A guide to Long Service Leave in New Zealand for Employers
Here’s the simple truth about long service leave in New Zealand: it's not a legal requirement.
Unlike in Australia, where it’s a standard entitlement, NZ law doesn’t automatically grant employees extra leave just for sticking around. It’s an optional, contractual benefit you can choose to offer to reward loyalty and commitment. So, if you're a small business owner wondering if you've missed a memo on this, you can relax.
Understanding the basics of long service leave in NZ
Picture this: a key team member who’s been with you for a decade mentions they heard about long service leave from a friend across the ditch. It’s a common scenario that can catch Kiwi business owners off guard, simply because our system is different.
Here in New Zealand, the Holidays Act 2003 sets out the minimum leave entitlements every employee is due. This covers the essentials like annual leave, sick leave, and bereavement leave. Long service leave, however, isn't on that list.
This means you are under no legal obligation to provide it. Instead, it’s a powerful perk you can build into an employment agreement to recognise your most dedicated people. Think of it less as a legal box to tick and more as a strategic tool for keeping your best staff on board.
Statutory vs contractual leave types in New Zealand
To make this crystal clear, it’s crucial to understand the difference between what the law requires (statutory) and what you can choose to offer (contractual).
Long service leave falls firmly in the contractual camp. It only exists if you create a policy and include it in your employment agreements, making it a powerful point of difference for your business.
To lay it out simply, here’s a comparison:
Statutory vs contractual leave types in New Zealand
| Leave type | Is it a legal requirement? | Typical entitlement | Governed by |
|---|---|---|---|
| Annual Leave | Yes | 4 weeks per year | Holidays Act 2003 |
| Sick Leave | Yes | 10 days per year | Holidays Act 2003 |
| Bereavement Leave | Yes | Up to 3 days per bereavement | Holidays Act 2003 |
| Long Service Leave | No | Varies (e.g., 2 weeks after 10 years) | Employment Agreement |
As the table shows, statutory leave is non-negotiable-it’s the legal minimum. Contractual benefits like long service leave, on the other hand, are entirely at your discretion. They're an added extra you design and offer.
Why the distinction matters
Getting your head around this distinction is vital. It puts you in control and helps you manage expectations with your team.
You can confidently explain that while you value loyalty, any extra leave for long service is a special benefit offered by the company, not a universal right. It prevents misunderstandings before they even start.
For any business owner in New Zealand, navigating the rules is key-from employee benefits right through to things like Health and Safety Management for New Zealand Contractors.
Ultimately, knowing the rules empowers you to make smart decisions about your benefits package. You can build a great place to work that attracts and retains top talent, without mistakenly thinking you're falling short of a legal requirement.
Why offer long service leave if it’s not required?
Just because long service leave isn't a legal must-have in New Zealand, it doesn’t mean you should dismiss it. Think of it less as an expense and more as a powerful investment in your best people-the ones you genuinely can't afford to lose.
In a tight job market, a standout benefits package is a huge advantage. Offering long service leave can be the game-changer that convinces your most experienced team members to stay for the long haul, rather than looking for greener pastures.
A strategic tool for retention and engagement
Rewarding a decade of loyalty sends a powerful message: we see your commitment, and we value it. This kind of recognition goes far beyond a pay cheque.
It’s a strategic move that can dramatically boost team morale, slash your recruitment costs, and build a reputation as an employer who truly cares. When people feel valued, they're more engaged, more productive, and more likely to become champions for your business.
A well-designed long service leave policy can be the key to:
Preventing burnout in your most critical roles by giving them a significant, well-earned break to properly recharge.
Reducing expensive turnover and the endless cycle of hiring and training new staff.
Fostering a culture where people want to build a career, not just clock in for a job.
Long service leave isn't just about giving extra time off. It's about securing your most valuable asset-your people-and showing them they have a future with you. This 'extra' perk delivers a genuine return by safeguarding institutional knowledge and leadership.
