Getting annual leave payments right is one of the most common compliance challenges for Australian employers. Whether leave is taken during employment, paid out on termination, or cashed out, the rules must be followed carefully to avoid underpayments.

Here’s a clear breakdown of the key requirements under the National Employment Standards (NES), Awards and enterprise agreements.

1.Paying Annual Leave When It Is Taken

Under the NES, annual leave is paid at the employee’s current base rate of pay for their ordinary hours. This does not include overtime, penalty rates, allowances or bonuses (unless an Award or agreement provides otherwise).

Many Awards go further. For example, under the Building and Construction Award, an employee taking annual leave must be paid what they would have earned for their ordinary hours, plus the higher of:

• 5% annual leave loading, or
• the shift loadings they would normally receive.

All-purpose allowances must also be included where required by the Award. Always check the specific instrument that applies to your business.

2.Payment of Annual Leave on Termination

When employment ends (resignation, redundancy or dismissal), any outstanding annual leave balance must be paid out in full. It cannot be withheld from final pay.

The amount paid on termination must be the same as if the employee had taken the leave during their employment — including any annual leave loading or other entitlements provided by the Award or agreement.

3.Cashing Out Annual Leave

Cashing out is only permitted if allowed under an Award or enterprise agreement, and strict conditions usually apply. For example, under the Clerks Award:

• A maximum of 2 weeks can be cashed out in any 12-month period
• The employee must retain at least 4 weeks of leave after cashing out
• Payment must be at the same rate as if the leave were taken

Always check the relevant instrument before agreeing to a cash-out request.

Common Mistakes to Avoid

• Deducting annual leave when a public holiday falls during a period of leave (it should not be deducted)
• Automatically converting unused sick/carer’s leave into annual leave without the employee’s agreement
• Failing to accrue annual leave from day one of employment (including during probation)
• Not keeping accurate records of leave balances and when leave is taken

Practical Tips for Employers

1. Identify the correct Award or enterprise agreement for each employee.
2. Confirm whether annual leave loading or other additional payments apply.
3. Use the Fair Work Ombudsman’s free Pay Calculator and Leave tools to cross-check calculations.
4. Keep clear records of leave accruals, balances and payments.
5. Review final pay calculations carefully when employment ends.

At HR Bridge Australia, we regularly help SMEs get annual leave payments right — from everyday leave processing to complex termination calculations and Award interpretation. Correct leave payments protect both your employees and your business from costly underpayment claims.

If you would like a review of your current annual leave practices or assistance with a specific Award, we are here to help.