A practical guide to continuous employment, entitlement dates and payroll treatment

Author: David Jenkins, NZPPA CEO

An unpaid absence can affect more than the current pay. Its reason, duration and agreed treatment can change when annual holidays become available, how they are paid, and whether a public holiday during the absence must be paid. A single “leave without pay” code can therefore produce the wrong result even when the employee correctly receives no wages for the absence.

The Holidays Act recognises unpaid sick, bereavement and family violence leave when determining continuous employment. It does not create a general right to unlimited unpaid leave. Usually the absence requires employer approval or a right under the employment agreement; statutory rights under other legislation must also be considered. The classification must reflect the actual reason, rather than the payroll outcome the employer prefers.

In this article, I look at the unpaid leave issues NZPPA is regularly asked about through our PayTech AdviceLine. Unpaid leave generally requires the employer’s agreement, and a request can be declined unless the employee has a right under legislation or their employment agreement. The questions we receive often concern what happens after leave is approved: what was agreed with the employee, how payroll has recorded and applied that agreement, and the effect on other leave entitlements, payments and record-keeping. Understanding the reason for the absence is essential, because different types of unpaid leave can have different payroll consequences. This article explains the rules under the Holidays Act and the practical checks payroll needs to make to apply the right treatment.

Four categories payroll needs to distinguish

Unpaid sick leave

This may be agreed when an employee is sick or injured, or needs to care for a sick or injured spouse, partner or dependant, and has no paid sick leave available. Check eligibility and existing balances first. The usual statutory entitlement is 10 days after qualifying, with unused entitlement carried over up to the statutory maximum balance of 20 days. More generous agreed terms may apply.

The parties may instead agree to paid sick leave in advance, additional paid leave or annual holidays. Unpaid sick leave is not sick leave in advance: it should not create a negative paid balance or be deducted automatically from the next entitlement. Approved unpaid sick leave counts towards annual-holiday continuous employment, even where it lasts several weeks.

Unpaid bereavement leave

This may be agreed before the employee qualifies for paid bereavement leave, or when more time is needed than the paid entitlement covers. Paid bereavement leave is generally three days for specified bereavements, including qualifying miscarriage or stillbirth circumstances, and one day for another accepted bereavement. It is assessed per bereavement, not as a three-day annual bank. Record additional unpaid days against the relevant event without using up an entitlement for a future bereavement.

Unpaid family violence leave

An employer may agree to unpaid time to deal with the effects of family violence where paid entitlement is unavailable or exhausted. Eligible employees have up to 10 paid days in each relevant 12-month period; the statutory entitlement does not carry forward. Paid leave in advance or extra paid support are different arrangements. Approved unpaid family violence leave retains its own continuity protection. Keep the reason and supporting information confidential.

Other agreed unpaid leave

Travel, study, a sabbatical or extra personal time commonly falls into ordinary leave without pay. This is the category for which a continuous spell exceeding one week can change the annual-holiday entitlement date, unless the parties agree to count the absence as continuous employment.

Continuous employment has more than one purpose

For annual holidays, section 16 provides at least four weeks after each 12 months of continuous employment. Its rules count some unpaid periods and permit exclusion of others. Excluding time under that section delays the next annual-holiday entitlement; it does not terminate employment or require a new employment start date. Calling it a “break in service” without that qualification is misleading.

The following points cover the “Period or Situation” and what is the “Annual-holiday continuity treatment”:

• Paid holidays and leave under the Act – Count. Ordinary non-working days within ongoing employment; they also do not restart service.
• Approved unpaid sick, bereavement or family violence leave – Counts for the whole period. Do not apply the ordinary one-week exclusion rule.
• Statutory parental leave and qualifying volunteers’ leave – Counts under the applicable statutory protections. Use the separate leave category and rules.
• Period receiving qualifying ACC weekly compensation – Counts. Record ACC status separately and confirm the actual dates and payment arrangements.
• Ordinary agreed unpaid leave of one week or less – Counts. No annual-holiday anniversary extension.
• Ordinary agreed unpaid leave exceeding one continuous week – The excess over the first week is excluded by default, or included by agreement with the required average weekly earnings (AWE) adjustment.
• A genuine statutory annual closedown – Continuity is preserved. A separate anniversary reset may apply to employees not yet entitled to annual holidays under sections 34–35.

The continuity categories above draw on section 16 and Employment New Zealand guidance. A genuine end of employment is different from unpaid leave. Resignation, dismissal, expiry of a valid fixed term or gaps between genuinely separate engagements need their own assessment. Section 85 also creates a continuity presumption where an employee is dismissed and re-employed within one month, subject to its statutory exception. Do not use a termination and rehire transaction to administer approved leave.

