Annual leave loading in Australia: 17.5% rule, awards and termination pay

What annual leave loading is

Annual leave loading is an additional payment made to employees when they take annual leave. It is typically 17.5%, added to their base pay.

Leave loading is not a National Employment Standards entitlement. Instead, it is provided through modern awards, enterprise agreements, or individual contracts of employment.

The original intention of annual leave loading was to compensate employees for any loss of overtime, shift penalties, or other variable income they would have otherwise received while working. While 17.5% is the most common rate in modern awards, some awards may specify higher figures or shift-loading equivalents.

Award sources and shift workers

Many modern awards contain a clause regarding annual leave loading. These clauses typically stipulate that employees are paid the greater of a 17.5% loading or the shift/weekend penalty rates they would have otherwise received had they been working. This ensures shift workers receive appropriate compensation for the disruption to their regular working patterns.

Certain awards provide for shift workers to receive 5 weeks of annual leave, rather than the standard 4 weeks. This provision is outlined in section 87(1)(b) of the relevant award.

It is important to note that not all awards apply the 17.5% leave loading. Some, such as those in the Banking, Finance and Insurance sector, instead provide for rolled-up wages in lieu of leave loading. Enterprise agreements can also modify or cash out leave loading, provided the Better Off Overall Test (BOOT) is satisfied.

Section 90 and termination pay

Section 90 and termination pay

Section 90(1) of the Fair Work Act 2009 stipulates that paid annual leave must equal the amount that would have been paid for performing work during that period. This principle extends to termination of employment.

Section 90(2) requires payment of unused annual leave at termination at the rate the employee would have been paid had the leave been taken during employment. The Fair Work Ombudsman considers that annual leave loading is payable on termination if it would have been paid had the leave been taken during employment.

It is important to note that some modern awards contain provisions stating that leave loading is not payable on termination. However, these provisions may be inconsistent with the requirements of section 90(2).

Tax, super and common errors

Annual leave loading is considered ordinary time earnings (OTE) for superannuation guarantee purposes when it is related to ordinary hours of employment, rather than compensation for lost overtime. The Australian Taxation Office (ATO) provides guidance on this distinction in ruling SGR 2009/2. Employers should refer to this ruling to determine whether leave loading should be included in the OTE used to calculate superannuation.

When an employee’s employment ends, annual leave loading paid is generally not considered OTE. Consequently, it is not subject to the superannuation guarantee charge. This is a key distinction from payments made during ongoing employment.

Common errors in applying annual leave loading include incorrectly excluding it from long-service-leave-style cash-outs and failing to include it in a final pay upon termination of employment. Employers should review their payroll practices to ensure accurate application of leave loading in all circumstances.