Paycheck surprise: The impact of parental leave on annual leave in New Zealand
Did you know that taking parental leave can impact employees’ annual leave? We break this down so employers and employees know what to expect. We suggest that employees chat with HR or the payroll team to get specific details about their situation.
How annual leave works in New Zealand under regular circumstances
Under the Holidays Act 2003, employees are entitled to four weeks of annual leave, paid at the higher of their:
Ordinary weekly pay: their regular contracted earnings.
Average weekly earnings: the weekly average of their last 12 months’ earnings before taking annual leave.
You can find a detailed explanation of what’s included here.
How annual leave works after parental leave
Employees 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 the organisation or a company-wide anniversary date, on which all employees’ annual leave entitlements occur.
If an employee takes annual leave they became entitled to during parental leave or the following 12 months after their return, they’ll be paid at the rate of their average weekly earnings only over the 12 months immediately before the end of the last pay period before the annual leave is taken or paid out. This is referred to as the ‘parental leave override’.
When the average is calculated, it includes the time the employee was on parental leave. Government-paid parental leave is not included. With the unpaid weeks included, the average can be substantially lower than their usual pay rate, resulting in a surprise that can catch returning parents off guard.
The impact is most noticeable when employees take annual leave soon after returning from parental leave, and it reduces the longer they’ve been back at work.
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Here’s an example to show how annual leave accrued before parental leave - but not entitled to until after parental leave begins - works:
Jane’s annual leave entitlement date: 1 September each year
Parental leave start date: 1 June 2025
By the time Jane starts parental leave, she has accrued 3 weeks of annual leave over the previous 9 months.
She only becomes entitled to this leave on 1 September 2025, when she is already on parental leave.
This means that the 3 weeks accrued before parental leave and the 1 week accrued during parental leave will be paid at her average weekly earnings rate when she takes this leave upon her return to work.
Jane’s return to work date: 31 May 2026
Jane accrues another 4 week of annual leave while she’s on parental leave and in the first three months upon her return to work.
She only becomes entitled to this leave on 1 September 2026, within her first 12 months from parental leave.
This means the 3 weeks accrued during parental leave and the 1 week accrued while she’s back at work will be paid at her average weekly earnings rate when she takes this leave.
Five example scenarios
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.
Other circumstances to consider:
When an employee resigns 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.
When an employee resigns after returning from parental leave
See: How to calculate annual leave for final pay when an employee resigns after parental leave.
When an employee reduces their contracted hours
An employee’s annual leave balance is recalculated when there is a change in contracted hours. See: How annual leave works when an employee returns part-time after parental leave.
When employees use a period of preference
Employees who hold a key position or who are made redundant may be able to invoke a 26-week period of preference. During this period, if a position becomes available that is substantially similar to their original role, employers must offer it to them first.
During this period, the employee is still considered employed and accrues annual leave. If they become entitled to annual leave during this period, it is paid out at the average weekly earnings only.
Furthermore, if they return to work during the period of preference, any annual leave entitlement that arises within the following 12 months will also be paid at the average weekly earnings rate.
This means the parental leave override could potentially impact a 30-month window of annual leave entitlements: 12 months of parental leave, the 6-month period of preference, and 12 months after returning to work.
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, due to feedback on the draft Bill, the Government has returned to the drawing board. It is now unlikely we’ll see any legislative updates in 2025, so the wait for a new Holidays Act will continue for some time.
Actions you can take
For employers
Check your parental leave policy
Before discussing annual leave payments with employees, confirm whether your policy allows annual leave to be paid at the higher of ordinary weekly pay or average weekly earnings.
Proactively communicate how parental leave will affect their annual leave balance
Employees may be unsure how parental leave affects their annual leave balance and payment rates. Providing clear, proactive guidance can help them make informed decisions. Encourage them to speak with HR, payroll, or Employment New Zealand.
Consider paying them at the standard rate
If your policy currently pays annual leave based on average weekly earnings only, consider allowing exceptions for employees returning from parental leave or revising the policy altogether. Offering this flexibility can be a powerful way to support employees through major life transitions and foster loyalty.
For employees
Review your employer’s policy
Some employers go beyond the standard legislation and pay annual leave at the higher of your ordinary weekly pay or average weekly earnings upon your return from parental leave. It’s worth checking with your HR or payroll team to understand how your leave will be calculated.
Be strategic about how you use your annual leave
Check out our article: How to make the most of your annual leave before (and after) parental leave.
For further enquiries
While we work to keep our information current, the last word lies with the relevant government agencies:
Contact Inland Revenue (IRD) about government-paid parental leave, including payment eligibility, application processes, rates, or transferring payments.
For everything else related to parental leave entitlements, contact the Ministry of Business, Innovation and Employment (MBIE) through Employment New Zealand.
Crayon’s Baby Prep Program helps employees plan ahead for the financial costs of parental leave, including annual leave, with personalised interactive tools.
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 19 May 2025.
Stephanie Pow
Founder & CEO of Crayon
