Author: David Jenkins, NZPPA CEO

Introduction

Once an employment change has been agreed, payroll needs to make sure the system gives effect to it correctly. Updating the employee’s status, hours or pay rate is only part of the work. Existing leave, service dates and earnings history must also be carried through, and the resulting payments need to be checked.

In Part 2, I look at how payroll can put the agreed change into practice. This includes explaining what happens to leave when hours change, using the right effective dates, checking wider payroll consequences and testing the first pay. The aim is to give payroll practitioners a practical process they can use before, during and after a change.

This article follows the current Holidays Act 2003. Those rules continue to apply until the replacement legislation takes effect. Changes planned for 2028 should not be applied early.

A short review of Part 1

Part 1 started with the employment relationship. Payroll must establish whether employment is continuing with the same legal employer or genuinely ending. A change of job, employment agreement or payroll number does not, by itself, require a final pay or allow leave to be cleared.

It also covered the need to confirm the actual working arrangement, document agreed terms and identify the effective date. Pay-as-you-go holiday pay needs its own legal assessment when it starts or stops. These decisions should be settled before payroll changes the record, with unclear or disputed matters referred to HR or an employment adviser.

Start with a record of the position before the change

Save the employee’s existing settings and reconcile the leave position before making adjustments. Record the original start date, relevant service dates, annual holiday anniversary, sick leave entitlement date, working pattern and pay arrangements. Keep entitled annual holidays separate from any estimated accrual and leave already taken in advance.

Also retain alternative holiday days, other leave records, current deductions and any contractual benefits. A balance report on its own is not enough. Payroll must be able to explain how the balance arose and identify any unresolved errors. Carrying an incorrect figure into a new record makes it harder to correct later.

Record the employment change date separately. A justified annual holiday changeover date following pay-as-you-go employment must not overwrite service dates used for other purposes. Keep the decision, its reason and the supporting agreement together.

Preserve annual holiday weeks when hours change

Under sections 16 and 17 of the Holidays Act, the minimum annual holiday entitlement is four weeks after each completed 12 months of continuous employment. What counts as a working week must reflect the employee’s actual arrangement. A payroll balance expressed in days or hours is a way of representing that entitlement.

When an employee moves from full-time to part-time work, or the reverse, review the days or hours representing their remaining holiday weeks. A change in the displayed figure can be correct, provided the underlying weeks are preserved. Explain the conversion to the employee and check any contractual entitlement that is more generous than the statutory minimum.

Example: A change from five days to three days

An employee has three weeks of entitled annual holidays remaining. They currently work five eight-hour days each week, so payroll displays 15 days or 120 hours. They agree to move permanently to three eight-hour days each week.

Under the new arrangement, those same three weeks are represented by nine days or 72 hours. The employee can still take three complete working weeks off. The reduction from 120 to 72 displayed hours does not mean they have lost 48 hours of their statutory holiday entitlement. It reflects the shorter working week.

The reverse also matters. If an employee with three weeks remaining moves from three eight-hour days to five eight-hour days, their three weeks would be represented by 15 days or 120 hours. Leaving the balance at 72 hours would no longer provide three weeks away from the new working pattern.

These examples assume regular, equal-length working days and no additional contractual protection of hours or value. For rotating rosters, unequal days or variable work, agree a method that genuinely reflects the working week. A standard eight-hour day or five-day week may produce the wrong result.

Keep entitlement and payment separate

Preserving holiday weeks does not mean freezing their dollar value at the date of the employment change. For entitled annual holidays, section 21 generally requires payment at the greater of ordinary weekly pay at the start of the holiday or average weekly earnings over the relevant preceding 12 months. Special rules connected with parental leave are covered later in this article.

Ordinary weekly pay or OWP reflects an ordinary working week and can include regular overtime, allowances and other regular payments. It is not always just the base wage. Where OWP cannot be determined, the statutory four-week formula applies. Average weekly earnings or AWE generally uses Holidays Act gross earnings for the 12 months ending at the end of the last pay period before the holiday, divided by 52.

Example: Annual holiday pay after a reduction in hours

Assume the employee now works 24 hours each week at $30 an hour, with no additional pay components. Their OWP is $720. Their relevant 12-month gross earnings are $57,200, giving AWE of $1,100. For a complete week of entitled annual holidays, the minimum payment is $1,100 gross, because AWE is greater.

For one eight-hour day of annual holidays in that regular three-day week, the deduction is one-third of a week and the payment is $366.67 gross, subject to normal rounding. The leave deduction and payment must use the same proportion of the working week.

AWE will change as earlier earnings move out of the averaging period. After a reduction in hours or pay, annual holiday pay may therefore reduce over time. Explain this before the change is agreed. There is no general requirement to terminate employment and pay out leave to preserve its earlier dollar value.

A change of role must not restart the averaging history. Retain relevant earnings across the change, including payments from different departments or roles with the same employer. For one continuous period of annual holidays, calculate the statutory payment at the beginning of that period. Do not restart it merely because a new pay period begins; check any contractual pay increase or more generous payment obligation separately.

