Annual Leave Loading: What you need to know

By Chloe Boike, Workplace Relations Advisor 

Ensuring employees are paid correctly can sometimes be a little complicated – especially when it comes to annual leave loading. If you, as an employer, have found yourself asking ‘what exactly is annual leave loading’, you are not alone. There are many employers who struggle with understanding annual leave loading and when it is paid. This article takes a look at the common questions that arise with annual leave loading and provide clarity on the more common questions. 

Annual leave loading is intended to compensate employees who may rely on the overtime and penalty rates they would have received if they had worked instead of taking leave. 

Most awards such as the Hospitality Industry (General) Award 2020 and the Restaurant Industry Award 2020 state employees are paid an annual leave loading of 17.5% when they take a period of annual leave. This is not the same throughout all awards, the Clerks – Private Sector Award 2020 states the annual leave loading should be the higher of: 

• 17.5% of the minimum hourly rate for the employee’s ordinary hours; or 
• The minimum hourly rate for the employee’s ordinary hours of work in the period inclusive of the applicable penalty rates*. 

The rules around annual leave loading also differ for shift workers. In the Building and Construction General On-Site Award 2020, where an employee would have received shift loadings for their work if they were not on annual leave, and the shift loading is greater than 17.5%, the employee would be entitled to the shift loading instead of the standard 17.5% annual leave loading*.  

It is important for employers to review the award relevant to their industry to ensure employees are being paid correctly. 

* Conditions apply. Please contact Business Chamber Queensland for more information. 

Is Annual Leave Loading payable upon termination? 

Whether an employee resigns or is terminated, they are entitled to be paid out any unused accrued annual leave including annual leave loading if it would have been paid during employment. Section 90(2) of the National Employment Standards, as enshrined in the Fair Work Act 2009 (Cth), states when employment ends and the employee has a period of untaken leave, the employee must be paid the amount that would have been payable if the employee had taken that period of leave. Accrued annual leave when paid on termination therefore includes annual leave loading, or in the case of other specific award conditions, payments such as those referred to above.

Does Superannuation have to be paid on Annual Leave Loading? 

Superannuation payments are calculated based on an employee’s ordinary time earnings.  

Annual leave loading is included in the definition of ordinary time earnings unless it is linked to lost overtime.  

In 2021 The Australian Taxation Office ruled annual leave loading is included as ordinary time earnings because it is related to annual leave. However, the ruling goes on to state if an employer can show annual leave loading is to compensate for the employee’s inability to work overtime, the employer will not need to include annual leave loading in the ordinary time earnings calculation.  

An employer will need to obtain written evidence the annual leave loading is linked to a lost opportunity to work overtime. The ATO states this evidence can be either: 

• The relevant Award or agreement; or 
• A documented policy, understood by the employer and the employees that states the reason for the annual leave loading entitlement.

Is Annual Leave Loading required when paying above the award rate? 

Sometimes employers want to pay their employees above the relevant Award rate for the employee’s classification. Employers may choose not to pay annual leave loading if their employees are ‘better off’ financially on the above award system.  

However, before taking this approach, employers need to be aware any agreement made regarding this must be in writing and signed by both the employer and the employee. If an employer pays $1 or $2 above the relevant Award classification rate, it cannot be said they will automatically be better off without annual leave loading payment.  

If you are considering including the payment of annual leave loading in an above-award wage, contact Business Chamber Queensland as we can assist you to ensure your employees will be ‘better off’ financially, and you are meeting your requirement to document the arrangement in place 

The general rule to remember when it comes to over-Award payments is if the over-Award payment is in compensation of other Award entitlements, if it is not in writing, it does not exist.  

Example Scenario:

Cody is a full-time Level 2 Kitchen Attendant at a fast-food chain. Under the Hospitality Industry (General) Award 2020 (HIGA), his base rate of pay is $22.77 an hour with 17.5% annual leave loading.  

However, his employment contract states he will be paid above the HIGA rate at $30.00 per hour and annual leave loading is compensated for in the above HIGA hourly rate. This is clearly stated in writing. 

If Cody were to take five days of annual leave, he would be entitled to $1,140.00 in accordance with his employment contract. Compared to his rate under the HIGA which is $1,016.68 including annual leave loading for the period, Cody will receive $123.32 more on his ‘above-HIGA rate’ with no annual leave loading.  

This means Cody will be ‘better off’ under his current employment contract rather than under the HIGA. Of course, when the HIGA rates increase, as they may do so as part of the Fair Work Commission annual wage review (likely to be from July 1 2023), the employer will need to ensure the above-HIGA rate of pay paid to Cody continues to result with Cody being better off.  

More Information and Assistance 

Business Chamber Queensland members with access to the Workplace Advisory Services helpline as part of their membership who require assistance with workplace matters are encouraged to contact the Workplace Relations team via telephone at 1300 135 822 or via email: [email protected].   

Non-members, or members who do not have HR services as part of their membership, can also contact the team for assistance at a competitive hourly consulting rate.