Sick and family violence entitlement dates are separate

Paid sick, bereavement and family violence leave generally requires six months’ current continuous employment, or the alternative six-month hours test: an average of at least 10 hours a week and at least one hour every week or 40 hours every month. Apply the appropriate route; a continuously employed person does not need to satisfy the hours test as well.

MBIE explains that agreed leave without pay during ongoing employment still counts for sick and family violence leave qualification and does not move their normal entitlement dates. Keep those dates separate from the annual-holiday date. Bereavement eligibility must likewise be considered separately, rather than switched off by an annual-holiday exclusion setting.

Applying the one week rule correctly for unpaid leave

Apply this rule only after establishing that the absence is ordinary unpaid leave rather than a protected category. Assess the continuous spell, including its real start and end dates. A week is not automatically 40 hours or five unpaid workdays. For an employee who works two days a week, a whole week away may involve only two unpaid working days.

Do not add scattered unpaid days or separate one-week absences together to create an exclusion. Equally, a pay-period boundary or an ordinary weekend within one continuing absence does not create a fresh spell. Keep the absence dates as well as the unpaid hours used to reduce pay. Mixed paid and unpaid periods, partial days and unusual roster cycles need a documented assessment of the actual spell.

The following points cover the “Length of an ordinary continuous spell” and what is the “Effect on the annual-holiday date”:

• Less than one week, No change.
• Exactly one week, No change. The threshold is more than one week
• More than one week without a continuity agreement, Move the next entitlement date by the actual period exceeding one week.
• More than one week with a continuity agreement, Keep the date and apply the section 16(3) AWE divisor adjustment.
• Two separate one-week spells with a return to work between them, No date change and no section 16(3) divisor adjustment for either spell.

Option one is to move the annual holiday date

For three continuous weeks of ordinary unpaid leave, the first week counts and the remaining two weeks delay entitlement. An existing entitlement date of 1 October 2026 becomes 15 October 2026. Preserve the original employment commencement date and the history of previous anniversaries. Future annual-holiday anniversaries follow the adjusted date, subject to later valid changes.

Do not remove annual holidays already entitled or restart the employee’s entire 12-month qualifying period. Only the excess time is excluded. A system that simply stops an hourly “accrual” for all unpaid hours may fail to provide the statutory four-week entitlement on the correct date.

Option two is to agree that the whole spell counts

The employer and employee may agree that ordinary unpaid leave exceeding one week counts towards annual-holiday continuous employment. Record the agreement in writing and explain the pay calculation consequence. Approval of the time off alone should not be assumed to establish this separate agreement.

The original entitlement date then stays in place. Section 16(3) also requires the AWE divisor to be reduced for whole or part weeks beyond the first week. Keeping the date while leaving the divisor unchanged can underpay annual holidays. Do not apply both statutory alternatives to the same excess period. More generous contractual terms can be provided and should be recorded separately.

How unpaid leave changes annual holiday pay

For entitled annual holidays, normally compare ordinary weekly pay (OWP) at the beginning of the holiday with average weekly earnings (AWE) for the relevant preceding 12 months, and pay the greater. Lower earnings during unpaid leave may reduce AWE even when the entitlement date is protected. Continuous employment does not mean that unpaid time produces lower earnings.

The following points cover the “Unpaid leave treatment, Annual holiday date, and AWE divisor effect”:

• Protected unpaid sick, bereavement or family violence leave – Unchanged – No automatic section 16(3) reduction merely because the absence was unpaid.
• Ordinary leave of one week or less – Unchanged – No section 16(3) reduction.
• Ordinary leave over one week with excess excluded – Moves by the excess period – Normally retains 52 for the standard AWE calculation.
• Ordinary leave over one week agreed to count – Unchanged – Reduce 52 for the relevant whole or part weeks beyond the first week.

Whole and part weeks require particular care

MBIE’s guidance counts each excess whole or part week as one when reducing the divisor. Its example of two and a half weeks’ ordinary unpaid leave produces a reduction of two, giving a divisor of 50. That is different from shifting an anniversary by the actual excess of one and a half weeks.

For another example, a continuous spell of two weeks and two days has an excess of one week and two days. Under the default option, an anniversary of 1 October 2026 moves nine calendar days to 10 October. Under the agreed-continuity option, the date stays at 1 October and the AWE divisor is 50 while that whole spell is relevant. Do not use 50.7143 or 50.5 merely because the excess includes a fraction of a week.

