As an employer, your obligations are multifaceted. This means that meeting these obligations takes much more consideration than a surface-level understanding of your employees' entitlements.
This is true for many aspects of your work, including leave entitlements.
Annual leave loading is an extra payment that some employees receive when taking annual leave that often gets forgotten.
It was introduced as a result of the 1970s labour movement and was meant to support workers who relied on overpay and increased overtime rates to maintain their finances. Annual leave loading offers some compensation for the extra expenses an employee incurs on annual leave.
Many businesses may be unaware of this obligation, but it's still an important one to remember to avoid underpayment and its risks.
But we're getting ahead of ourselves. Let's start with the basics...
What does annual leave loading mean?
Annual leave loading is also called leave loading or holiday leave loading. Regardless of what you call it, it is an extra payment employees may be entitled to on top of their usual base rate of pay either upon the commencement of, or during a period of, annual leave.
All Australian workers have a minimum entitlement to paid annual leave, but not every employee is entitled to annual leave loading.
The National Employment Standards (NES)—a set of standards that form part of the Fair Work Act 2009 and apply to all employees covered by the national workplace relations system—prescribe a minimum of four weeks paid annual leave per year for full-time and part-time employees regardless of any award, agreement or contract.
The NES does not provide for annual leave loading, however, as this is only covered by awards or Enterprise Bargaining Agreements.
What is the leave loading amount?
While the loading amount (if any) varies depending on the modern award or enterprise agreement, which covers the eligible employee's role, it usually amounts to 17.5% of their base rate or their usual rate of pay.
The loading amount may also vary to be equal to a shift loading or weekend penalty rate, whichever is higher, depending on when the leave is taken.
Who is eligible for annual leave loading?
Eligibility for annual leave loading is determined by the award or enterprise agreement that applies to the employee. If they aren’t covered by an award or registered agreement, then an employment contract with the employer may provide for annual leave loading.
Employees under most modern awards or registered agreements are entitled to annual leave loading when they take paid annual leave. If an employee doesn’t fall under a relevant award or agreement they will be paid at their base pay rate, or the rate at which they are usually paid for annual leave.
Full-time, part-time and shift worker entitlements
Are entitled to four weeks of annual leave per year based on their ordinary hours of work up to 38 hours a week.
Are entitled to paid leave on a pro-rata basis according to the number of hours they work.
May be entitled to an extra week of leave depending on their award. Whether or not an employee is a shift worker will depend on the definition in the relevant award or registered agreement that applies to that employee.
What about accrued annual leave?
It's important to keep in mind that annual leave loading is payable on all accrued annual leave when taken by an employee.
So, it’s not restricted to the current year’s accrual alone. It will continue to be applied to all untaken annual leave, which carries over from year to year.
Calculating annual leave pay and annual leave loading payments
An employee must be paid, at minimum, their base pay rate for hours they would have otherwise worked during a period of annual leave up to 38 hours a week. That is unless their award, registered agreement or contract provides them with a greater entitlement.
The base rate of pay generally does not include penalties, allowances, loadings or bonuses. But, under some awards, there are exceptions to this rule.
A number of awards stipulate that employees get paid the higher of the following, calculated over the whole period of leave that is taken:
a 17.5% loading on the employee’s base rate of pay for the job they do under the award classification for the ordinary hours they would have worked if they weren’t on leave; or
the employee’s normal (over-award) rate of pay for the hours they would have worked if they weren’t on leave plus 17.5% loading; or
the weekend penalty rates the employee normally gets if they would have worked (plus shift loading if the employee is a shift worker).
Let's break it down even further with an example.
What could your annual leave loading calculator look like?
If your small business hires an employee to work 4 hours every day from Tuesday to Saturday, their working hours will add up to 20 hours every week.
Now, let's say they get paid $20 per hour. And they'll get paid a 25% weekend penalty for the hours they work on Saturday. So, on Saturday your employee will earn $25 per hour.
When your employee takes annual leave for one week, they'll get paid either:
their minimum weekly rate plus 17.5% leave loading or
their minimum weekly rate plus their weekend penalties
For this week off, depending on which value is higher. How do you determine which value is higher? Let's look at the numbers.
Minimum weekly pay without weekend penalties
20 hours x $20= $400
Minimum weekly pay plus annual leave loading
$400 + 17.5%= $470
Minimum weekly pay plus weekend penalties
20 hours x $20= $400
4 hours x $25= $100
Does your employee get paid annual leave loading or their usual payment?
In this case, they get paid annual leave loading.
Because their minimum weekly pay with the addition of annual leave loading is $30 higher than their minimum weekly pay plus weekend penalties, your employee will get paid $500 for their week of annual leave.
When do you pay annual leave loading?
Leave loading generally needs to get paid at the same time your employee gets their annual leave pay. Because annual leave pay is generally matched to any employer's normal pay cycle, the same applies to leave loading payments.
But, some awards or registered agreements may require employers to pay leave loading as well as annual leave before the annual leave is taken. So, make sure the process you're following is compliant with regulations for what your employee is entitled to.
What happens to annual leave loading if an employee is terminated?
When an employee is terminated or resigns, they must be paid out all remaining unused annual leave, and also paid their annual leave loading if they are entitled to it.
If they receive annual leave loading during their employment, then they will also be entitled to it when their employment ends.
Annual leave loading is paid out even when an award, registered agreement or employment contract says that it’s not as the entitlement is based on a provision of annual leave on termination within the Fair Work Act 2009. The provision states that if an employee is terminated and they have a period of unused annual leave, they must be paid out what they would have been paid had they taken that period of annual leave.
When employment ends, if an employer wishes to make a deduction for any valid reason, annual leave and annual leave loading are not permitted to be deducted from in any circumstance. This deduction may only come from outstanding salary.
What if my employee's final pay includes leave loading?
Some employees may receive an annual salary or an all-inclusive hourly rate that includes their applicable annual leave loading.
In these cases, their leave loading payment doesn't need to be paid out separately. Whether your employee's salary amount includes annual leave loading or forms part of an hourly rate will usually be laid out in their employment contract.
Get holiday loading right
Getting leave loading right every step of the way—from determining whether your employees are entitled to leave loading to the right time to make a leave loading payment—is a huge part of meeting your obligations.
Make sure you follow the laws that are applicable to your particular industry. And, if you need, turn to industry experts for advice.