Check accrual displays and leave already booked

Many systems show an “accrued” or “available” annual leave balance building up between anniversaries. The statutory entitlement arises in weeks after the qualifying period; the display is not a separate hourly entitlement created by the Act. Understand what the system figure contains before changing it.

Where employment continues, a change in hours alone does not restart the annual holiday year. Check that the next anniversary gives the correct entitlement, accounting for leave taken in advance. Do not simply add historical hourly accruals calculated under different working patterns and assume the result represents four weeks.

Where lawful pay-as-you-go holiday pay stops, configure the agreed changeover method described in Part 1. Record when the 8% payment stops, the annual holiday entitlement date, the earnings history to use and any permitted credit for earlier payments. A credit must have a clear legal basis and must not reduce the employee’s holiday weeks. Incorrectly paid 8% must not be recovered automatically by reducing leave or pay.

Review future leave bookings as well. A request entered before the change may still carry the old days or hours. Confirm the intended time away with the employee and manager, then check the deduction and payment under the arrangement applying to the leave. Keep the original booking and any agreed amendment visible in the record.

Apply the right rules to other leave

Do not apply the annual holiday conversion method to every leave balance. Sick leave and alternative holidays are expressed in days under the current Act and need separate treatment.

An eligible employee’s statutory sick leave is not reduced in proportion to their part-time hours. For example, an employee with six sick days remaining still has six days after moving from five days to three days a week. If they continue to qualify, their next statutory allocation is 10 days, subject to the carryover rules. Preserve the entitlement date and check eligibility where work becomes genuinely intermittent. If the system uses hours, it must still provide the required days of leave.

Retain unused alternative holidays as days. An employee with two alternative holidays does not lose part of those days because their working hours change. When a day is taken, it is a whole otherwise working day off, with payment based on that day’s relevant daily pay or average daily pay where applicable. It is not limited to the hours originally worked on the public holiday.

Carry forward the information needed for bereavement and family violence leave, including eligibility and leave already used. These leave types have different rules; do not create an annual accumulated balance for every leave category or reset eligibility because the payroll record has changed.

Relevant daily pay or RDP is what the employee would have received had they worked that day, including applicable additional payments. Average daily pay or ADP may be used where RDP cannot practicably be determined or daily pay varies within the pay period. ADP uses relevant gross earnings and whole or part days worked or on paid leave. This is why payroll needs paid-day history as well as dollar totals.

Reassess public holidays against the new arrangement

An otherwise working day is assessed for the particular day. Consider the employment agreement, actual work pattern, roster and reasonable expectations. A payroll status such as “casual” or “part-time” cannot answer the question by itself.

For example, an employee genuinely changes from Monday to Friday work to a permanent Tuesday to Thursday arrangement. A later Monday public holiday would ordinarily fall outside that new working pattern. That conclusion should not be copied automatically to a temporary return-to-work plan, sickness absence or unpaid leave arrangement; the circumstances may be different.

Update the roster and relevant public holiday settings, including weekend observance where applicable. If an employee works on a public holiday, check the statutory payment and alternative holiday requirements. If a qualifying public holiday falls during annual holidays, process it as a public holiday and avoid deducting annual holidays for the same day.

Use effective dates throughout payroll

The agreed change must apply from the correct date, even where that date falls within a pay period. Update guaranteed hours, working days, roster cycles, wage or salary rates, allowances, overtime rules and cost allocations together. Keep the earlier settings available for calculations relating to the period before the change.

Example: A change halfway through a fortnight

In this separate example, an employee works 40 hours at $30 an hour in the first week and changes to 24 hours at $32 an hour in the second week. With no leave or other payments, ordinary gross wages are $1,200 + $768 = $1,968. Applying either arrangement to the whole fortnight would be wrong.

For salaried employees, check the agreed method for calculating a partial pay period. Do not assume that the method used to divide salary also satisfies the separate Holidays Act calculations. Review any retrospective change for effects on wages, leave payments, deductions and reporting already processed.

Remove or amend an obsolete fixed-term end date where employment is continuing. Otherwise, an automated process may terminate the employee or stop pay despite the agreed extension. Temporary changes also need a review or end date, with clear instructions about what should happen next.

Keep one complete employment history across records

Some systems require a new payroll record for a change of pay frequency, employment category or organisational unit. Obtain the provider’s documented process before proceeding. Confirm how service dates, holiday weeks, leave days, earnings and paid-day history will remain available to every relevant calculation.

Where an employee has several roles or pay rates, check that all relevant earnings and work patterns are considered. Separate timesheet approvers or cost centres should not create duplicated statutory entitlements, isolated averaging histories or a false termination. Confirm that any new identifier flows correctly through HR, rostering, employee self-service and payday filing.

