Annual leave in Australia
Under the National Employment Standards (NES), all employees (except casual staff) are entitled to at least four weeks paid annual leave per year. This includes full-time and part-time workers, with part-timers receiving a pro rata entitlement. Some shift workers are entitled to an extra week.
Annual leave starts accruing from the first day of employment and builds up progressively based on ordinary hours worked. Unused leave carries over from year to year and must be paid out when employment ends.
What is leave loading and who gets it?
Leave loading is an additional payment that boosts an employee’s regular pay while on holiday. While the standard loading rate is 17.5%, some awards and agreements use different methods, such as paying the higher of 17.5% or the applicable weekend penalty rate.
Unlike standard annual leave, which is covered by national law, annual leave loading is not a statutory requirement for all employees. Instead, it depends on the award, enterprise agreement or employment contract that covers the employee.
Leave loading was originally designed to support workers who regularly earned overtime or penalty rates. Without it, taking leave meant a significant drop in income and could lead to extra expenses incurred by workers. Today, it continues to be common across industries like retail, hospitality, construction and education.
How to calculate leave loading
Calculating annual leave loading is usually straightforward. You apply the 17.5% rate to the employee’s base weekly pay.
Example:
An employee earns $1,000 per week
Annual leave loading would be $175 (17.5% of $1,000)
Total pay for one week of annual leave would be $1,175
If an award offers a higher leave loading rate, you compare that amount to the 17.5% and use whichever is the higher, but not both. Some employees on annual salaries may have leave loading built into their pay. In these cases, no separate payment is required unless their contract says otherwise, especially when the employee takes annual leave.
Pro rata leave loading
For part-time staff, leave loading is paid in proportion to their hours. For example, someone working 20 hours a week who takes two weeks off would receive leave loading based on those 20 hours, not a full-time schedule. This ensures fairness and accurate pay for the time they actually work, particularly when shift loading applies to their hours.
Leave loading and superannuation
Whether annual leave loading counts as Ordinary Time Earnings (OTE) depends on its purpose. If the loading is paid as compensation for lost overtime, it may be excluded from super. However, if there is no clear link to overtime, then it must be included in OTE and attract super contributions, including any loading paid on termination.
To exclude leave loading from superannuation, employers must keep written documentation – either from the applicable award or a workplace policy – explaining that the payment is specifically to compensate for lost overtime.
Tax on leave loading
Leave loading is treated the same as regular pay for tax purposes. It is taxed at the employee’s marginal rate and must be included in payslips and payment summaries. Employees need to check their payslips to confirm that the correct amount of tax and super is being withheld.
When to pay annual leave loading
Employees should receive their leave loading at the same time as their annual leave pay. This can be before, during or immediately after their time off, depending on the business’s payroll cycle. The key is to ensure that it is paid in full, clearly itemised and correctly recorded in the employee’s payslip and payroll system.
Annual leave loading on termination
When an employee leaves your business, whether due to resignation, redundancy, dismissal or retirement, you must pay out any unused annual leave, including applicable leave loading payments.
Even if the employment ends without the employee taking their leave, they are still entitled to the full value of their accrued entitlements. The Fair Work Act makes it clear that employees must receive the same pay for untaken leave as if they had taken it during employment.
This final payment is known as an employment termination payment (ETP). Calculating it accurately is critical, especially since employees can recover underpaid entitlements for up to six years.
If your award, agreement or contract specifies leave loading, ensure that it is factored into the final annual leave payout. You can use the Australian Taxation Office’s ETP guides to work out the correct tax rates and obligations.
Should you offer leave loading if not required?
Even if your award or contract does not require it, offering perks such as holiday loading and annual leave loading can be a way to support employee well-being and demonstrate goodwill. For businesses that employ people who regularly work overtime or weekend shifts, it can be an important retention tool.
That said, if your workforce is salaried and not typically earning above their base pay, paying leave loading may not be necessary if the salary is above the minimum hourly rate. Always check your awards or agreements before deciding one way or the other.
Is annual leave loading still relevant?
Some employers may question the fairness of annual leave loading, particularly in industries where overtime and penalty rates are no longer common. But for employees who rely on those extra earnings, such as those covered by the general retail industry award, it can make the difference between taking a proper break or not.
The original purpose of leave loading still applies, namely giving workers a financial buffer so they can take leave without financial stress.
Supporters say this helps employees return to work refreshed and more productive. No matter your opinion on the topic, the most important thing is to follow your legal obligations and ensure that any leave loading entitlements are applied correctly.
