1 February 2027. A permitted credit for lawful holiday pay already paid reduces the subsequent holiday payment, not the four weeks of time off. Agree and record how that credit will be applied.
Irregular work becomes regular or ongoing
MBIE identifies two approaches where the earlier pay-as-you-go arrangement was lawful: start the annual holiday entitlement period when the work becomes regular and pay-as-you-go stops; or recognise the earlier service and apply an agreed credit for lawful pay-as-you-go payments. The average weekly earnings (AWE) history must match the chosen approach. The Act does not prescribe this changeover as expressly as the fixed-term situation, so record the agreed approach and obtain advice where the facts are unclear.
Confirm the change date and previous payments
Identify the actual change date. Late paperwork does not extend eligibility for pay-as-you-go. Where 8% has been paid incorrectly, the employee may retain it as well as being owed annual holidays. Do not automatically recover it from leave or final pay. Review the affected history.
Do not use a status change to cash out leave
Continuing employment does not create a general right to pay out all outstanding annual holidays. Statutory cashing up is a separate process: the employee must request it in writing, the employer may decline, and the statutory limit is up to one week of the four-week entitlement per entitlement year. It cannot be made a condition of accepting the new arrangement. Check separate contractual rules for additional leave.
Alternative holidays have their own cash-payment rule after 12 months, by agreement following an employee request. Changing status is not a substitute for meeting that rule.
If an ongoing employee moves to genuinely irregular work, obtain advice on how existing annual holiday rights and any part-year position will be preserved before starting prospective pay-as-you-go. There is no general authority to clear everything through a “final pay” simply to make the new payroll category easier to administer.
Conclusion
Before changing a payroll record, establish what is happening to the employment relationship. Confirm the legal employer, whether service continues, the terms agreed and the effective date. A new job title, agreement or payroll category does not, by itself, justify a final pay or the clearing of leave balances. Any change to pay-as-you-go holiday pay also needs a clear legal basis and an agreed, documented approach.
Payroll should raise these questions early enough to help the employer and employee understand the consequences. Where continuity, casual status or leave treatment is disputed, obtain specific employment advice before finalising that treatment. Once those matters are settled, payroll can apply the agreed change. Part 2 examines how to preserve leave entitlements, update the system and check that the resulting payments are correct.