Managing Parental Leave

Parental leave is an extensive period of unpaid leave, bringing its own challenges to payroll. This article walks you through managing parental leave in our system.

Updated: September 2023

In this article:

Setting up your Payroll for Parental Leave

Info - Blue Block (1)
Parental Leave is a period of unpaid leave,  but is still considered continuous employment under the Holidays Act. Do not terminate the employee in the payroll system.

Parental Leave Period

There are 5 different kinds of parental leave, all unpaid by the employer, which your employee may apply for online through their MyIR. The employer no longer needs to verify income for this application.

The period they qualify for is based on their period of employment directly before going on parental leave: 

  • Employees who have worked for you for six months (for an average of at least 10 hours a week) are entitled to take up to 26 weeks of unpaid parental leave.
  • Employees can take up to 12 months of Extended Leave if they have worked for at least 10 hours a week for a year or more.
All parental leave must be taken in the first year after the birth or adoption of a child under the age of six. In certain circumstances, parental leave may start before the birth.

Parental Leave Payments are government-funded payments for up to 26 weeks and are outside of the employer's payroll.  Employees who qualify for parental leave payments can choose to first use other types of paid leave they have earned but not used, e.g.

  • annual leave

  • alternative days

  • special leave

  • time off in lieu

The employee can choose to start their parental leave payment period after they have taken other types of paid leave - even if this is after the child's arrival. Allocated annual leave taken before parental leave will be calculated at the greater of OWP or AWE, as usual.

Info - Blue Block (1)Granting leave in advance ahead of parental leave is not advisable, as this could be overpaid. When the employee returns to work after parental leave, their work pattern could change affecting allocation. Leave taken is also calculated differently.

In the Thankyou Payroll System

  • Stop paying your employee on parental leave by not toggling them on in a pay run. 
    • If you have pay automation, go into the Employee Profile - Standard Pay Tab and remove all entries from the 'Default Standard Week' row. This will ensure that the employee is not included in a pay run.  Remember to SAVE this change.
  • Take a screenshot of their Leave Liability Table so you have a record of their leave balances before going on parental leave. This leave will continue to be calculated at the greater of OWP and AWE when taken upon the employee's return.
  • The system updates calculations and balances when timesheets are processed. Until this is done, their leave liability table will remain unchanged.

Payroll during Parental Leave

Info - Blue Block (1)The system does payroll calculations when a timesheet is processed. So if your employee does not receive a pay during their parental leave period, their leave balances and accrual will not update. This is normal.

*The system will update balances with the first timesheet processed.

Annual Leave

Under the Parental Leave and Employment Protection Act 1987, employees continue to accrue annual leave during parental leave. The system will update accrual balances when the next timesheet is processed.

Other Leave Types

As parental leave is continuous employment, sick leave is allocated on the usual anniversary date. As parental leave is a period of unpaid leave (thus not considered as otherwise working days), the employee does not receive payment for public holidays, sick leave, bereavement leave, or family violence leave which falls within this parental leave period.

KIT Hours

A limit of 64 keeping-in-touch hours is allowed during the 26 weeks of government-paid parental leave. These must be agreed to by the employer and are paid at the employee's ordinary rate. Set up a taxable Custom Pay Type to easily keep track of these hours in the payroll system.

Tax Codes

As your employee will have more than one source of income, they will need to assign a secondary tax code to the smaller income stream which could be their usual employment. 

  • Make sure that you have received an IR330 for each of the Tax Code changes, or you will have to use the non-declaration code which is very high.
  • To update the tax code, do this in the Employee Profile (and save the change) BEFORE loading a timesheet on the dashboard. If the timesheet has already been loaded, the tax code change will not be applied to that timesheet unless you resave the timesheet.

