Holiday Pay During The Redundancy Notice Period In New Zealand

Redundancy is never a fun conversation to have in a small business. Even when it’s genuinely a “role no longer required” situation, you still need to run a fair process and get the final payments right.

One of the most common (and expensive) problem areas is working out holiday pay during a redundancy notice period - especially where an employee has a decent annual leave balance, the business is trying to manage cashflow, or you’re unsure whether you can direct someone to take leave while they work out their notice.

This guide breaks down what holiday pay is, how it interacts with a redundancy notice period, what you can (and can’t) require, and the practical steps to reduce the risk of a dispute.

What Is “Holiday Pay During Redundancy Notice Period” Actually Referring To?

When people talk about holiday pay during the redundancy notice period, they’re usually referring to one (or more) of these situations:

• The employee takes annual leave during the notice period (either by agreement or because you’ve directed it).
• The employee doesn’t take annual leave, and you pay out their remaining annual leave in the final pay.
• The employee is paid in lieu of notice, and you’re unsure how leave accrual and payments work in that scenario.
• Public holidays fall during the notice period, and you’re unsure whether to pay them as a public holiday or as annual leave (if annual leave is being taken at the same time).

In New Zealand, annual leave and holiday pay are primarily governed by the Holidays Act 2003. The redundancy process itself sits within the wider framework of the Employment Relations Act 2000 (including good faith obligations).

It’s also important to remember: redundancy does not remove the need to follow your employee’s individual employment agreement, workplace policies, and any applicable collective agreement.

If you’re still working through the redundancy process itself (not just final payments), it’s worth getting advice early - small process mistakes can create big risk later. Many employers start with Redundancy Advice so the “numbers” and the “process” line up from day one.

Do Employees Keep Accruing Annual Leave During The Notice Period?

In most cases, yes - an employee continues accruing annual leave during the redundancy notice period if they remain employed and are working their normal hours (or are on paid leave).

Think of it this way: until the employment actually ends, most entitlements continue to operate as usual. That includes:

• accrual of annual leave (as they continue to complete their entitlement year);
• entitlements to paid public holidays (if they would otherwise be working days);
• sick leave (if eligible and not exhausted); and
• bereavement leave (if the circumstances arise).

Practical tip: if the employee has a long notice period, their annual leave position may change between the day you give notice and their final day. Make sure payroll is working off the correct “as at termination date” figures, not the “as at notice date” figures.

If you’re considering paying out notice instead of having the employee work it, you’ll want to be very clear about what happens to entitlements and the “official” end date. In many cases, employers explore Payment in Lieu of Notice to manage risk (for example, where there are performance concerns or sensitive client relationships), but it needs to be handled carefully.

Can You Require An Employee To Take Annual Leave During The Notice Period?

This is where many small businesses get stuck. You might be thinking:

• “We can’t afford a big leave payout.”
• “It’s quiet right now - it makes sense for them to use leave.”
• “If they’re leaving anyway, can’t we just put them on leave until the end date?”

In New Zealand, employers can require employees to take annual holidays in some circumstances - but there are limits, you must follow the Holidays Act rules, and you should be cautious about doing this in the middle of a redundancy process.

The General Rule: Notice Is Required (And It’s About Entitled Annual Holidays)

Under the Holidays Act, an employer may require an employee to take annual holidays that the employee is entitled to, provided the employer gives at least 14 days’ notice (unless the employment agreement allows for a shorter period).

Employees are generally not required to take annual holidays before they become entitled (for example, in advance of their 12-month anniversary), unless the employee agrees to take leave in advance.

There can also be relevant terms in the employment agreement or workplace policy. If you’re unsure what you can require (and when), the safest approach is to check your contract and get tailored advice. This is a common issue covered in Annual Leave discussions.

Redundancy Adds A “Process Fairness” Layer

Even if you technically have the ability to direct annual holidays, redundancy is a time when employees are especially likely to challenge decisions as unfair or heavy-handed.

From an employer’s perspective, it’s usually smarter to:

• discuss the leave balance during consultation (and invite feedback on options);
• agree on a plan in writing (for example, “two weeks’ annual leave will be taken in the final month”); and
• apply the approach consistently across affected employees, where possible.

