Paycheck surprise: The impact of parental leave on annual leave in New Zealand

Did you know that taking parental leave can impact your annual leave? We look at just how your annual leave is affected by parental leave, and how you can prepare.

Imagine taking a much-needed holiday six months after returning from parental leave, only to notice that your paycheck is lower than expected. Super frustrating, especially when you have a holiday to pay for.

The implications of taking annual leave after parental leave are not widely known, so let’s look at how this can happen and what you can do about it. We suggest you also chat with your HR or payroll team to get the specific details of your situation.

How annual leave works in New Zealand under regular circumstances

First, let’s remind ourselves of annual leave under regular circumstances. As an employee, under the Holidays Act 2003 you are entitled to a minimum of four weeks of annual holidays paid at a rate that is greater of your:

• Ordinary weekly pay (aka what you earn under your employment contract, such as a regular salary); or

• Average weekly earnings (the weekly average of what you’ve earned over the last 12 months before taking annual leave).

You can find a detailed explanation of what’s included here.

What happens to your annual leave if you resign while on parental leave

If you choose not to return to work, you will receive holiday pay based on your leave balance on the date you started parental leave. This means you won’t be paid for any annual leave you accrued while on parental leave.

What happens to your annual leave after parental leave

​​Now, let's move on to what happens to your annual leave entitlement after parental leave. You continue to accrue annual leave throughout the year, including while you're on parental leave. However, you only become entitled to this leave once a year. The date of entitlement usually coincides with the anniversary of when you started working with your employer or a company-wide Anniversary Date, meaning all employees’ annual leave entitlements happen on that date.

If you take annual leave that you became entitled to during parental leave or in the next 12 months after returning, you will be paid at the rate of your average weekly earnings only. This could be lower than your usual salary or wages, resulting in a surprise that can catch returning parents off guard. The impact is most noticeable when you take annual leave soon after returning from parental leave, and it disappears after being back at work for 12 months.

Let's look at some examples to give you an idea of what this looks like in practice. Meet Mia, who earns $1,000 per week before tax and takes 12 months of parental leave starting from 1 March 2022.

Scenario 1: Mia takes a week of leave three months after returning from parental leave. She used up all of her annual leave before going on parental leave, so she has to use the annual leave she became entitled to while on parental leave. 

Her pay for the week she takes on annual leave is equal to her average weekly earnings over the last 12 months, which is equivalent to $250 before tax - much less than her weekly salary of $1,000.

Scenario 2: Mia takes a week of leave three months after returning from parental leave. Mia had a week of unused annual leave she became entitled to before she went on parental leave, which she uses for this vacation. 

Because Mia is using annual leave that she became entitled to before parental leave, her pay for the week she takes annual leave is equal to the higher of:

• Her average weekly earnings over the last 12 months, which is $250 from the example above

• Her ordinary weekly pay, which is her salary of $1,000 per week

Therefore, Mia is paid $1,000 before tax for the week she takes on annual leave. Thankfully no surprises here!

Scenario 3: Mia takes a week of leave ten months after returning from parental leave. She used up all of her annual leave before going on parental leave, so she has to use the annual leave she became entitled to within 12 months of her return from parental leave. 

Mia’s pay for the week she takes on annual leave is equal to her average weekly earnings over the last 12 months. This is equivalent to $833 before tax - still less than her weekly salary of $1,000.

Scenario 4: Mia takes a week of leave twelve months after returning from parental leave. She used up all of her annual leave before going on parental leave, so she has to use the annual leave she became entitled to within 12 months of her return from parental leave. 

Mia’s pay for the week she takes on annual leave is equal to her average weekly earnings over the last 12 months. This is equivalent to $1,000 before tax since she’s been working for a full year by this point. 

Scenario 5: Mia goes on parental leave with two weeks of unused annual leave. Partway through her parental leave, she decides not to return to her employer. 

Mia is paid for the unused annual leave she had when she started parental leave. In other words, Mia is paid two weeks of annual leave at the higher of her ordinary weekly pay or her average weekly earnings. 

Mia is not paid for any annual leave she accrued while on parental leave. 

Legislation is pending

The good news is that changes are coming, and they may be in your favour. The Holidays Act Taskforce has recommended changes to the law that will require employers to pay their employees the higher of their ordinary weekly earnings or average weekly earnings when they take annual leave after returning from parental leave. These changes were expected to pass in 2023, but these changes haven’t yet happened, so we’ll keep you up to date on this!

Actions you can take to ensure you’re paid annual leave correctly during and after taking parental leave

In the meantime, there are a few things you can do to ensure you're being paid correctly.

Check your employer’s policy: check your employer's policy to see if they pay annual leave at the higher of your ordinary weekly earnings or average weekly earnings when you return from parental leave. Some employers already do this, so it's worth checking.

Consider using some of your annual leave before going on parental leave: chat with your HR or payroll team or contact Employment New Zealand before going on parental leave - the calculations for annual leave payments can be complicated. It may make financial sense for you to request to take annual leave in advance of entitlement before going on parental leave. The legislation allows you to start paid parental leave after the arrival of your child if you are taking paid leave (such as annual leave or days-in-lieu) immediately beforehand.

You may still want to retain some of your annual leave balance, even if you know you won’t receive your full wage rate when you take annual leave after returning from parental leave. This way, you'll have the peace of mind that you can take time off when you need it, even if it's paid at a lower rate.

Talk to your manager: some employers may not be aware of how annual leave works after parental leave, which means they may be willing to pay you at your normal rate. It never hurts to ask!

If you have any questions or concerns, speak with your HR or payroll team for more information.

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Crayon’s Baby Prep Program helps you plan ahead for the financial costs of parental leave, including annual leave, with personalised interactive tools. Ask your employer if they offer the Program.

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Now for the important legal part: Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. The information we provide is general and not regulated financial advice for the purposes of the Financial Markets Conduct Act 2013. Please seek independent legal, financial, tax or other advice in considering whether the content in this article is appropriate for your goals, situation or needs. The information in this article is current as at 12 February 2023.

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Stephanie Pow

Founder & CEO of Crayon

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