Unused annual leave paid out on termination
Four weeks a year, accrued from day one, never lost. Here is what the payout looks like.
Updated on · Mottalib Radif · Editorial policy
How much accrues
Full-time employees accrue 4 weeks (20 days) of annual leave per year, progressively; shift workers under some awards get 5 weeks. Part-time accrues pro-rata. Leave keeps accumulating year to year and is paid out in full when the job ends, at the base rate plus any loading the award attaches to leave.
Accrual is continuous and proportional to ordinary hours: a full-time employee on a 38-hour week accrues 2.923 hours of leave per week, and the balance on the payslip is usually expressed in hours rather than days. Leave accrues during paid leave, including annual leave itself, personal leave and long service leave, and during periods of workers’ compensation where the state law allows. It does not accrue during unpaid leave or unpaid parental leave. Casual employees do not accrue annual leave; their 25% casual loading is paid instead. There is no cap on the balance and no expiry: an employee who has never taken leave in twelve years is owed 48 weeks on termination, which is why awards allow employers to direct excessive balances to be taken.
Example: $300 a day
| Unused days | Base payout | Loading 17.5% | Total |
|---|---|---|---|
| 5 | $1,500 | $263 | $1,763 |
| 10 | $3,000 | $525 | $3,525 |
| 15 | $4,500 | $788 | $5,288 |
| 20 | $6,000 | $1,050 | $7,050 |
| 30 | $9,000 | $1,575 | $10,575 |
The rate of payment
Section 90 of the Fair Work Act requires unused annual leave to be paid at the amount the employee would have been paid had they taken the leave. That is the base rate of pay for the ordinary hours plus whatever the award or agreement adds to annual leave: leave loading of 17.5% in most awards, or the shift loading and weekend penalties the employee would have received, whichever is higher, for shift workers. A common error is to pay out leave at the base rate only; the Fair Work Ombudsman treats the omission of loading as an underpayment. Where the employee’s rate changed over time, the rate at termination applies to the whole balance, including leave accrued years earlier at a lower rate. Salary sacrifice does not reduce the rate, but a contractual annualised salary that expressly absorbs loading may.
Leave loading
Leave loading dates from the 1970s, when it compensated employees for the overtime they could not earn while on holiday. It survives in most modern awards at 17.5% of the base rate for the period of leave, and in many enterprise agreements. Award-free employees and those whose contract states that the salary includes loading do not receive it. When leave is paid out on termination, the loading follows the leave: if the award pays 17.5% on leave taken, it must pay 17.5% on leave paid out. Some awards give shift workers the higher of the loading and the shift penalties; on termination the same comparison applies. Loading is taxed with the leave it attaches to, and is generally not superannuable when paid on termination.
| Employee | Rate for payout | Loading on termination? |
|---|---|---|
| Award employee, day work | Base rate | Yes, 17.5% if the award provides it |
| Award shift worker | Base rate | Higher of 17.5% and shift penalties |
| Enterprise agreement employee | As the agreement states | If the agreement pays loading on leave |
| Award-free, salary “inclusive of loading” | Base rate | No |
| Award-free, contract silent | Base rate | No |
| Casual | Not applicable | No leave accrues |
Tax
On a genuine redundancy, invalidity or early retirement scheme, unused annual leave is withheld at 32%. On resignation or other termination, the payment is added to your marginal rate using ATO Schedule 7; the calculator estimates it from your salary. Leave accrued before 18 August 1993 has concessional treatment.
Schedule 7 sets out how the employer withholds tax on unused leave. For a genuine redundancy, invalidity or an approved early retirement scheme, the whole payment, loading included, is withheld at a flat 32%, made up of 30% plus the 2% Medicare levy, and reported separately on the income statement as a lump sum A with type R. For any other termination, leave accrued after 17 August 1993 is added to the normal pay for the final period and tax is withheld at marginal rates under the ordinary tax table, which for a large payout can mean withholding at 37% or 47% on part of the amount. Leave accrued between 16 August 1978 and 17 August 1993 is withheld at 32% whatever the reason for termination, and leave accrued before 16 August 1978 is only 5% assessable. Employers rarely have records going back that far, so employees with very long service should raise it. In the tax return, lump sum A amounts are taxed at no more than 30% plus Medicare, so any excess withheld comes back as a refund.
Other leave types on termination
- Personal and carer’s leave: never paid out under the NES, however large the balance, unless an award or agreement expressly provides.
- Long service leave: paid out according to the state or territory Act once the threshold is reached; see the long service leave calculator.
- Rostered days off and time off in lieu: depend on the award; most require accrued RDOs to be paid out, and TOIL under a written agreement to be paid at the overtime rate.
- Purchased leave: any balance already deducted from salary but not taken must be refunded.
- Leave in advance: may be recovered from final pay only where the award or a written agreement permits.
Timing and superannuation
Unused annual leave is part of the final pay and must be paid within the time the award specifies, usually seven days after the end of employment, or on the next pay day for award-free employees. Superannuation is not payable on annual leave paid out on termination, because the ATO does not treat termination leave payments as ordinary time earnings; annual leave taken during employment is superannuable, and so is the loading in most cases. This creates a small incentive to take leave before finishing rather than have it paid out, particularly for employees close to a superannuation contribution milestone. Against that, leave taken during a notice period extends the termination date and can push service across a redundancy or long service leave threshold. The final pay calculator shows the leave payout, its loading and the tax on it alongside the other components.