If you try to “force” annual holidays without meeting notice requirements, or if it looks like you’re doing it to punish the employee or reduce their options during consultation, you can create unnecessary legal risk.

What About “Garden Leave”?

Sometimes employers want the employee not to attend the workplace during notice (for example, to protect confidential information or client relationships). That’s different from annual leave.

Whether you can put someone on garden leave depends on the employment agreement and the situation. If you do it, it’s usually still paid as normal salary/wages - not automatically annual leave - unless annual leave has been properly agreed or directed under the Holidays Act rules.

This is a good moment to check whether your Employment Contract has the right clauses to manage these situations.

How Do You Calculate Holiday Pay When Employment Ends After Redundancy?

When the employee reaches their final day, their final pay may include multiple “leave” components. Getting this right matters because Holidays Act calculations can be technical, and mistakes often show up later (for example, when an employee queries a payslip or seeks advice).

Generally, final pay on redundancy may include:

• pay up to the final day worked (including any overtime/allowances that are part of their normal pay patterns);
• payment for annual leave taken during the notice period (if any);
• payment for unused annual holidays the employee is entitled to as at termination date;
• holiday pay for annual holidays accrued but not yet entitled (often calculated at 8% of gross earnings since the employee’s last anniversary date, less any amount already paid as “pay-as-you-go”);
• public holiday pay if a public holiday falls on an otherwise working day during notice (and the employee is still employed on that day);
• alternative holidays (days in lieu) if owed;
• any redundancy compensation if it’s provided under the employment agreement, a policy, or a negotiated outcome; and
• any other contractual amounts (commission, bonuses, reimbursements) depending on the agreement terms.

Unused Annual Leave: What Rate Should You Pay It At?

For annual holidays the employee is entitled to (for example, leave from completed 12-month entitlement years), payment for unused annual holidays on termination is generally at the higher of:

• the employee’s ordinary weekly pay, or
• their average weekly earnings.

These are defined concepts under the Holidays Act and can be tricky where hours vary, commission is involved, or pay has changed recently (for example, a pay rise shortly before redundancy).

Separately, for annual holidays the employee has accrued but is not yet entitled to (i.e. the part-year since their last anniversary), the Holidays Act approach is commonly an 8% calculation of gross earnings over that period (with adjustments depending on what has already been paid).

Practical tip: if your employee has variable hours, is on wages, or has a commission structure, it’s worth checking your payroll system is applying the Holidays Act rules properly (including the correct treatment of “not yet entitled” annual holidays). Underpayments are a common source of post-termination complaints.

If The Employee Takes Annual Leave During Notice, Do You Still Pay It The Same Way?

Usually, yes. If the employee is on annual holidays during the notice period, those days are paid as annual leave (based on the Holidays Act rules), and their entitled leave balance reduces accordingly.

This can be a sensible approach for businesses who:

• have a quiet period before the final date;
• want a smooth handover without the employee being physically present; or
• need to manage the cashflow impact of a large annual leave payout.

Just be careful not to mix up “annual leave” with “notice” - the employee is still employed during that period, and it should be recorded correctly.

What If Public Holidays Fall During The Notice Period?

Public holidays can complicate holiday pay calculations during a redundancy notice period.

As a general rule, if a public holiday falls on a day the employee would otherwise have worked, they may be entitled to be paid for that public holiday - provided they are still employed on that day. If the employee is on annual holidays at the time, you need to check whether the day should be treated as annual leave or as a public holiday (because public holidays can override annual holidays in certain circumstances).

Because these calculations depend heavily on work patterns and rosters, it’s a good idea to:

• confirm the employee’s normal working days;
• check whether the workplace closes on public holidays; and
• ensure payroll has a consistent approach documented.

If you’re already making changes to rosters or hours leading up to redundancy, be cautious - changing hours can have flow-on effects for leave calculations and may raise process issues. If you’re considering changes as an alternative to redundancy, you may also need advice on Reducing Staff Hours.

Notice Period Vs Payment In Lieu: How Does Annual Leave Payout Change?

From a small business perspective, one of the key choices is whether the employee will:

• work out the notice period (possibly with some annual leave taken by agreement), or
• finish up sooner with some form of payment in lieu of notice.

