How parental leave affects annual leave in New Zealand

Employees in New Zealand are entitled to a minimum of four weeks paid annual leave and up to 26 weeks unpaid parental leave. While this is great news for parents and caregivers, it’s important they know how a period of maternity leave can affect future holiday pay.

Employees who have recently taken parental may be in for a shock when they apply for annual leave and discover a low rate on the payslip. As an employer or HR manager, it may be up to you to help them understand the effect parental leave has on annual leave.

Parental leave in New Zealand

In New Zealand, employees are entitled to up to 52 weeks of parental leave.

Employees who worked for an average of 10 hours per week for 12 months or more before the birth of their child, or the date they’ll take over the care of the child, are entitled to:

52 weeks of unpaid parental leave
26 weeks of government-funded parental leave payments if they are the primary carer.

Does annual leave accrue during maternity leave?

An employee who is on parental leave is still eligible to accrue annual leave. But if that employee takes annual leave within 12 months of being on parental leave, they need to understand their holiday pay will be affected.

Holiday pay is based on the average weekly earnings from the past 12 months. This will include the time they were on parental leave and not earning income. It is here that employees can often get caught out. Essentially, the sooner an employee takes annual leave after parental leave, the less they will receive as annual leave pay.

Understanding the impact of parental leave on annual leave

New Zealand’s Holiday Act 2003 ensures employees are entitled to a minimum of four weeks of annual holidays due either on the anniversary of their start date or at the beginning of an employer’s regular season shutdown.

Under the Parental Leave and Employment Protection Act 1987, annual leave calculations change when an employee becomes eligible for annual leave during, or in the 12 months following parental leave.

Parental payments are determined by taking the employee's average weekly earnings for the 12 months immediately before the period of annual leave being taken, which may include parental leave.

This is why employees often choose not to take annual leave for a while after returning to work from maternity leave. If an employee takes annual leave shortly after parental leave they may discover their payment is starkly different to the pay they normally receive.

There is further information on the IRD website on parental leave and annual leave entitlements, as well as examples which clarify how annual leave is calculated after maternity leave.

Calculating annual leave after parental leave

Let’s take a look. In this example, let’s say an employee’s weekly salary is $1,000.

The employee takes parental leave from 1 January to 1 September. They have used up all of their annual leave prior to going on maternity leave. When they return to work, they take a holiday on 1 November. The employee has worked eight weeks since returning to work.

The average weekly earnings are worked out using the 12 months leading up to 1 November, which includes the period of parental leave where they weren’t earning.

Annual leave is calculated by:
$8,000 ÷ 52 weeks = $153 per week.

Quite different from the expected $1,000 per week.

Alternatively, if the same employee took annual leave immediately after parental leave (without returning to work), the holiday pay would be $0 per week, based on the average weekly earnings from the last 12 months (i.e. $0).

If the employee waited 12 months after parental leave to take their annual leave, their holiday pay would be at their full rate of $1,000 per week

Choosing not to return to your job after parental leave

If an employee decides not to go back to their job, they can resign at any time while on parental leave. The employee is only paid for leave they were due up to the date parental leave commenced.

How to manage maternity leave in Xero

As expected, Xero makes it easy to set up maternity leave for employees. It is possible to add parental leave as a leave type to ensure employees are paid correctly. Xero allows you to set up a parental leave balance for an employee in an unscheduled pay run or the next scheduled pay run. An employee will continue to receive payslips while on paid parental leave, and any annual leave or sick leave falling due while on parental leave will accrue automatically. Find out more about managing maternity leave on Xero here.

If you have employees who are planning to head off on parental leave, make sure they understand how annual leave calculations work. It may be your best bet in avoiding nasty surprises. Need help calculating annual leave entitlements or managing parental leave in Xero? Get in touch - we’re here to help.