What Is Annual Leave Loading?

A considerable number of Australian workers are eligible for annual leave loading, but it is generally less well understood than its associated entitlement, annual leave. So what is annual leave loading? In this article, we will look at this entitlement and how it might affect you as an employer.

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Annual leave in Australia

Australian law says that every worker is entitled to at least four weeks (20 business days) of paid annual leave every year. This is enshrined in the National Employment Standards (NES) and applies nationwide. Four weeks is the minimum amount of annual leave required by law. Awards, enterprise agreements and other registered agreements can have provisions offering more annual leave, but not less. All employees except for casuals are entitled to annual leave. Part-time workers are also eligible for paid annual leave, but it is paid pro rata. Some shift workers can get an extra week of annual leave.
 

Does annual leave accrue?

Yes, annual leave begins accruing from the first day of employment. The amount accrued is proportionate to the number of hours worked. So, if your employee has worked for six months, they will have saved up two weeks of annual leave. Any unused leave rolls over to the next year.

Annual leave loading – the basics

Annual leave loading is extra pay on top of the base rate of pay that some employees may be entitled to receive when they take their paid annual leave.
 

Is annual leave loading compulsory?

Annual leave loading is not compulsory for all employees. Some employees are eligible to receive it under certain awards and workplace agreements.
 

Who is eligible for annual leave loading?

Unlike the right to annual leave, which applies to all workers and is legislated nationally in the National Employment Standards (NES), part of the Fair Work Act 2009, annual leave loading is set out in major national awards. So, it only applies to the workers employed under those awards. An award is a legal document that governs the minimum rates of pay and working conditions for a particular industry. Entitlement to annual leave loading can also be stipulated in enterprise agreements, employment contracts or other registered agreements between you and your employees. Some common industries with awards that give employees the right to annual leave loading include building and construction, manufacturing, hospitality, hair and beauty, and real estate. So, make sure you check your employee’s award or enterprise agreement carefully to see if you are obliged to pay annual leave loading.
 

Annual leave loading calculator

Calculating annual leave loading is fairly simple. In most awards, it is an extra 17.5% on top of your employee’s base rate of pay. However, some awards, for example, the General Retail Industry Award 2010, state that annual leave loading is either 17.5% of base pay or the relevant weekend penalty rate – whichever is greater, but not both. Let’s look at an example of how annual leave loading is calculated: Chris has worked in a restaurant for one and a half years. He hasn’t taken any annual leave yet, so he has accumulated six weeks of paid annual leave. Now Chris wants to go on a six-week holiday. His base pay is $800 per week. His six weeks of annual leave pay (excluding annual leave loading) is therefore worth $4,800. His total annual leave pay, including annual leave loading, is $5,640. ($800 x 6 weeks = $4,800) + (17.5% x $4,800 = $840) = $5,640.

Should annual leave loading be included in OTE?

Ordinary Time Earnings (OTE) refers to the salary and wages that employees earn for their ordinary work. It is used as a basis for calculations of how much superannuation is payable to workers. In recent years, there has been some confusion about whether annual leave loading should be included in OTE. The reason for this confusion is that, in the past, leave loading only applied to industries in which overtime was common. Gradually, however, annual leave loading has expanded to other industries and many people who do not regularly work overtime are now eligible for this entitlement. The result is that its purpose has become less clear. For years, employers have not been including annual leave loading in OTE, their rationale being that it was compensation for lost overtime pay, and overtime is not OTE. As superannuation contribution calculations are based on OTE, this means that employees have potentially been receiving less superannuation than they are entitled to. According to the Australian Taxation Office (ATO), annual leave loading must be included in OTE unless you can prove that it is clearly linked to lost overtime. If you want to exclude annual loading from OTE, you need to provide the ATO with written evidence to show the payment is to compensate employees for not being able to receive overtime while on annual leave.
 
Acceptable evidence includes:

  • the relevant award or agreement
  • a documented policy, understood by you and your employees, that states the reason for the leave loading entitlement.

Why is annual leave loading necessary?

Everyone needs to take a holiday from time to time to rest and rejuvenate. But for many people, taking a holiday would be unaffordable without annual leave loading, even if they were to continue receiving their base pay. This is because annual leave pay does not include all of the additional payments workers regularly receive, such as overtime, shift work payments and other allowances. These can add up to a substantial amount. So, for some workers who often do shift work, such as nurses, their take-home pay is usually considerably more than their base pay. The idea of annual loading is that it compensates workers for this lost income. Annual leave loading dates back to the mining boom of the 1960s, when metal tradesmen complained about being on a much lower wage during holidays.

Annual leave loading when employment ends

Along with other entitlements, including annual leave pay, you must pay out any annual leave loading owed to your employee when their employment ends. According to Fair Work Australia, it must be paid out regardless of what is stipulated in any award, registered agreement or employment contract. This is because these have to comply with the National Employment Standards (NES), which state that employees must be paid any accrued annual leave when their employment ends.
 

Employment termination payment

When your employee is terminated for any number of reasons, including voluntary resignation, dismissal, redundancy or retirement, the lump sum payment you give them is called an employment termination payment (ETP). This includes accrued annual leave entitlements. It can be complicated to work out the ETP amount, given that what you need to pay varies depending on what is specified in the various awards, enterprise agreements and employment contracts. So, make sure you read the relevant document and check what you need to pay your employee when their employment ends. It’s important to include the 17.5% annual leave loading in your employee’s final pay to avoid underpaying them. Your employee will be able to recover any past underpayments for up to six years. Be careful with the tax rate that applies to the annual leave payout – this will differ depending on your employee’s age, the length of their employment and whether the termination was due to redundancy or retirement. You can use this guide from the ATO to work out how much annual leave loading you owe your employee when their employment ends.
 

When is the final payment due?

Again, this varies, but most awards require employers to give employees their final payment within seven days of their termination of employment. If this is not stipulated in the award, employment contract or enterprise agreement, best practice is to make the payment within seven days.
 

When is leave loading paid?

You should pay your employees leave loading at the same time as you pay them their annual leave pay, either before, during or after their time off.

When can your employees use their annual leave?

By law, employers cannot refuse an annual leave request without giving a valid reason. However, some valid reasons for which you might refuse a request are:

  • too many other staff are on leave at the same time
  • it is a busy period for the business
  • your employee did not give enough notice.

If your employee has accrued an excessive amount of annual leave, you can request that they take their leave. Also, remember that you can establish a leave policy with your staff, in which you agree on when they take annual leave and for how long. Make sure you include your leave policies in your HR policies and procedures so that your employees are aware of them.

Is annual leave loading fair for employers?

You may be questioning whether having to pay a flat rate of 17.5% on top of your employees’ annual leave pay is justified, given that loading has become a common feature of many awards, including for industries in which overtime is not common. This is a fair enough question. Supporters of annual leave loading argue that it allows employees to come back to work well rested after a relaxing holiday, ready to be more productive at work than employees who are stressed about financing their holiday or resentful that they can’t afford a holiday at all. In any case, it is important to be aware of your obligation to pay your employees this allowance if they are eligible for it.

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