Leave without pay

Leave without pay (LWOP) is any agreed period where an employee stays employed but is not paid. Whether they keep progressing towards their annual leave entitlement during that time depends on the reason for the leave. Some reasons still count as continuous employment, and some do not.

We can share how the Holidays Act treats these situations and show you how to action your decision in PaySauce. When the situation is complex, we recommend confirming your intended approach with MBIE, your employment adviser or a lawyer before you change anything in payroll.

Leave without pay is an agreed absence where the employee remains employed but earns no pay for the period.
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Sometimes this is something like parental leave, which has separate treatment and is covered in our Parental Leave article.

Sometimes unpaid leave actually relates to a period of time where the employee has been injured or is on ACC. For more on this specific scenario you can refer to our ACC article.

Unpaid leave is also sometimes used for when employees are sick, or have experienced a bereavement, but do not have an available balance of sick leave or need to take more time off.
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Sometimes unpaid periods away from work include things like extended personal time off, a career break, etc.
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It depends on the reason for the leave. Under the Holidays Act, annual leave entitlement is reached after each 12 months of continuous employment. Some kinds of unpaid absence still count as continuous employment, so the employee keeps progressing towards their next entitlement.

Getting the reason right is the important step, because it decides whether the next entitlement date stays where it is or moves out.

These unpaid absences still count as continuous employment, so the employee keeps progressing towards their four week annual leave entitlement, and the entitlement date does not move. The employee needs to keep accruing their annual leave calculations each week to receive the correct entitlement at their next anniversary.

Any employee under one of these scenarios cannot have their annual leave entitlement paused or stopped. If a 12 month anniversary passes while they are away, that year's four week entitlement is reached in the normal way.

If the leave is ordinary LWOP for a reason not listed above, and it runs longer than one week, the position is different. The first week still counts for accrual and entitlement as described above, but for the part beyond one week you can move the employee's next annual leave entitlement date out by that amount. This means the anniversary at which they next become entitled to four weeks shifts later.

In short, you do not handle this by stopping or removing accrual - it is handled by moving the date when the employee will be entitled to annual leave. If you simply stop the accrual, the employee will not receive 4 weeks of annual leave on their next entitlement date which is not the correct treatment.

This is a common request, and in most cases there is less to worry about than it first seems.

If the reason counts as continuous employment (ACC, unpaid sick leave, and the others listed above), you cannot pause or reverse the progress towards entitlement. The employee keeps their entitlement, and if an anniversary passes while they are away, that four week entitlement is reached and cannot be clawed back.

If it is other LWOP longer than one week, the treatment is not to reverse leave already earned. It is to move the next entitlement date out for the correct number of weeks (total number of weeks on unpaid leave less 1 week which is covered as continuous employment as described above).

The reassuring part is that annual leave building up in the current entitlement year, before the next anniversary, does not have a separate dollar value in a final pay/termination pay. The current entitlement year is paid as 8 percent of gross earnings. While an employee is on unpaid leave, no gross is being earned, so that portion is not growing. So even where it feels like leave is quietly accruing, there is no value being added to the final pay amount - unless they pass an entitlement date.

Recording periods of time of unpaid leave/leave without pay will always accrue annual leave and this cannot be prevented. As explained above, the correct treatment is actually to move the entitlement date, not prevent accrual from occurring.
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For an employee on a period of unpaid leave for one of the reasons covered as continuous employment, you must record unpaid leave to ensure the employee's leave is managed correctly.

We can show you how to record leave without pay, set or move an entitlement date, and process a final pay in your account, based on the approach you have decided on. What we cannot do is make the judgement call for you, because the right treatment depends on the reason for the leave and the specifics of the situation. We will always point you to the requirements and suggest you seek advice where the situation is finely balanced.
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