In Australia, employees have an entitlement to time off while still receiving their usual base rate of pay. For full-time and part-time employees, they can accrue up to four weeks annual leave. Anyone classified as a shift worker is entitled to five weeks of annual leave.
There are many misconceptions around paid annual leave on termination, which is why there are strict procedures for businesses to follow. When an employee is fired or resigns, 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.
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.
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.
Some employees may not be able to get annual leave loading because their employment contract or registered agreement says they’re not eligible. But the Fair Work Act of 2009 states that any earned leave payment must be received when terminated or an employee quits their job.
To pay out accumulated yearly leave loading, 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.
Using Pay Cat’s payroll products and services, the calculations are done automatically, 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 paying employees is necessary for any leave they have already earned when their job ends. Staff are entitled to the same rate as if they had taken leave while still employed.
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.
The cost of not ensuring accrued leave loading is part of an employee’s final salary slip is high and is taken quite seriously by the fair work ombudsman. 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 service such as Employment Hero Payroll for accuracy.
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.
Our ongoing support ensures that businesses understand the scope they have to work within and delivers 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 rate of pay or an annual leave payout.
Like all our clients, we know that businesses want to make processes as simple as possible to ensure all staff – including shift workers, and those that 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.
