How taking parental leave impacts your peoples’ annual leave
Do you know how taking parental leave can impact your peoples’ annual leave payouts? Imagine planning a much-needed holiday a few months after returning from parental leave—only to find you were paid $6 an hour. Not ideal, right? To ensure your team members don’t face disappointing surprises, here’s everything you need to know (and what to tell them).
How does annual leave usually work in New Zealand?
Under the Holidays Act 2003, employees are entitled to four weeks of annual leave, paid at the higher of:
ordinary weekly pay: their regular contracted earnings.
average weekly earning: the weekly average of their last 12 months’ earnings.
You can find a detailed explanation of what’s included here.
What happens to employees’ annual leave if they resign while on parental leave?
If an employee does not return to work, they’ll receive holiday pay based on their leave balance on the date they started their parental leave. This means they won’t be paid for annual leave accrued while on parental leave.
What happens to annual leave after parental leave?
Your people accrue annual leave throughout the year, including while they’re on parental leave. However, they only become entitled to this leave once a year. This date is usually the anniversary of when they started working with you or a company-wide anniversary date, whereby all employees’ annual leave entitlements happen on that date.
If an employee takes annual leave they became entitled to during parental leave or in the following 12 months after returning, they’ll be paid at the rate of their average weekly earnings only. Since this includes time on parental leave, this could be lower than their usual salary or wages, resulting in a surprise that can catch returning parents off guard.
The biggest impact occurs when an employee takes annual leave soon after returning from parental leave.
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.
How parental leave impacts annual leave pay: 5 scenarios
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, there are 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 equals her average weekly earnings over the last 12 months. This is equivalent to $1,000 before tax since she’s been working for an entire year.
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 according to the final pay rules. Mia is not paid for any annual leave she accrued while on parental leave.
Legislation is pending
The Holidays Act has been under review, and the Minister flagged that annual leave after parental leave will be treated like any other annual leave. However, these changes haven’t yet happened, so we’ll keep you updated.
Actions you can take
In the meantime, there are a few things you can do to communicate how your employees’ parental leave may affect their annual leave so they don’t end up experiencing disappointing surprises.
1. Check your parental leave policy: before you have the conversation with your team member, check whether your policy already allows for annual leave to be paid at ordinary earnings. Some employers already do this—so it’s worth confirming!
2. Advise employees how parental leave will affect their annual leave balance: Employees may choose to take annual leave before starting parental leave. Parents can start government-paid parental leave after their baby arrives if they take paid leave (e.g., annual leave) first. The calculations for annual leave payments can be complicated. If an employee is unsure, they should ask HR, payroll, or Employment New Zealand for advice.
3. Consider paying them at the standard rate: If your policy does not pay annual leave at the higher of ordinary or average weekly earnings, consider making an exception if an employee asks. Even better? Proposing updating your policy!
Proactively making this change ensures your company is ahead of potential law changes and supports a happier return to work for employees.
Crayon’s Parental Leave Toolkit helps you rollout a new parental leave policy with simplicity and ease. Plug-and-play templates, guides and checklists are all there to help you save time and make your people happier.
Now for the important legal part: 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 4 February 2025.
Stephanie Pow
Founder & CEO of Crayon
Understand how taking parental leave can impact your peoples’ annual leave payouts