Since 1973, a four (4) week annual leave period for the benefit of an employee has been standard practice, increasing from the initial one (1) week annual leave standard introduced in 1941. Today, annual leave entitlements now form part of the National Employment Standards (NES) providing a minimum safety net of employee entitlements.
Under the NES, all employees (except casual employees) get paid annual leave based on their ordinary hours of work. An employee is entitled to:
- 4 weeks annual leave for each 12 months of service; or
- 5 weeks annual leave for some shift workers for each 12 months of service.
To qualify for the shift work entitlement of 5 weeks annual leave, an employee must either be classified as a shift worker under an award or agreement, or if not covered by an award or agreement, they must meet all of the following criteria:
- they are employed in an enterprise where shifts are continuously rostered 24 hours a day for seven days a week;
- they are regularly rostered to work those shifts; and
- they regularly work on Sundays and public holidays.
An annual leave entitlement that comes from an award or agreement may be different, but cannot be less than the NES entitlement.
Casual employees are excluded from annual leave entitlements on the basis that casual loading is intended to compensate them for such entitlements together with paid personal leave.
Annual Leave Accrual
Annual Leave is based on the number of hours worked. For example, a full time employee working 38 hours per week accrues annual leave at the rate of 2.92 hours per week. A part-time employee working 15 hours per week will accrue1.15 hours of annual leave per week.
An employee’s entitlement to annual leave under the NES accrues progressively during a year of service according to their ordinary hours of work and accumulates from year to year.
Leave continues to accumulate while employees are taking paid annual leave and paid personal leave. However, annual leave does not normally accumulate during periods of unpaid leave, such as unpaid parental leave, or unpaid authorised absences.
As long as an employer can determine an employee’s entitlement at any time they request leave, or their employment ends, it is generally sufficient to accrue it on any regular basis, unless an applicable award or agreement specifies a particular accrual method.
The Fair Work Ombudsman suggest that an employer should record the accrual of leave not less than monthly (or more frequently if required by the applicable award or agreement).
Taking Annual Leave
An employee can take paid annual leave when their employer has agreed to their request for leave. The employer must not unreasonably refuse to agree to a request to take annual leave.
There's no minimum or maximum amount of accrued annual leave that must be taken at a time.
An award or agreement may allow for an employee to be directed to take annual leave in certain circumstances, for example:
- during a period of shut down (such as between Christmas and New Year)
- if the employee has an excessive accumulated annual leave balance.
However, the employer’s requirement or direction to take leave must be reasonable, taking into account factors such as:
- the needs of the employee and the employer’s business;
- any agreed arrangement with the employee;
- custom and practice of the business;
- timing of the direction or requirement to take leave; and
- reasonableness of the period of notice given.
Annual leave falling on a public holiday is to be paid on the basis of the public holiday and is not considered to be annual leave or to be deducted from an employee’s annual leave balance.
Annual Leave Payments during the course of employment
Under the NES, an employer must as a minimum, pay annual leave at an employee's base rate of pay for their ordinary hours during the period of leave.
An employee’s base rate of pay (other than a pieceworker) is the rate of pay payable to an employee for his or her ordinary hours of work, but not including any of the following:
- incentive-based payments
- monetary allowances
- overtime or penalty rates
- any other separately identifiable amounts.
Awards and agreements may provide for annual leave to be paid at a higher rate than that required by the NES. For example this may include the payment of annual leave loading (usually 17.5%) in addition to the ordinary rate of pay.
Cashing Out Annual Leave Entitlements
Under the NES, for employees covered by an award or agreement, annual leave can be cashed out if the award or agreement allows it. Award or agreement free employees may also agree with their employer to cash out annual leave.
However, for all employees that agree to cash out annual leave, the following conditions apply:
- an employee must retain an entitlement to least four weeks paid annual leave;
- there is a separate agreement in writing on each occasion that leave is cashed out;
- an employer must not exert undue influence or undue pressure on an employee to agree to cash out an amount of annual leave; and
- an employee must be paid at least the full amount that would have been payable had the annual leave been taken.
These restrictions on cashing out are intended to safeguard employee entitlements to annual leave. Determinations seeking to limit cashing out provisions in enterprise agreements with respect to satisfying the ‘Better Off Overall Test’ (BOOT) have been overruled on the basis that legislative safeguards should be regarded as adequate.
On termination of employment an employer must pay an employee for any untaken annual leave which has accrued.
Whilst annual leave loading is not a minimum entitlement, if an employee is entitled to annual leave and annual leave loading, then they must be paid out for both entitlements if their employment is terminated. This applies even if a clause in a modern award, agreement or contract expressly states that either entitlement is not payable.
This entitlement is based on the annual leave on termination provision in s.90 (2) of the Fair Work Act , 2009 which provides that a terminated employee with a period of untaken annual leave must be paid what they would have been paid if they had taken that period of leave.
The correct payment of annual leave entitlements on termination is important. In the event that an annual leave payment on termination is paid incorrectly, employers may be exposed to underpayment claims from employees who have not received payment of their correct annual leave entitlement of annual leave loading on termination. Underpayment claims may be brought up to six years after the claim arose, and may give rise to penalties of up to $33,000 per breach.
A ‘transfer of employment’ occurs when an employee moves from one employer (the old employer) to another employer (the new employer) within three months of a transfer of business and performs substantially the same work for the new employer as they performed for the old employer.
A transfer of employment can also occur where an employee moves from one employer (the old employer) to another employer (the new employer) who is an associated entity of the old employer within 3 months of ending employment with the old employer.
A transfer of business can occur where one of the following connections between the old employer and the new employer exists:
- a transfer of assets
- where the two employers are associated entities.
When there is a transfer of employment, the period of service with the old employer will generally count as service with the new employer, and the employee will keep any annual leave balance they had accrued with the old employer.
However, where the employers are not associated entities, the new employer can decide not to recognise an employee’s service in relation to annual leave with the old employer. In such cases, the old employer will be required to pay out the employee’s untaken accrued annual leave.
Annual leave entitlements are generally straightforward. Notwithstanding, employers should ensure that in paying out an employee’s entitlements on termination inadvertent breaches of the Fair Work Act, 2009 do not occur.
Employers should also be mindful as to whether an employee has an entitlement under the NES that overrides or complements entitlements in a relevant award or agreement.
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Author: Jo-Anne Chong
It is intended as a guide only and does not replace specific legal advice.