Track qualifying spells within the rolling AWE reference period and recalculate the adjustment each time annual holiday pay is calculated. Stop including an absence once it is outside that period; check the calculation as a spell moves across the boundary. Do not search further back than the statutory reference period simply to find 52 paid weeks.

A worked pay comparison

Assume an employee has at least 12 months’ service, $50,000 of qualifying gross earnings in the relevant reference period, OWP of $980, and one three-week ordinary unpaid spell wholly within that period. With agreed continuity, AWE is $50,000 ÷ 50 = $1,000, so one week of entitled annual holidays is paid at $1,000. Under the date-extension option, AWE is $50,000 ÷ 52 = $961.54; OWP is higher, so the week is paid at $980. These are illustrative inputs, with no parental-leave special rule applying.

OWP must be established under section 8, not assumed to be zero because the most recent pay was nil. Annual holidays in advance and final holiday pay have their own statutory calculations; do not apply a single “exclude unpaid time from all averages” setting.

Interactions that can change the payroll result

Public holidays during unpaid leave

During a pre-arranged period of ordinary unpaid leave, a public holiday will generally not be an otherwise working day because the employee was not going to work. In contrast, where an employee is absent because paid sick, bereavement or family violence leave has run out, a public holiday must still be paid if it is otherwise a working day. The same otherwise-working-day protection applies during a statutory annual closedown. Assess and record the circumstances rather than automatically suppressing every public holiday inside an unpaid booking.

For example, an employee normally works Mondays and remains ill after using all paid sick leave. An applicable Monday public holiday during that absence is paid as an unworked public holiday if Monday is otherwise a working day. Use relevant daily pay (RDP), or average daily pay (ADP) where permitted. Do not deduct sick leave or pay time and a half for a day not worked.

A new paid entitlement arising during the absence

An employee on approved unpaid sick leave may reach their next sick-leave entitlement date while still ill. If ongoing employment and eligibility continue, process the new entitlement on time and assess payment for subsequent otherwise working days of sickness. Do not wait for a return to work. Similarly, keep the family violence leave entitlement cycle operating. Becoming entitled to paid leave does not automatically turn an unrelated planned unpaid holiday into paid sick or family violence leave.

Proof and a payment temporarily withheld

Unpaid leave by agreement is different from payment withheld because required proof has not been supplied. Sections 68 and 71 govern sickness proof and withholding; sections 72G and 72I address family violence leave. Apply the reasonable-excuse requirements and review payment when proof is supplied. For sickness of fewer than three consecutive calendar days, an employer requesting proof must meet the statutory notice and reasonable-cost requirements. Bereavement leave does not have the same statutory proof mechanism.

Keep a pending-proof record distinct from ordinary unpaid leave. Do not let temporary withholding move the annual-holiday anniversary, erase the underlying reason, or silently exhaust a future entitlement. Reconcile pay and balances when the matter is resolved.

ACC, parental leave and closedowns

A period receiving ACC weekly compensation is protected for annual-holiday continuity. An injury not attracting weekly compensation may still involve approved unpaid sick leave and therefore remain protected for that separate reason. Confirm the absence category; the source of income support alone does not determine continuity.

Statutory parental leave preserves continuity. Annual holidays to which an employee becomes entitled during that leave or in the 12 months after return are paid using AWE alone under the special parental-leave rule. Do not apply the ordinary unpaid-leave divisor adjustment. A statutory annual closedown is also separate: sections 34–35 may require an 8% payment and anniversary reset for an employee not yet entitled to annual holidays. That reset is not the ordinary one-week rule.

What payroll needs before processing the absence

Payroll needs an authorised instruction that identifies the reason and treatment of the absence. A manager’s request to “stop pay for three weeks” leaves too many decisions unresolved. Obtain and retain the following information before making date or balance changes.

• The leave category, reason sufficient to support that category, approval and relevant employment agreement or policy provisions. Store sensitive evidence separately with restricted access.
• Actual start and finish dates, expected return date, the work pattern and unpaid working days or hours. Record extensions, returns and any change of reason within the absence.
• Paid eligibility and balances checked, any advance or extra paid leave agreed, and why the remaining period is unpaid.
• For ordinary leave exceeding one week, whether the excess is excluded or agreed to count; the written agreement, old and new annual-holiday dates, or the AWE adjustment basis.
• Public-holiday decisions, entitlement dates occurring during the absence, any continuing benefits or contributions, and who will check the return to normal payroll.

Configure the result by category

The following is a proposed configuration map. Code names are illustrative; confirm that the software implements the legal behaviour, including any more generous agreed terms.

