In Australia, employees are entitled to time off while still receiving their usual base pay rate. Full-time and part-time employees can accrue up to four weeks of annual leave, and anyone classified as a shift worker is entitled to five weeks of annual leave.
Many misconceptions exist about paid annual leave on termination, which is why businesses must follow strict procedures. When an employee is fired or resigned, fair and equal treatment is essential for all.
At the end of the day, businesses must compensate employees for any unused paid annual leave or risk facing a costly claim.
In this blog post, we will look at how entitlement to annual leave loading on termination works, and how to do it right with the assistance of Pay Cat’s services and software.
What is Annual Leave Loading?
As a lesser-known entitlement payable on termination, annual leave loading in the context of employment is extra money an employee is entitled to receive on top of their usual rate, including any applicable annual leave loading.
Most modern awards entitle employees to a 17.5% annual leave loading.
At first, annual loading was only for people who worked in jobs that often paid overtime, like construction, mail delivery, plumbing, and registered nursing. Why? Because overtime staff were disadvantaged by not being able to earn overtime during their annual leave.
Throughout the years, it has become a feature of most awards, including in workplaces where overtime isn’t common.
Annual leave loading is an additional payment made to employees when they take annual leave. This extra payment is intended to compensate workers for the extra expenses incurred during their time off.
Unlike regular pay, leave loading is not an automatic entitlement and is usually paid on top of the base rate of pay. It is a legal entitlement in most industry awards, ensuring employees receive extra financial support while on leave.
The amount of leave loading varies depending on the industry and award, but it is typically around 17.5% extra pay on top of the annual leave pay.
Eligibility for Paid Annual Leave Loading on Termination
Eligibility for annual leave loading is derived from the award or enterprise agreement that applies to the employee. Employees under many Modern Awards or registered agreements are entitled to a loading when they take paid annual leave.
If an employee doesn’t fall under a relevant Award or registered agreement, they will be paid at their base pay rate or the rate at which they are usually paid. A full-time employee is entitled to four weeks of annual leave per year based on their ordinary hours of work, up to 38 hours a week. Part-time employees are entitled to pro-rata paid leave according to their work hours.
By including an employee’s annual leave pay in their yearly salary, they won’t have any outstanding wages, meaning there won’t be any holiday loading on their final payslip. However, loading must be included in the final payment calculation if it is paid on termination.
Some employees may not be able to get annual leave loading because their employment contract or registered agreement says they’re not eligible. However, the Fair Work Act of 2009 states that any earned leave payment must be received when terminated or an employee quits their job.
Leave loading is typically paid alongside annual leave payments during or after the time off. On termination of employment, any accrued annual leave and associated leave loading must also be compensated to the employee.
To pay out accumulated yearly leave loading on termination, there are many things to think about, such as:
- Whether the employee is a trainee or apprentice
- Whether they’re full-time or part-time
- Level of experience and seniority
Leave loading is taxed if it exceeds $320; anything less is exempt.
When calculating pro rata paid leave, the formula is as follows:
weeks worked ÷ 40.6 × 4 × 17.5% × Employee’s Weekly Rate of Pay.
The formula for calculating annual leave loading is similar:
4 × 17.5% × Employee’s Weekly Rate of Pay.
For example, if there are two weeks left on leave loading upon the termination of an employee, the formula changes the calculation to:
2 × 17.5% × Employee’s Weekly Rate of Pay.
When calculating employee pay during periods of leave, the minimum hourly rate is used alongside leave loading and weekend penalty rates to determine overall compensation. The calculations are done automatically using Pay Cat’s payroll products and services, with less room for error.
Is Annual Leave Loading a Legal Requirement?
The National Employment Standards and the Fair Work Act of 2009 clarify that employees must be paid for any leave they have already earned when their job ends. Staff are entitled to the same annual leave pay, meaning they receive the same rate as if they had taken leave while still employed, including any additional loading or penalties applicable during their employment.
Annual Leave Loading on Termination and Taxation
Annual leave loading is taxable in Australia. The first $320 of this payment is not taxable, providing a small relief for employees.
If an employee receives leave loading on a pro-rata basis, the leave loading payment will be added to their earnings for this period and taxed accordingly. The final payment will typically include a payout for any untaken leave, pro-rata bonuses, and notice pay, if applicable.
Employers must include annual leave loading payments in the employee’s earnings and calculate the superannuation guarantee contributions (SGC) using the total.
Annual Leave Loading and Superannuation
Annual leave loading is included in ordinary time earnings (OTE), which means employers are required to pay superannuation contributions on this amount. However, employers can decide not to pay super on annual leave loading if they consider it compensation for overtime wages.
It is essential to note that annual leave loading is a taxable component of an employee’s income, and employers must report it in the employee’s payment summary.
What Steps Do Employers Need to Take?
In addition to following the Fair Work Act and the National Employment Standards, employees must be paid in full for any accrued leave loading when they quit their job or are let go from their position. It is important to consider the minimum weekly pay when calculating these amounts, especially if leave loading or weekend penalties are involved.
The cost of not ensuring accrued leave loading is part of an employee’s final salary slip is high, and the Fair Work Ombudsman takes this very seriously. Employees can seek legal help if they choose.
As an employer, the immediate action you can take to ensure smooth transitions is:
- Payment for accrued unused annual leave
- Leave loading is paid according to eligibility
- Unpaid wages are paid, including penalty rates
- Use an automated payroll service for accuracy and compliance.
Make Annual Leave Payments Easy with Pay Cat’s Payroll Software & Services
Employers who use Pay Cat’s outsourced payroll services can rely on our team of payroll specialists to ensure annual leave loading and the cover for an employee’s last entitlements are correctly calculated. The yearly leave loading is calculated when you sync your modern award or enterprise agreement with our custom-built template and your payroll system.
Additionally, our system can manage different pay rates, such as the Saturday pay rate, to ensure accurate payments.
Our ongoing support ensures that businesses understand the scope they have to work within and deliver annual leave loading seamlessly and accurately on termination.
Clients choosing to use Employment Hero Payroll, our cloud-based software, without the addition of in-house services, is an intuitive platform to help them get all their calculations correct when employment ends.
Withholding pay or an employee not receiving untaken annual leave earnings on their final slip is illegal and needs to be rectified immediately.
To simplify your business processes around annual leave payouts and other leave entitlements, a cloud payroll software that matches your enterprise agreements and modern awards can ensure your current and outgoing staff are accurately paid every time.
Additionally, Pay Cat will custom-build a file template that seamlessly and automatically calculates payroll requirements, whether a base pay rate or an annual leave payout.
Like all our clients, we know that businesses want to make processes as simple as possible to ensure that all staff—including shift workers and those who have been let go—are paid, with annual leave loading included for those who are eligible.
By choosing to enlist the help of Pay Cat, you can expect to enjoy:
- Stress-free wage distribution
- No data re-entry
- Less room for error
- No back pay calculations
- Always getting it right!
Get in touch with us about our services and software if you’re looking to pay annual leave loading to entitled staff with ease, among other strategies that actively deliver smooth payroll processes.