Unpaid Leave In New Zealand Employment Law

If you employ staff in New Zealand, it won’t be long before someone asks for time off that isn’t covered by annual leave, sick leave, bereavement leave, or another paid entitlement. That’s where unpaid leave (sometimes called “leave without pay”) comes in.

Handled well, unpaid leave can be a practical way to support your team while keeping your business running smoothly. Handled poorly (for example, by making assumptions, applying inconsistent rules, or trying to “force” leave without pay), it can quickly turn into an employment relations issue.

Below, we break down what unpaid leave is, when it comes up, what you can and can’t do as an employer, and how to set your process up so you’re protected from day one.

What Is Unpaid Leave?

Unpaid leave is time away from work where the employee is not paid and the time off is usually not an automatic legal entitlement (unlike annual leave or sick leave). In most cases, unpaid leave is taken by agreement between you and the employee.

In practice, unpaid leave often shows up when:

• an employee has used up their paid leave entitlements (like sick leave) but still needs time off;
• an employee requests additional time away for travel, family commitments, or study;
• an employee needs time to deal with something personal but doesn’t want (or can’t) use paid leave; or
• you and the employee agree to a temporary arrangement to manage a period of reduced work or availability.

Because unpaid leave is typically based on agreement, your starting point should always be:

• What does the employee’s employment agreement say?
• What do your policies say?
• What have you done in similar situations before (and can you justify any differences)?

If your contracts and policies are silent, that doesn’t mean you can’t approve unpaid leave - it just means you should be extra careful about consistency and documentation. Having a clear Employment Contract (and using it properly) is one of the easiest ways to avoid confusion later.

When Does Unpaid Leave Come Up For Small Businesses?

From a small business perspective, unpaid leave requests are rarely “textbook”. They’re often urgent, personal, or tied to operational realities like rostering and cashflow.

Common Scenarios

Here are some of the most common unpaid leave scenarios we see for SMEs:

• Medical or mental health time off after sick leave runs out: sometimes an employee needs more recovery time than their paid sick leave balance allows. (This may overlap with disability obligations, so it needs careful handling.)
• “Mental health days” where the employee doesn’t want to use sick leave: in many cases, mental health can still fall within sick leave, depending on the circumstances and evidence available. It’s worth understanding how these requests usually work in practice, including in a Mental Health Day context.
• Extended travel or family commitments: an employee asks for an extra 1–4 weeks beyond annual leave.
• Study leave: sometimes tied to professional development, sometimes purely personal.
• Care responsibilities: where the employee needs time away to care for a family member (and has exhausted relevant paid leave).
• Roster changes or quieter trading periods: where you and the employee agree on time off as an alternative to other arrangements.

Unpaid Leave vs Annual Leave vs Time Off In Lieu

One of the biggest practical issues is that employees often use “unpaid leave” as a catch-all phrase when what they really need is one of the following:

• Annual leave (paid time off that they’re entitled to);
• Sick leave (paid time off if they’re unwell or injured and meet the requirements);
• Time off in lieu (where you’ve agreed to provide paid time off instead of payment for extra time worked - but only if you have a compliant arrangement in place). See Time Off In Lieu for how this typically works.

It’s also common for employers to ask: “Can I just direct them to use annual leave instead of unpaid leave?” That depends on the situation and what the contract/policy says. If you’re thinking along those lines, it’s worth being familiar with the rules around annual leave directions before you make a call.

Do You Have To Approve Unpaid Leave (And Can You Say No)?

In most situations, unpaid leave is not a guaranteed right. That means you can often say no - but you should do it carefully.

As an employer, you generally need to act in good faith under the Employment Relations Act 2000. “Good faith” isn’t just being polite. It means being communicative, not misleading the other party, and dealing with issues constructively.