The following points cover the “Illustrative category” and what is the “Required payroll behaviour”:

• Unpaid sick leave, Zero leave pay for the approved unpaid portion; retain the reason; preserve annual-holiday continuity; no automatic paid-balance deduction.
• Unpaid bereavement leave, Record unpaid days against the event; preserve continuity; do not treat it as an annual paid-leave bank.
• Unpaid family violence leave, Preserve continuity and the paid entitlement cycle; restrict access and use a safe external description.
• Ordinary LWOP with excess excluded, Link transactions to one absence spell; move only the annual-holiday entitlement date by the excess; retain the calculation and original dates.
• Ordinary LWOP agreed to count, Preserve the date; record the agreement and qualifying excess weeks for the rolling AWE adjustment.
• Parental leave, ACC or statutory closedown, Use separate categories and their own continuity and payment rules; prevent the ordinary LWOP rule being applied automatically.

A separate code is useful only if its settings differ correctly. An unpaid-sick label attached to an ordinary LWOP rule can still postpone entitlement unlawfully. Where software cannot hold the required detail, use a controlled supporting register and independent calculations until the limitation is resolved.

Checks during leave and on return

Keep employment active and retain the contractual work pattern. For a salaried employee, calculate the agreed unpaid portion using a defensible method consistent with the employment terms. Do not set the base salary or ordinary hours permanently to zero. Check that the adjustment is made once and that normal pay resumes on the actual return date.

Record actual earnings only. Fully unpaid days with no work do not belong in the ADP divisor; a day partly worked still counts as a day for the statutory whole-or-part-day calculation. Paid holidays and paid leave days are included. The AWE week adjustment and the ADP day count are separate rules.

Keep date changes, calculation workings, approval evidence and correction history with the holiday and leave record. Wage, time, holiday and leave records must generally be retained for six years; IRD requires wage records for seven years. Apply appropriate access restrictions, particularly to medical and family violence information, and provide an employee with a clear explanation of any entitlement-date change.

Test the settings against real outcomes

The following points cover the “Test case” and what is the “Expected result”:

• An ordinary unpaid spell of three calendar days, or exactly one continuous week, No annual-holiday anniversary extension or section 16(3) AWE adjustment.
• Three continuous weeks of ordinary unpaid leave, Two-week date extension by default; or unchanged date and AWE divisor 50 with agreement, while wholly in the reference period.
• Two weeks and two days of ordinary unpaid leave, Nine-day date extension by default; or unchanged date and divisor 50 under the MBIE whole-or-part-week approach.
• Four weeks of approved unpaid sick leave, Annual-holiday date unchanged; no automatic s16(3) divisor adjustment; check new sick entitlement and public holidays.
• The same absence split over two pay periods, One continuing spell, rather than two fresh one-week allowances.
• Employee returns early or leave is reclassified, Reverse or revise the original adjustment, preserve an audit trail and check affected holiday payments.

Final pay, tax and continuing benefits

If employment later ends, check whether the corrected annual-holiday anniversary occurred before termination. Outstanding entitled holidays and the part-year 8% component are different calculations. Use actual qualifying gross earnings and the correct entitlement history; a displayed hourly “accrual” balance is not a substitute for the statutory calculation.

KiwiSaver contributions normally stop when no salary or wages are paid, but contractual or voluntary employer contributions may continue. IRD permits reporting those contributions with zero gross earnings; ESCT still applies unless the contributions are treated as salary or wages. Review other superannuation and benefit terms separately. Normal payday filing follows payments; if the employer will pay no wages for a month or more, notify IRD as required. Unpaid leave is not an employment cessation.

In conclusion, unpaid leave needs to be recorded and processed according to the reason for the absence. Payroll must check its effect on leave entitlements and holiday pay, even when no wages are being paid. Approved unpaid sick, bereavement and family violence leave still counts towards annual holiday entitlement. Other agreed unpaid leave of one continuous week or less also counts. For longer spells of ordinary unpaid leave, only the time beyond the first week can delay the entitlement date. If the employer and employee agree to keep that date unchanged, payroll must make the required adjustment to average weekly earnings. Delaying an annual holiday entitlement date does not end employment or reset the employee’s start date.

Before processing unpaid leave, payroll needs clear approval, accurate dates and a record of any agreement about how the absence will affect annual holidays. Check that the payroll settings apply the correct rules, and explain any change to the employee. Public holidays and new paid leave entitlements arising during the absence also need attention. An adjustment to the annual holiday date must not automatically change sick or family violence leave entitlement dates.

Clear records should allow payroll to explain why the leave was recorded in a particular way and how any adjustment was calculated. Checking the result during the absence and when the employee returns helps prevent an error affecting later pays and leave entitlements.