Quick Summary
Quick Summary
- All employees must be paid accrued annual leave on termination — it’s a non-negotiable legal obligation
- Pay on or before the last day of employment at the employee’s ordinary rate — not average pay or next pay run
- Annual leave accrues at 4 weeks per year; pro-rata for part-time; no entitlement in first 12 months
- Withhold PAYG tax and clarify superannuation treatment with your accountant
- Long service leave is separate and has state-specific payout rules — check your state
When an employee leaves your business — whether by resignation, redundancy, or termination — you have a legal obligation to pay out all accrued but unused annual leave. This is one of the most misunderstood areas of employment law, and getting it wrong can cost you thousands. Here’s what you need to know.
Who Gets Annual Leave?
Under the National Employment Standards (NES), all employees are entitled to a minimum of 4 weeks’ paid annual leave per year (pro-rata for part-time). This applies to:
- Full-time employees
- Part-time employees (calculated on hours worked)
- Fixed-term contract workers (if employed for 12 months)
- Casual employees with a regular pattern (4 weeks per year after 12 months)
Award-covered employees may have additional leave entitlements — always check the relevant Modern Award.
When Must You Pay Annual Leave?
On termination, final payment is due:
- Before or on the last day of employment — NOT at the next pay run
- In the same way as regular wages (bank transfer, cheque, cash)
- Accompanied by a payslip showing leave taken, amount owed, and tax withheld
Failing to pay on time can trigger:
- Fair Work Commission claims (without time limits)
- Personal liability for directors under the Fair Work Act
- Wage theft allegations if deliberate
How to Calculate the Payout
Annual leave is paid at the employee’s ordinary rate of pay — not including bonuses, commissions, or penalties (unless they form part of the ordinary rate under the Modern Award).
Formula:
Annual Leave Owed = (Weekly ordinary pay) × (Weeks of leave owed)
Example:
- Employee: full-time, $60,000/year ordinary pay
- Weekly pay: $60,000 ÷ 52 = $1,154
- 3 weeks unused leave owed
- Payout: $1,154 × 3 = $3,462 (before tax)
What If Annual Leave Can’t Be Taken?
Under the Fair Work Act, annual leave cannot be “cashed out” while the employee is still employed unless a modern award expressly permits it. However, on termination, leave must be paid.
Special rules:
- Unused leave cannot be forfeited — even if the employment contract says so
- Taken leave isn’t owed — if an employee used all 4 weeks, there’s no payout
- Pro-rata leave applies — if someone worked 6 months, they’ve accrued 2 weeks
Tax and Superannuation
Annual leave payouts are taxable income. You must:
- Withhold PAYG tax at the employee’s marginal rate (unless they claim tax-free threshold)
- NOT pay superannuation on leave taken during the notice period (concessional)
- DO pay superannuation on leave accrued but not taken at termination (unless specified in award)
Clarify with your accountant — superannuation treatment varies by award.
📅 Important Deadline: Annual Leave Payout Due On Last Day
Annual leave must be paid on or before an employee’s final day of work. Delayed payment can trigger Fair Work Commission claims without any time limit. Act immediately to avoid compliance risk.
Key Takeaways
Key Takeaways for Employers
- ✓Annual leave payout is mandatory on termination — you cannot forfeit or defer it under any circumstances
- ✓Ordinary rate calculation is critical: use weekly base pay only, never average pay or commissions
- ✓Payment timing: last day of employment, not next pay run — failure to pay can trigger unlimited Fair Work claims
- ✓Always issue a final payslip showing gross payout, tax withheld, and net amount; retain records for 7 years
- ✓Long service leave is separate with state-specific rules (10+ years in most states) — don’t confuse the two entitlements
- ✓If you’ve already missed a payout, contact the employee immediately, calculate correctly, and update your processes
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Common Mistakes Employers Make
- Paying leave to the “next pay run” — pay it immediately on last day
- Calculating on average pay instead of ordinary rate — only use ordinary pay
- Deducting notice period from leave — can’t do this under Fair Work law
- Forgetting to withhold tax — you’re liable, not the employee
- Not issuing a payslip — this is mandatory and creates evidence of payment
What About Long Service Leave?