When Saying No Can Be Risky

Even when unpaid leave is discretionary, a refusal can still create risk if:

• you refuse without genuinely considering the request;
• you treat similar employees differently without a valid reason (which can look like unfairness or discrimination);
• the request relates to a protected ground (for example, disability, family status, religious observance) under the Human Rights Act 1993;
• the employee is unwell and you’re effectively pressuring them to attend work when it’s unsafe or unreasonable (which can also connect with your duties under the Health and Safety at Work Act 2015).

This doesn’t mean you must always approve unpaid leave. It means you should:

• ask for enough information to assess the request (without prying unnecessarily);
• consider operational impact (rostering, deadlines, customer demand);
• look at alternatives (annual leave, adjusted hours, flexible work); and
• respond with a clear decision and reasons.

Be Consistent (Or Be Ready To Explain Why Not)

A common small business pitfall is approving unpaid leave “as a favour” for one employee, then refusing a similar request later because the business is under pressure.

You’re allowed to take business realities into account - but consistency matters. If you do treat requests differently, make sure you can explain why (for example, a peak season period, different roles, different notice provided, or different staffing levels at that time).

Can You Put Someone On Unpaid Leave (Or “Force” Unpaid Leave)?

In most cases, you can’t unilaterally force unpaid leave just because it would be convenient for the business.

Putting an employee on unpaid leave without agreement can lead to claims such as:

• unjustified disadvantage (because you’ve reduced their income/benefits without a lawful basis);
• breach of employment agreement (if the agreement doesn’t allow it); and/or
• wage arrears issues (if they were ready and willing to work but you did not provide work and did not pay them in accordance with the agreement).

If you’re trying to manage reduced workflow or roster demand, unpaid leave might be one option - but it should be agreed. Often, what you actually need is a broader conversation about restructuring hours or duties. For example, if you’re considering cutting shifts or changing rosters, it’s worth understanding the legal risks around Reducing Staff Hours before you make changes.

What About “Stand Downs” Or Business Closures?

Employers sometimes use the term “stand down” to mean “we’re not paying you because there’s no work.” The problem is that whether this is lawful depends on:

• what the employment agreement says about availability of work and business closures;
• whether the employee is guaranteed hours;
• the reason for the closure (and whether it was foreseeable/manageable); and
• whether you’ve followed a fair and lawful process.

If you’re in this territory, it’s usually a sign you should get advice early. A quick chat with an Employment Lawyer can save you a much bigger problem later.

How Does Unpaid Leave Affect Pay, Holidays, And Other Entitlements?

This is where things get technical - and it’s also where small businesses can accidentally make payroll mistakes if there isn’t a clear process.

Generally, when an employee is on unpaid leave:

• they are not paid wages/salary for the unpaid leave period;
• their employment usually continues, but their pay and leave calculations can be affected depending on the length of the unpaid leave and how the Holidays Act 2003 applies to their situation;
• annual holiday entitlement (the right to four weeks after 12 months) is not automatically “lost”, but annual holiday pay and related calculations (such as ordinary weekly pay/average weekly earnings) can be impacted by weeks with no earnings;
• public holiday entitlements can become complicated depending on what their “otherwise working day” would have been, and whether they would have worked that day if not for the leave; and
• KiwiSaver contributions typically stop for the unpaid period (because there are no wages on which to deduct/contribute), unless you agree otherwise.

Short Unpaid Leave vs Extended Unpaid Leave

A single day of unpaid leave is usually simple to record and administer.

Extended unpaid leave (for example, several weeks or months) needs more planning. You’ll want to be clear on:

• start date and end date (and whether any extensions are possible);
• what happens to benefits (for example, vehicle use, phone allowance, tools);
• communication expectations during leave (especially if the leave is health-related);
• return-to-work requirements (for example, updated medical clearance if appropriate); and
• how the role is covered while they’re away (temporary duties, fixed-term cover, contractors).

If you allow people to “go informal” on extended unpaid leave without documenting it, you can end up in a messy situation later - particularly if you need to backfill the role and the employee expects to return to exactly the same hours and duties.

Privacy And Medical Information

Unpaid leave requests sometimes involve sensitive personal information (especially if the leave relates to health).

