Annual leave looks like the simplest entitlement in the National Employment Standards. Four weeks a year, take it when you want, done. In practice it produces more payroll questions than almost anything else, because the interesting parts are all in the edges.
How it accrues
Full-time employees accrue four weeks of paid annual leave per year of service; certain shiftworkers accrue five. Part-time employees accrue on a pro-rata basis according to their ordinary hours. Casuals do not accrue annual leave, which is part of what the casual loading compensates for.
Leave accrues progressively throughout the year, not in a lump on an anniversary, and it carries over from year to year. It also continues to accrue while an employee is on paid leave — including while they are on annual leave. It does not accrue during most unpaid leave.
Taking leave
Leave is taken by agreement, and an employer must not unreasonably refuse a request. “Unreasonably” is doing real work in that sentence: genuine operational reasons are fine, a blanket policy of refusing leave in a particular month usually is not.
The reverse also has limits. An employer can only direct an employee to take leave where an award, registered agreement or the NES permits it — most commonly during a genuine shutdown period, or where the employee has an excessive accrued balance. Both usually come with notice requirements and specific conditions in the applicable award. Sending someone home on annual leave because the week is quiet is not one of the permitted grounds.
Excessive balances
Most awards define an excessive balance as more than eight weeks (ten for some shiftworkers) and set out a process: the employer and employee should first try to reach agreement, and if that fails the employer may, after a genuine attempt and with appropriate notice, direct the employee to take some leave — subject to the limits in the award.
Large balances are also a real financial exposure. Leave is paid out at the rate applying when it is taken or paid, not when it was earned, so an employee who accrues leave for five years and then receives several pay rises has a balance that has quietly grown in value. Managing balances is as much a cash-flow question as a wellbeing one.
Cashing out
Cashing out is permitted only where an award or agreement allows it, and where the strict conditions are met: a separate written agreement for each occasion, at least four weeks of leave remaining afterwards, and payment of at least what the employee would have received had they taken the leave. It cannot be a standing arrangement in a contract, and it cannot be pressured.
Leave loading
Many awards provide annual leave loading — commonly 17.5% — on top of the base rate when leave is taken. Whether it applies, and whether it is also payable on termination, depends on the award. This is a frequent source of underpayment because it is easy to configure a payroll system to pay base rate only and never notice.
At termination
Accrued but untaken annual leave is paid out on termination, regardless of why employment ended. Whether leave loading is included in that payment depends on the award and, where none applies, on the contract. Getting this wrong is common, visible and easy to avoid — it is the last thing an employee looks at closely, and often the first thing they query.
What to check in your own setup
- Does your payroll system accrue at the correct rate for each employee type, including part-timers whose hours have changed?
- Is leave loading configured, if your award requires it — both when leave is taken and on termination?
- Does anyone review balances regularly, or does the first review happen when someone resigns?
- Is your shutdown provision, if you use one, actually permitted by the applicable award?
If you are unsure which award applies in the first place, that is the place to start — see how to find the right modern award. And the National Employment Standards set the floor that every one of these rules sits on.
Annual leave’s companion entitlement, personal and carer’s leave, accrues and behaves quite differently — it is worth reading the two together.