Building a better workplace culture
While New Zealand doesn't mandate long service leave, the country is already recognised for its fantastic approach to employee wellbeing. In fact, our generous leave policies are a key reason New Zealand has been ranked as having the best work-life balance in the world for three years running, scoring 86.87 out of 100 on the Global Life-Work Balance Index. Find out more about how NZ's leave policies contribute to this top ranking.
Adding long service leave builds on this strong foundation. It shows you're not just meeting the minimum requirements but are actively creating a workplace where people can thrive long-term.
It signals that you're an employer of choice, one who invests in the wellbeing and loyalty of your team. For many small businesses, creating this kind of positive environment is a huge competitive advantage.
It's one of many positive steps you can take in managing your people. For a complete overview of how to manage your team effectively, check out our complete guide to HR support for small businesses.
Ultimately, choosing to offer long service leave is a proactive business decision. It helps secure the talent that drives your success, making your business more stable and resilient for whatever comes next.
How to design a fair and clear long service leave policy
So, you're ready to create a long service leave policy? Fantastic. This is your chance to craft a benefit that not only rewards loyalty but also fits your business like a glove.
The key is to be crystal clear from the get-go, leaving no room for confusion down the track. A well-designed policy is fair, easy to understand, and sustainable for your business. It becomes a celebrated part of your culture rather than a source of headaches.
Let’s walk through the essential building blocks you’ll need to define in your employment agreements. The goal here is to create a document that works for both you and your team. Clarity now prevents disputes later.
Defining your eligibility criteria
The first and most important question your policy must answer is: who gets it and when? This is the foundation of your entire framework.
You need to set a clear milestone for continuous service. While there's no set rule, a common benchmark in New Zealand is 10 years of continuous service, but you could set it at 8, 12, or even 15 years-whatever makes sense for your business.
Your policy must also spell out what "continuous service" actually means. What about parental leave or a long-term, unpaid sabbatical? It’s best practice to state that periods of unpaid leave do not break service but may not count towards the accrual period.
Here are the core questions to answer:
How many years? Specify the exact length of continuous service required (e.g., 10 years).
What about part-timers and casuals? Be explicit about whether the policy applies to all employment types.
How is 'service' calculated? Clarify how periods of paid and unpaid leave affect an employee’s continuous service record.
Setting the leave entitlement
Once an employee qualifies, what do they actually get? This part needs to be just as specific.
A popular and manageable option for many SMEs is offering an additional two weeks of paid leave. However, you could offer more-four weeks is also a common choice for businesses looking to provide a more significant reward.
This entitlement should be clearly stated in the employment agreement. For example: "After 10 years of continuous service, the employee will be entitled to an additional four weeks of paid long service leave." Simple, direct language is your best friend here.
Rules for taking and paying for leave
Now for the practical details. A great policy anticipates questions and provides clear answers, making it easy for everyone to manage.
Think about how the leave can be taken. Can an employee take it all at once, or can they break it up? Allowing flexibility, such as taking the leave in smaller one-week blocks, can make the benefit more useful for your team and easier for you to manage from a workflow perspective.
Next, how is it paid? The standard approach, and the simplest, is to pay the leave at the employee’s current ordinary rate of pay at the time they take the leave. This aligns with how annual leave is often handled and avoids complex calculations.
Another crucial point to address is whether the leave can be cashed out. Deciding this upfront is vital. While allowing a cash-out option can be an attractive perk, it also creates a financial liability. Many employers state that the leave cannot be cashed out and must be taken as time off, reinforcing its purpose as a period of rest and recharge.
Remember, the more specific you are, the better. Vague terms like "a reasonable amount of leave" or "at a time agreed" without further definition can lead to misunderstandings. Spell everything out.
Getting these policy details right can feel like a big task, especially when you're juggling a dozen other things. When designing your long service leave policy, understanding the advantages of outsourcing human resources can provide options for expert guidance and administrative support in compliance and policy management. Ensuring your HR framework is solid is crucial for smooth operations.
How to calculate and manage long service leave payroll
Right, so you've mapped out a brilliant long service leave policy. Now for the bit that can make even the most seasoned business owner a little nervous: getting the payroll right. But don’t stress, this doesn't have to be a headache. Once you grasp the principles, managing the financial side is pretty straightforward.