Long service leave is a separate entitlement (varies by state). Unlike annual leave, LSL is NOT always payable on termination in all states. Check your state’s legislation:
- NSW/VIC/QLD: LSL generally NOT payable unless 10+ years service or specified by agreement
- SA/WA/TAS: Rules differ — seek state-specific advice
- ACT/NT: Different thresholds apply
Scenarios: What You Owe
| Scenario | What You Owe |
|---|---|
| Employee resigns with 2 weeks’ notice; has 3 weeks unused leave | 3 weeks’ pay (on last day) |
| Employee made redundant; has 1.5 weeks unused leave | 1.5 weeks’ pay (immediately) |
| Full-time employee, first 3 months of role, then terminates | 0 — NES leave accrues after 12 months of employment |
| Part-time worked 26 weeks with no leave taken | 2 weeks’ pro-rata pay (52 weeks ÷ 2 = 26 weeks’ work = 2 weeks’ accrual) |
Your Compliance Checklist
- Calculate weekly ordinary pay correctly
- Count all weeks of leave accrued since hire date
- Deduct only leave actually taken
- Pay on or before last day of employment
- Withhold PAYG tax at correct rate
- Issue payslip with breakdown
- Retain records for 7 years (payroll + employment agreement)
- Update payroll system to reflect final payment
What If You Didn’t Pay?
If you’ve already terminated an employee and didn’t pay annual leave, act immediately:
- Calculate the correct amount owed
- Contact the employee and offer immediate payment
- Issue a backdated payslip
- If the employee disputes the amount, seek Fair Work Commission guidance
- Update your payroll processes to prevent recurrence
Unpaid leave claims are among the most straightforward cases Fair Work Ombudsman investigates — don’t let it reach that stage.
Getting Help
- Fair Work Ombudsman: 13 13 94 — free guidance on leave entitlements
- Modern Award: Search your industry at www.fairwork.gov.au/awards
- State Fair Work bodies: Check if additional state-based leave applies (long service, etc.)
- Fair Work Centre: Our members receive customised payroll and termination templates to avoid this issue entirely.
Frequently Asked Questions
Yes. Under the Fair Work Act, all accrued but unused annual leave must be paid to the employee on or before their last day of employment. This applies to all terminations: resignation, redundancy, dismissal, or end of fixed-term contract. You cannot withhold, forfeit, or defer this payment.
Final annual leave payout must be paid on or before the employee’s last day of work. It cannot be delayed to the next pay run. Payment should be made in the same manner as regular wages — bank transfer, cheque, or cash. Failure to pay on time can result in Fair Work Commission claims without any time limit.
Multiply the employee’s weekly ordinary rate of pay by the number of weeks of leave owed. For example, if someone earns $1,200/week and has 3 weeks of unused leave, the payout is $3,600 (before tax). Do not use average pay or include bonuses unless they are part of the ordinary rate under their Modern Award.
Yes. Part-time employees accrue 4 weeks’ paid annual leave per year, calculated pro-rata on the hours they work. For example, if a part-time employee works 20 hours/week, they accrue 80 hours of annual leave per year. On termination, you pay the equivalent pay for those accrued hours at their ordinary hourly rate.
Casual employees are entitled to 4 weeks’ paid annual leave per year after 12 months of continuous service (if there is a regular pattern of work). Prior to 12 months, no annual leave is owed unless the Modern Award provides differently. Once entitled, the payout is calculated at their ordinary hourly rate for all accrued weeks.
This varies by Modern Award and employment circumstances. Generally, superannuation is not payable on leave taken during the notice period, but it may be payable on accrued leave not taken at termination. Consult your accountant or payroll provider, as the rules are complex and vary by award.
No. You cannot reduce the annual leave payout by the notice period. These are separate entitlements. If an employee works their notice period in lieu of leave, that is a separate arrangement and must be documented in writing and agreed by both parties.
If an employee took more annual leave than they had accrued (an advance), you can deduct the overpayment from their final pay, but only to the extent of the overage. For example, if they accrued 3 weeks but took 4 weeks, you can deduct 1 week’s pay from their final payment. Always document this in writing.
Yes. Annual leave payout is taxable income and you must withhold PAYG tax at the employee’s marginal tax rate. Provide a payslip showing the gross payout, tax withheld, and net amount. Without withholding, you remain personally liable for the tax owed.
Long service leave is separate from annual leave and the payout rules vary by state. In most states (NSW, VIC, QLD), long service leave is NOT payable unless the employee has worked 10+ years or the award/agreement specifies otherwise. In other states, the threshold is lower. Always check your state’s legislation and the relevant Modern Award.
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