Sporadic Return To Work during Extended Leave

Employees may return to work for multiple periods after the 26-week parental leave payment period has ended. This is by agreement and is paid at the ordinary rate as stated in the employment agreement. These periods of sporadic return do not extend the period of parental leave forward. Parental leave will end on the original end date, regardless of the number of return-to-work periods. As this is not restricted, 'standard pay' can be used in the timesheet.


It is worth noting that payroll deductions cease when an employee doesn't receive pay. This impacts the employee's KiwiSaver as their KiwiSaver contributions, the Employer's Contribution to their KiwiSaver and ESCT also stops. The employee should be made aware of this, so they can have plans in place to limit the impact of parental leave on their KiwiSaver. 

When a timesheet is loaded for the employee, these deductions will be automatically included again for that pay.

When the Employee Returns to Work

Info - Blue Block (1)Annual leave allocated during parental leave or in the 12 months after the parental leave period has ended, is calculated at the AWE rate for the 12 months immediately before the end of the last pay period before the leave is taken.

*This leave does not revert to the greater of OWP/AWE calculation, ever.

Changing Work Patterns or Hours

Often when an employee returns, they return to fewer hours or days per week.

  • Update the Employee Profile to the new work pattern before you load their first pay on their return to work form parental leave. Remember to update both the 'Standard Pay' tab and the 'Leave' tab with the new information and SAVE.

  • Do not change start dates, sick leave balances, or anniversary dates.

Calculating Annual Leave

  • The employee is still entitled to their 4-week annual leave allocation, but this allocation will be calculated according to their new work pattern.

e.g. If the employee used to work 5 days a week, their allocation on their previous anniversary date was 20 days. When they return to work after parental leave and now only work a 3-day week, their entitlement to 4 weeks of annual leave is calculated based on their new work pattern. They will receive (3 days x 4 weeks) 12 days of allocated annual leave on that anniversary date.

  • The payment calculation changes when the employee takes annual leave that was allocated during parental leave or in the 12 months following the parental leave period. The payment amount is determined by calculating only the employee's average weekly earnings (AWE) for the 12 months immediately before the end of the last pay period before the annual holiday is taken. This is even if the leave allocated during this period is taken or paid out years later.
    • This means that if an employee takes annual leave soon after coming back from parental leave the payment will be lower than if they took their leave after months have passed since their parental leave period has ended.
    • If the employer provides additional annual leave (an extra 5th week above the 4-week Holidays Act entitlement) this leave is by agreement and calculated according to the employment agreement. 
  • Allocated leave before the parental leave period, and after 12 months since the employee's return to work is unaffected by this calculation change. This leave would continue to be calculated at the greater of OWP or AWE. 

Info - Blue Block (1)Annual leave is always calculated at the time the employee takes their leave. Please contact the Customer Team if you are unsure about how to set the calculation rate at AWE for annual leave in a timesheet.

Payroll Exit for the Non-returning Employee

Info - Blue Block (1)If your employee does not return to work after parental leave, the first day of parental leave becomes their termination date.

Leave Balances

Include the employee's annual leave balance and leave accrual up to the termination date in the employee's final pay.

  • Any annual leave entitlement allocated or accrued after that date is lost

  • Base any alternative leave owing on the rate of the last day of employment, which is their parental leave start date.

  • If the employee has a positive allocated leave balance and a public holiday falls within that extended time, include payment for that public holiday in the final pay as with any other final pay scenario.
    • e.g. the employee (work pattern: Mon-Fri) went on parental leave on Friday 21 April, with a positive allocated leave balance of 3 days. They do not return after parental leave, so this date becomes their termination date. The 3 days of positive allocated leave extends the termination date out to 26 April. ANZAC day falls on the 25th, so payment for ANZAC day must be included in the final pay.

What about KIT hours and return-to-work periods?

Any KIT hours or periods of return to work pay do not form part of the 8% of gross earnings calculation on termination as this falls after the termination date.

Resources and Further Information

If you are unsure of the employee's entitlement, please contact Employment NZ or seek other legal advice.