Getting the numbers spot-on is critical. It’s not just about paying your employee correctly; it’s about keeping your financial records clean and avoiding those messy payroll mistakes that are a real pain to unravel later. A tiny error now can snowball into a much bigger problem, so accuracy is your best friend here.
Adopting principles from the Holidays Act
Because long service leave isn't a statutory right in New Zealand, there's no specific law telling you exactly how to calculate the payment. So, what’s the best approach? Look to the Holidays Act 2003.
This Act is the rulebook for calculating payments for things like annual leave. By borrowing its principles, you create a process that’s fair, consistent, and legally sound. The two key concepts you'll want to use are Ordinary Weekly Pay (OWP) and Average Weekly Earnings (AWE).
For annual leave, the rule is simple: pay the employee whichever is higher of their OWP or their AWE. Applying this same logic to your long service leave payments is the gold standard.
OWP vs AWE explained in plain English
Let's quickly break down these terms without getting bogged down in jargon.
Ordinary Weekly Pay (OWP): This is simply what your employee would normally earn in a week. For a salaried employee on a consistent wage, it's just their weekly salary. Easy.
Average Weekly Earnings (AWE): This is their average weekly earnings over the last 12 months. It’s especially important for staff whose pay fluctuates due to things like overtime, commissions, or variable hours.
Using the 'higher of' rule ensures your employee is paid fairly, particularly if they’ve been pulling extra hours or earning more in the year leading up to their leave.
Let's look at a worked example
Seeing how this works in the real world makes it much clearer. Let's create a step-by-step example for an employee named Sarah who has qualified for two weeks of long service leave.
The table below breaks down the calculation process.
| Calculation step | Example employee (Sarah) | Result |
|---|---|---|
| 1. Determine OWP | Sarah’s normal contract is for 40 hours at $30/hour. | OWP = $1,200 |
| 2. Determine AWE | Over the past 12 months, Sarah earned $65,000 including overtime. | $65,000 / 52 weeks = $1,250 |
| 3. Compare OWP and AWE | We compare her OWP of $1,200 with her AWE of $1,250. | AWE is higher. |
| 4. Calculate the Leave Payment | We must use the higher figure (AWE) and multiply it by the number of leave weeks. | $1,250 x 2 weeks = $2,500 (before tax) |
As you can see, because Sarah worked extra hours over the year, her AWE was higher. Using the 'higher of' rule ensures she receives a payment that truly reflects her recent earnings.
Managing it in your books and payroll system
Long service leave is a future cost, so you need to plan for it financially. It should be recorded as a contingent liability in your financial statements.
This just means setting aside funds as the leave is earned, so you’re not hit with a surprise expense years down the line. Most modern payroll software has a function to accrue these leave entitlements automatically, which takes a lot of the manual work out of it.
For many Kiwi employers, using robust accounting software is key to managing this efficiently. You can make life much easier by integrating with Xero to automate these kinds of financial workflows.
Getting payroll right is non-negotiable, as even small slip-ups can cause big headaches. Miscalculations can easily lead to accidental underpayments or overpayments. To get a better handle on these risks, you might find it useful to read our article on how to deal with overpayments, a common payroll mistake.
Common long service leave mistakes to avoid
Even with the best of intentions, it’s easy to trip up when you’re managing something that isn't set in stone by law. A well-meaning long service leave policy can quickly turn into a source of frustration and confusion if it’s not handled with care.
We often see businesses run into the same few preventable pitfalls. The good news? Once you know what they are, they’re surprisingly easy to sidestep.
This section flags the common slip-ups we see time and again and gives you practical advice to steer clear of them. Let's make sure your policy runs smoothly and fairly for everyone.
Creating a vague or ambiguous policy
This is, without a doubt, the number one mistake. You might think using flexible language like "leave to be taken at a mutually agreeable time" is helpful, but without clear definitions, it’s a recipe for disputes.
Your long service leave policy forms part of your employment agreement, so it needs to be watertight. Ambiguity leaves things open to interpretation, which is the last thing you want when it comes to entitlements.
