If you employ staff, parental leave can be one of those moments where “people-first” and “paperwork-heavy” collide.
On the one hand, you want to support your employee and keep their role secure. On the other, you still have to run a business, forecast leave liabilities, and make sure payroll stays compliant.
A question we hear a lot from small business owners is whether annual leave accrues during parental leave in New Zealand.
Below, we’ll break it down in plain English, with the key legal concepts, payroll realities, and practical steps you can take so you’re protected from day one.
What Does “Annual Leave Accrue During Parental Leave” Actually Mean?
Before getting into the legal answer, it helps to unpack what people usually mean when they ask whether annual leave accrues during parental leave.
In New Zealand, “annual leave” (also called “annual holidays”) doesn’t usually build up as a visible “X hours per week” balance the way sick leave often does. Instead, annual holidays are primarily an entitlement that kicks in after an employee has been employed continuously for 12 months.
So when you’re asking if annual leave accrues during parental leave, you’re typically asking one (or both) of these:
- Entitlement / service question: Does an employee’s continuous employment keep running while they’re on parental leave, so they still reach (or keep) annual holidays entitlement milestones (like the 12-month anniversary)?
- Payment / liability question: If they take annual leave after returning, how do we calculate what it’s paid at, and how does parental leave affect that cost?
Both matter for employers. The entitlement affects HR planning and employee expectations. The payment calculation affects your leave provisions, budgeting, and payroll compliance.
Does Annual Leave Accrue During Parental Leave In NZ?
In most cases, yes - parental leave is generally treated as a period where the employment relationship continues. That means an employee’s continuous employment typically keeps running while they’re away on parental leave (even though they may not be working and may be unpaid by you).
In practice, that means:
- The employee generally remains your employee during parental leave (their job is protected and they’re still “on your books”).
- Their continuous service usually continues for entitlement purposes, including reaching the 12-month anniversary for annual holidays.
- They can still become entitled to annual holidays while they are away, depending on where their anniversary falls.
From an employer’s perspective, the easiest way to think about it is:
Parental leave doesn’t usually “pause” continuous employment. But it can affect how annual leave is paid when the employee returns (more on that below).
Why This Can Feel Confusing For Small Businesses
Many business owners assume annual leave only “builds up” when someone is actively working. That’s a fair assumption - but New Zealand’s leave framework is heavily tied to continuous employment and specific legal definitions under the Holidays Act 2003.
That’s also why it’s important to have a clear Employment Contract and well-written workplace policies that match how your payroll actually operates.
What About Paid Parental Leave Vs Unpaid Parental Leave?
This is another common sticking point.
Paid parental leave (funded through the government scheme, if the employee qualifies) is not the same thing as you paying wages. Many employees will be receiving parental leave payments, but not receiving their normal salary/wages from you.
From a business owner’s viewpoint, the key issue isn’t whether the leave is “paid” in everyday terms - it’s how the law treats the period of parental leave and how that flows into:
- the employee’s ongoing employment status
- their leave entitlements
- the calculation method for annual holiday pay
Because this can quickly become policy-heavy, many employers include parental leave processes in a Parental Leave Policy and cross-reference it in their staff handbook.
How Annual Leave Pay Is Calculated After Parental Leave (And Why It Can Surprise Payroll)
Even when the answer is “yes” on ongoing entitlement/service, the bigger “gotcha” for employers is often the annual leave pay rate once the employee starts taking annual holidays again.
Under the Holidays Act 2003, annual holidays are generally paid at the higher of:
- the employee’s ordinary weekly pay (what they would normally earn in a typical week at the time the leave is taken), or
- their average weekly earnings over the relevant period (commonly looking back over the previous 12 months)
Here’s the practical issue:
If an employee has had a long period of unpaid parental leave, their “average weekly earnings” figure may be lower than you expect (because there were weeks with little or no earnings in the averaging period).
That can mean annual leave taken soon after returning is sometimes paid based on ordinary weekly pay (if it’s higher), but you need to run the calculation correctly to stay compliant.
A Simple Example (Why Your Leave Provision Forecast Might Be Off)
Imagine your employee normally earns $1,200 per week. They take parental leave for 26 weeks, during which they receive no wages from you.
When they return and take one week of annual leave, you may need to compare:
- Ordinary weekly pay: roughly $1,200 (based on their normal roster/wage when back at work)
- Average weekly earnings:
If your systems don’t calculate this properly, it’s easy to accidentally:
- underpay annual leave (leading to payroll remediation risk), or
- overpay due to using the wrong default setting (which can create internal inconsistency and budgeting issues)
This is one of the reasons it’s worth getting your leave process reviewed early, especially if you’re hiring your first employees or you’ve recently grown.
Don’t Forget: “Accruing” And “Taking” Are Different Issues
From a compliance point of view, it’s useful to keep these distinct:
- Accrual / entitlement:
- Timing:
- Payment:
So even if you’re confident about the “does annual leave accrue during parental leave” question, it’s still worth checking the second piece: “are we paying it correctly when it’s taken?”