Reconcile the closing position on the old record with the opening position on the new one. Check that neither record pays the same entitlement twice and that historical adjustments can still be made. A provider’s assurance is useful, but the employer remains responsible for correct pay and leave.

Check the wider payroll consequences

Review KiwiSaver eligibility and automatic enrolment where casual or temporary work changes. An earlier exemption may no longer apply. Inland Revenue’s temporary employment rules include a 28-day threshold measured by the period of employment, not the number of shifts worked. Apply the rules to the facts, and do not enrol an existing member again merely because their status changes. Check contributions, savings suspensions and any valid rate instructions.

A move to part-time work does not automatically mean a secondary tax code is required. Use the employee’s current tax-code declaration or Inland Revenue instruction, and ask for an updated declaration when their circumstances require it. Check student loan, child support and other deductions, particularly when earnings or pay frequency change. Retain deduction authorities only where they remain applicable.

Check employer superannuation contribution tax under Inland Revenue’s applicable rules. Do not automatically reset the ESCT rate because a new record has been created or salary has changed. The annual rate-setting rules need to be followed.

Check minimum wage compliance for all hours worked, including where the employee is salaried. Ask HR to confirm work-visa conditions, collective agreement coverage, insurance, allowances and service-related benefits affected by the change. An administrative status change must not silently remove a contractual benefit.

Separate any parental leave, ACC or unpaid leave issues

A change in hours after parental leave needs both an employment-change review and a parental-leave review. Annual holidays that became entitled before parental leave generally retain the normal payment comparison. Annual holidays becoming entitled during parental leave or in the 12 months after return have special AWE-based payment rules. Keep these entitlements identifiable and check any more generous agreement.

For other unpaid leave exceeding one week, check whether the annual holiday anniversary must move or whether an agreed adjustment to the AWE divisor applies. Statutory exceptions include parental leave and ACC absence. Do not treat every unpaid absence in the same way.

If the change involves an ACC return-to-work arrangement, confirm the paid work, absence and top-up components separately. Record any planned review date and check public holiday treatment against the actual circumstances. Updating the employee’s status must not conceal an unresolved leave or compensation issue.

Check the first pay and the next leave event

Calculate an expected result independently before releasing the first changed pay. Compare ordinary earnings, allowances, leave, deductions, employer contributions and net pay. Ask someone other than the person who made the changes to review the result and record their approval.

A correct first wage payment does not establish that leave settings are correct. Test a full week and a part-week of annual holidays, a sick day, an alternative holiday and a relevant public holiday. Check the next leave anniversary as well. These checks can reveal a missing earnings history or an incorrect leave conversion before an employee is affected.

Explain the first changed payslip and any altered leave display to the employee. Where the arrangement is temporary or variable, set a follow-up review to check that actual working patterns still match the agreed settings.

Keep the agreement, calculations, configuration evidence and review together. Wages and time records, and holiday and leave records, must generally be retained for at least six years. Payroll tax records generally require at least seven tax years. Access must continue after a record is closed or a payroll system is replaced.

Overall checklist for Parts 1 and 2

Use this checklist for the whole change. Record the supporting evidence and the person responsible for each completed check.

Confirm the employment change

• ☐ Identify the legal employer and confirm whether employment continues or genuinely ends.
• ☐ Check the actual working arrangement, including any casual status or fixed-term reason.
• ☐ Obtain agreed written terms covering pay, hours, working pattern, effective date and any review date.
• ☐ Confirm consultation, collective agreement coverage and any unresolved employment questions.
• ☐ Establish the legal basis and treatment of any pay-as-you-go change or instructed final pay.

Protect leave and employment history

• ☐ Reconcile service dates, leave anniversaries, existing balances and leave taken in advance.
• ☐ Preserve entitled annual holiday weeks and document any conversion into days or hours.
• ☐ Retain sick leave and alternative holiday days, other eligibility records and contractual benefits.
• ☐ Keep earnings and paid-day history available for OWP, AWE, RDP and ADP calculations.
• ☐ Review future leave bookings, otherwise working days and any parental leave, ACC or unpaid leave issues.

Configure and verify payroll

• ☐ Apply all changed settings from the correct date and split the pay period where needed.
• ☐ Check obsolete end dates, multiple roles, new identifiers and connected systems.
• ☐ Review tax, KiwiSaver, ESCT, deductions and minimum wage compliance.
• ☐ Independently check the first pay, sample leave payments and the next entitlement anniversary.
• ☐ Explain changes to the employee, retain evidence and approval, and arrange any follow-up review.

Conclusion

In conclusion, changing employment status requires payroll to carry an agreed employment decision through to the employee’s pay and leave. The work starts with clear terms and a reliable record of the existing position. It finishes when the new settings, retained history and actual payments have been checked.

My advice is to involve payroll before the change is agreed. That gives the employer and employee time to understand the effect on leave and future payments, and gives payroll time to resolve system limitations. Where the legal position is unclear, obtain specific advice before finalising the treatment.