As a general rule:

• only ask for information you genuinely need to assess the request;
• store any medical evidence securely and limit access;
• don’t discuss the reason for the leave with other staff unless it’s necessary and appropriate; and
• make sure your internal documents and processes support confidentiality.

A clear Workplace Policy (and training managers to follow it) goes a long way in preventing accidental privacy breaches and workplace gossip.

How Do You Manage Unpaid Leave Requests Without Disrupting Your Business?

The best unpaid leave process is one that is consistent, documented, and flexible enough to deal with real life. Here’s a practical approach that works well for small businesses.

1. Check The Employment Agreement And Policies First

Before you respond, confirm whether the employment agreement already covers unpaid leave (for example, unpaid parental leave extensions, discretionary leave without pay, or a requirement to apply in writing).

If your documents don’t cover it, consider updating them so your expectations are clear going forward. This is particularly important as your team grows and you want managers to handle requests consistently.

2. Ask For The Basics (Not A Full Life Story)

You usually need enough information to understand:

• how long the employee wants off;
• when the leave is requested for;
• whether the dates are flexible; and
• whether there are any immediate health and safety implications (if relevant).

For health-related requests, you may be able to request reasonable medical evidence, depending on the situation. Be careful not to drift into intrusive questions.

3. Consider Alternatives That Might Work Better

Sometimes unpaid leave isn’t the best solution. Depending on what the employee needs (and what your business can handle), alternatives might include:

• using annual leave (if available);
• using sick leave (if appropriate);
• rearranging hours temporarily rather than taking time off;
• agreeing to Time Off In Lieu (only if you have a compliant arrangement); or
• a temporary adjustment to duties or work location.

The key is that you’re not just “approving or denying” - you’re problem-solving in good faith.

4. Confirm The Decision In Writing

Even if the request is straightforward, confirm the outcome in writing (email is usually fine). Your confirmation should cover:

• approved dates (start and end);
• that it is unpaid leave (and therefore unpaid);
• any conditions (for example, check-ins, providing a return-to-work confirmation); and
• who the employee should contact if circumstances change.

This protects both sides. It also prevents misunderstandings like “I thought it was annual leave” or “I assumed I could extend it another week.”

5. Think About Fairness Across The Team

Unpaid leave decisions can affect morale quickly, especially if you have a small team and roster coverage is tight.

To keep things fair and defensible:

• use the same process for everyone;
• apply clear criteria (notice period, peak seasons, minimum staffing);
• keep a simple record of decisions; and
• avoid off-the-record arrangements that other employees won’t get.

6. Plan For Coverage (And Don’t Accidentally Create A Second Employment Relationship)

If the employee will be away for a while, you may need temporary cover. This is where it’s worth slowing down and doing it properly - especially if you’re bringing someone in on a fixed-term basis or using contractors.

If you’re not sure which type of arrangement fits, getting advice early can prevent problems like misclassification, underpayment, or having a “temporary” arrangement that becomes permanent by default.

Key Takeaways

• Unpaid leave is usually time off that isn’t automatically paid or automatically entitled, and is commonly granted by agreement between you and the employee.
• Even when you can say no, you should handle unpaid leave requests in good faith and apply a consistent process to reduce legal risk and maintain trust.
• In most situations, you can’t force unpaid leave unless your employment agreement (and the law) supports it - unilaterally stopping pay can lead to disputes.
• Unpaid leave can affect Holidays Act pay calculations (and related public holiday “otherwise working day” assessments), particularly for extended periods, so record it clearly and check how your payroll system treats it.
• Document approvals in writing, and make sure your Workplace Policy and Employment Contract support the way you actually run your business.
• If unpaid leave is being used to manage reduced work or roster shortages, consider whether you really need a broader change process (for example, around Reducing Staff Hours or annual leave directions).

If you’d like help handling an unpaid leave request, updating your contracts and policies, or managing a tricky leave dispute, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.