Practical Steps For Employers To Manage Annual Leave During Parental Leave
When parental leave is handled well, it’s good for your employee and good for your business (less confusion, smoother return-to-work, fewer payroll surprises).
Here are practical steps you can take as an employer.
1) Confirm The Key Dates Early
As soon as you know parental leave is on the horizon, confirm (and document):
- the employee’s annual holidays anniversary date
- the expected parental leave start date
- the expected return date (noting this can change)
This helps you forecast when annual holidays entitlement will tick over and avoid surprises later.
2) Be Clear About Leave Requests Before Or After Parental Leave
Some employees want to “tag on” annual leave to the beginning or end of parental leave.
That can work well operationally, but you should treat it as what it is: annual leave being taken (paid by you) either before or after parental leave, and it should be recorded properly.
If you’re agreeing to annual leave around parental leave, make sure you’re also clear on:
- how the leave will be approved
- how it will be recorded in payroll
- how it affects the employee’s return-to-work planning
3) Make Sure Your Payroll System Handles The Holidays Act Calculations
Many small businesses use payroll tools that promise compliance, but still require correct setup and correct data.
Because annual holiday pay is a “higher of two calculations” approach, you want to be confident your system:
- uses the correct definitions of ordinary weekly pay and average weekly earnings
- handles periods of unpaid leave appropriately
- records parental leave and annual leave as different leave types
If you’re not sure, it’s worth getting advice sooner rather than later. Fixing payroll issues after the fact is rarely quick or cheap.
4) Put Your Process In Writing (And Keep It Consistent)
Small businesses often run into trouble not because they intended to do the wrong thing, but because they handled one person’s leave one way and someone else’s leave another way.
Having a written approach helps you stay consistent, fair, and compliant. In practice, that usually means:
- a solid Employment Contract with clear leave and pay clauses
- a workplace policy suite (often including a Parental Leave Policy)
- clear internal approvals (who signs off leave, who adjusts rosters, who checks payroll)
Common Tricky Scenarios (Where Employers Often Get Caught Out)
Parental leave and annual holidays are usually straightforward in concept, but real workplaces come with edge cases.
Here are a few scenarios where small business owners often need tailored advice.
Part-Time Employees Returning On Different Hours
If your employee returns from parental leave and shifts from full-time to part-time (or changes their roster days), you’ll need to think about:
- what a “week” of annual leave means for them now
- whether your payroll is calculating leave based on weeks vs hours in a way that matches the Holidays Act framework
- whether the change requires a contract variation
Even where everyone agrees to the change, you still want the paperwork to reflect reality, so you’re not exposed later if there’s a dispute.
Fixed-Term Arrangements And Parental Leave
If you’re using fixed-term agreements, be careful. A fixed-term has to meet specific legal requirements and can’t be used just for “convenience”.
Where parental leave is involved, you may also be hiring a temporary replacement, and the structure of that replacement arrangement matters (for example, making sure the end date is legitimate and properly documented).
If you’re unsure whether your staffing plan is compliant, it’s worth speaking with an Employment Lawyer before you commit to a structure that could be challenged later.
Employee Resigns During Or After Parental Leave
Sometimes an employee decides not to return, or resigns shortly after returning.
In those cases, you still need to correctly:
- calculate any annual holidays owed on termination (including entitlement vs accrued holidays)
- process their final pay in a compliant way
- keep proper payroll and leave records
If you’re in this situation, get advice early - final pay disputes can escalate quickly, and it’s often easier to resolve them when your records are clean and your process is consistent.
“Can We Ask Them To Take Annual Leave During Parental Leave?”
In many cases, annual leave is taken by agreement. Employers can also require employees to take annual holidays in some circumstances, but only if they follow the right process (including giving at least 14 days’ notice, unless the employment agreement provides otherwise) and act in good faith. If you’re considering this while an employee is on parental leave, it’s wise to get advice based on your specific facts.
Key Takeaways
- For most employees, annual leave continues to accrue during parental leave in the sense that the employment relationship generally continues and annual holidays entitlement can still arise based on continuous employment and anniversaries.
- The more common compliance risk for employers is not the entitlement, but paying annual leave correctly after a period of unpaid parental leave (because annual holiday pay involves comparing ordinary weekly pay vs average weekly earnings).
- Confirm key dates early (anniversary date, parental leave start/end dates) so you can forecast annual leave entitlements and staffing needs.
- Keep annual leave and parental leave clearly separated in your payroll records, and make sure your payroll settings reflect Holidays Act calculations.
- Put your approach in writing through an Employment Contract and a Parental Leave Policy so you stay consistent across your team.
- If you’re dealing with tricky situations (changed hours on return, resignations, fixed-term replacements), getting tailored advice from an Employment Lawyer can save you time, stress, and costly mistakes.
This article is general information only and is not legal advice. If you’d like help setting up your parental leave processes, reviewing your leave clauses, or making sure your payroll approach is compliant, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