To avoid this, be painstakingly specific on every single detail:
Eligibility: State the exact number of years of continuous service required.
Leave amount: Define the precise number of weeks or days of leave earned.
Payment rate: Clarify that leave will be paid at their current ordinary rate of pay.
Taking leave: Set clear rules on whether it can be taken in blocks or all at once.
Think of your policy as a user manual. A new employee should be able to read it and know exactly what they’re entitled to and how the process works, with no questions left unanswered.
Forgetting to account for the financial liability
Another common oversight is failing to treat long service leave as a future financial commitment. The moment an employee starts accruing this leave, your business takes on a liability that will need to be paid out years down the track.
Ignoring this can lead to a nasty shock to your cash flow when a long-serving employee finally becomes eligible. It's not just a potential cost; it's a definite one you need to plan for.
From an accounting perspective, this is a contingent liability that should be provisioned for in your accounts. This simply means you set money aside over time, so the funds are there when you need them. Most modern payroll systems can be configured to track this accrual automatically, making it much easier to stay on top of.
Applying the policy inconsistently
Fairness is everything. If you offer long service leave to one employee, you must apply the same rules and eligibility criteria to everyone else in a similar role. Inconsistent application is a fast track to team discontent and can even stray into risky legal territory.
Imagine one manager lets their team member take leave in one-week blocks, while another insists it must be taken all at once. This creates a sense of unfairness and completely undermines the purpose of the benefit-which is to reward and motivate.
The solution is simple:
One clear policy: Have a single, documented policy that applies to all eligible staff.
Train your managers: Make sure anyone with direct reports understands the policy inside-out and applies it consistently.
Stick to the rules: Avoid making one-off exceptions that could set a precedent you can't maintain.
Consistency ensures your policy is seen as a fair and valuable company-wide benefit, strengthening morale rather than causing division. Getting it right from the start saves a world of trouble later on.
Frequently asked questions about long service leave
When you start digging into the details of long service leave, a few common questions always seem to pop up. As a business owner, you want to be able to answer them with confidence, not guesswork.
Let’s run through the scenarios we hear about most often from Kiwi employers, giving you quick, clear answers to help you navigate the tricky bits.
Does parental leave break an employee’s continuous service?
This is a fantastic and very common question. The short answer is almost always no. Periods of unpaid leave, like parental leave, don't typically break an employee's continuity of service for long service leave purposes.
The key, however, is being crystal clear in your policy. You should state that while this kind of leave doesn't reset the service clock, the unpaid period itself might not count towards the total time accrued.
For instance, if your policy requires 10 years of service and an employee takes one year of parental leave, they would hit their 10-year milestone after 11 calendar years with your company. Being upfront about this in your policy from day one prevents any confusion down the track.
What happens to the leave if my business is sold?
Selling your business has a lot of moving parts, and employee entitlements are a massive piece of that puzzle. If you have employees who have accrued long service leave, this entitlement generally transfers straight over to the new owner.
Think of it just like annual or sick leave-it's a commitment that’s attached to the employee, not the owner. The employee's original start date is the one that counts, ensuring their continuous service is recognised by the new employer.
Your main job here is to make sure this is clearly handled in the sale and purchase agreement. The agreement needs to explicitly state that the new owner will honour all existing long service leave entitlements. This makes for a smooth, fair transition for your loyal staff.
Can I offer different long service leave benefits to different staff?
Technically, you can, but it’s a risky path and one we generally advise against. While long service leave is a contractual benefit you design, any differences in what you offer must be based on objective and fair grounds.
For example, offering a more generous package to senior managers than to frontline staff could easily open you up to claims of unfairness or even discrimination if you’re not careful. It can quickly create a "them and us" culture, which completely undermines the positive intent of the policy.
A consistent, transparent policy that applies equally to everyone is almost always the safer, smarter, and better approach. It keeps things simple to manage and reinforces a culture of fairness where every single person feels valued for their long-term commitment. That way, the benefit remains a powerful tool for rewarding loyalty across your entire team.
This article reflects employment law and best practice in New Zealand as at October 2024. It is intended as general guidance only and does not replace professional legal advice tailored to your situation.