These decisions can affect the timeline for calculating annual leave and public holidays, and they can also affect how the employee experiences the exit (which matters for risk management).

Option 1: Employee Works The Notice Period

If the employee works until their final day:

• annual leave continues to accrue until termination;
• any annual leave taken is paid as it’s taken; and
• unused annual leave is paid out on termination (including any “not yet entitled” portion calculated under the Holidays Act).

This option is often simpler administratively, but it may not always be the best fit where there are confidentiality, safety, or customer relationship risks.

Option 2: Payment In Lieu Of Notice

If you pay in lieu of notice, the key question becomes: what is the termination date?

In many cases, paying in lieu means employment ends earlier (so annual leave stops accruing earlier), and you make a separate payment representing the notice period pay. But the “right” structure depends on:

• the employment agreement terms (does it allow payment in lieu, and on what basis?);
• how you document the end date; and
• how you treat entitlements like public holidays that would have fallen during the notice period if the employee had remained employed.

Because payment in lieu can create unexpected obligations if done incorrectly, it’s smart to get it documented properly and aligned with your redundancy communications. If you need to formalise the exit terms (especially where there’s a higher risk of dispute), a Deed of Settlement can sometimes be used to capture agreed outcomes - but it needs careful drafting and should be tailored to the situation.

Common Employer Mistakes (And How To Avoid A Dispute)

Most holiday pay issues aren’t caused by bad intentions. They usually happen because redundancy is stressful, time-poor, and full of moving parts.

Here are the most common traps we see when employers are dealing with holiday pay during the redundancy notice period - and what you can do to reduce risk.

1. Treating Annual Leave As A “Tool” To Manage The Process

It’s understandable to want to reduce a large leave payout. But if you direct annual leave without proper notice, require leave the employee isn’t yet entitled to (without agreement), or do it in a way that feels punitive, it can escalate quickly.

Better approach: raise the leave balance early, propose options, and document what’s agreed.

2. Forgetting About Public Holidays And Alternative Holidays

Public holidays that fall during notice, or close to the termination date, can affect final pay. Alternative holidays (days in lieu) can also be overlooked, especially in hospitality and retail businesses.

Better approach: run a checklist for final pay items and reconcile balances before the final day.

3. Using Holidays Act Calculations Incorrectly (Including The 8% Component)

Holidays Act calculations can be technical. If your employee’s pay varies (overtime, commission, allowances), an incorrect calculation may not be obvious until much later.

Better approach: confirm your payroll provider’s Holidays Act settings (including correct treatment of “entitled” annual holidays vs “not yet entitled” annual holidays on termination) and keep records that explain how figures were calculated.

4. Changing Hours Or Duties Without Considering Flow-On Effects

During restructuring, you may reduce hours, change shifts, or reassign duties. These changes can influence holiday pay calculations and can also create arguments that the redundancy was not genuine or the process wasn’t fair.

Better approach: treat restructuring decisions as an employment law project, not just an operational one. If you need a clear overview of redundancy obligations, Redundancy is a useful starting point.

5. Not Having Clear Documents From Day One

Redundancy-related disputes often come down to what was promised, what the contract says, and what was documented during the process.

Better approach: make sure your employment agreements are up to date and your redundancy communications are consistent and in writing.

Key Takeaways

• “Holiday pay during a redundancy notice period” usually means either annual leave taken during notice or annual leave paid out at termination (and often includes public holiday issues too).
• In most cases, an employee will continue accruing annual leave during the notice period until employment actually ends.
• You may be able to direct an employee to take annual holidays during notice, but you must follow the Holidays Act requirements (including notice) and you generally can’t require leave before it’s entitled to unless the employee agrees. Redundancy also adds extra sensitivity around fairness and good faith.
• Final pay should correctly account for unused entitled annual holidays, the “not yet entitled” annual holidays component (often calculated using an 8% method), public holidays, alternative holidays, and any contractual payments (and the Holidays Act calculation method matters).
• Payment in lieu of notice can change the timeline for accruals and entitlements, so it should be documented carefully and aligned with the employment agreement.
• Most disputes can be avoided by planning early, communicating clearly, documenting agreements, and double-checking payroll calculations before the final day.

If you’d like help managing a redundancy process or checking your final pay approach (including holiday pay during the redundancy notice period), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.