Everything You Need to Know About Annual Leave

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Annual leave is one of those aspects of payroll compliance that’s often underestimated.

Most employers see it as simply fixed holiday pay that’s offered every year, but there are some nuances to it to ensure that you aren’t either over-accruing or under-accruing annual leave for your employees.

What if your employee is a shift worker? What if they take unpaid leave such as maternity leave? What if your employee switches from full-time to casual?

Understanding how this all works is integral to ensuring that annual leave is all accrued, managed and processed correctly.

Annual leave, often referred to as holiday pay is a type of payment for employees having time off from work.

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All employees receive annual leave except for casual employees.

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This is compulsory and must be provided to these employees as part of payroll compliance.

While four weeks is a minimum, employers have the option of offering more.

For example:

Jessica who works full-time 38 hours a week will accrue 152 hours of annual leave each year. This is the equivalent of 4 weeks (4 weeks x 38 hours = 152 hours) of annual leave.

Jerry who works part-time 20 hours a week will accrue 80 hours of annual leave each year. This is the equivalent of 4 weeks (4 weeks x 20 hours = 80 hours) of annual leave.

If your employee is classified as a ‘shift worker’, they may be entitled to five weeks of annual leave. However, you must check the relevant award they fall under if this is a minimum entitlement.

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An employee is classified as a shift worker if:

  • The business they work for rosters shifts for 24 hours a day, seven days a week
  • They are regularly rostered to work across all hours of the day
  • They regularly work on Sundays and public holidays
  • They are defined as a “shift worker” in the modern award or enterprise bargaining agreement (EBA)

These types of employees are entitled to five weeks of annual leave.

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This is done pro-rata based on the employee’s ordinary working hours.

For example, an employee that works 5 days and 38 hours a week for a full year will accrue 0.7308 hours of annual leave per working day. See calculations below:


152 hours of annual leave ÷ 52 weeks = 2.923 hours

2.923 hours ÷ 5 days = 0.5846 hours per working day


However, there are some important things to understand when employees will and won’t accrue for annual leave.

Annual leave accrues when an employee:

  • Takes paid leave such as annual leave, sick leave or carer’s leave
  • Takes community service leave such as jury duty
  • Takes long service leave

However, annual leave is not accrued when an employee:

  • Takes unpaid leave such as unpaid annual leave or sick leave
  • Takes unpaid parental leave
  • Takes unpaid family and domestic violence leave

If annual leave is not taken, it can be accumulated and rolled over to the next year until it is taken.

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This can include rules around how much notice is needed to take annual leave, taking annual leave within a period of time after accumulating a certain amount, and cashing out annual leave.

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This is usually outlined in some modern awards or registered agreements. Under new rules introduced in 2017 to some awards, an employee’s annual leave balance is considered excessive if:

  • There are more than 8 weeks of annual leave in their balance
  • There are more than 10 weeks of annual leave in their balance if an employee is classified as a shift worker

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This is an extra payment that employees are entitled to when they take annual leave, usually an extra 17.5% on top of their normal wage.

Again, we recommend you check this against your modern award to see whether you need to include annual leave loading.

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This means employees can cash out annual leave instead of taking time off from work.

However, if the award or registered agreement doesn’t cover this, the employer and employee can come to an agreement in writing to be paid out their annual leave if both parties agree to the conditions.

It’s necessary that the employee must have at least four weeks of annual leave to be able to cash out their annual leave.

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And when they start taking unpaid leave or there are some changes to their type of employment, this can all get really confusing.

We’ve found that businesses benefit greatly from using cloud payroll software that automates the process of accruing annual leave, managing leave requests and processing annual leave taken.

From using employee self-service to make annual leave requests and viewing their annual leaves right through to automating the annual leave accrual process, all of this can be managed with minimal manual payroll work.

At Pay Cat, we’ve been helping hundreds of businesses make the transition from manually managing annual leave to an automated process that requires minimal intervention.

If you’re interested in finding out the benefits of automating annual leave as well as all other aspects of payroll, get in touch with us to find out how we can match you with the most suitable cloud payroll software for your business.

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