What Is Annual Leave Loading? How Does It Work?

Annual leave is a well-earned break for employees, but did you know some workers can access extra pay on top of their base rate when they take leave? This additional payment is called annual leave loading.

But how does it work, who gets it, and how is it calculated? Let’s break it down in simple terms so you can understand it all. 

Understanding annual leave loading

In Australia, under the Fair Work Act 2009 (Cth), full-time employees are entitled to four weeks (20 business days) of paid annual leave per year, based on a standard 5-day workweek. 

Part-time employees are also entitled to paid annual leave, but the amount is pro-rata based on the hours they work. This means that part-time employees receive the same entitlement as full-time employees, proportional to their regular working hours. 

In some cases, employees can receive an extra payment known as leave loading—usually, the leave loading percentage is 17.5% of their base wage—on top of their standard pay during their leave.

Employers can offer leave loading for several reasons:

• to compensate employees for the potential loss of overtime and penalty rates while on leave; 
• to help cover additional expenses incurred during holidays; 
• to comply with standard entitlements in many modern awards; and/or 
• as an incentive to attract and retain employees.

Calculation of annual leave loading

Annual leave loading is generally calculated as 17.5% of an employee’s base weekly pay. The basic formula to calculate is: base weekly pay x 17.5% x employee’s weekly rate of pay. 

Example of how leave loading works: 

“John works 38 hours per week at $25 per hour and is entitled to 17.5% leave loading; He is taking one week off: 

Calculate his regular weekly pay:

38 hours × $25/hour = $950

Calculate the leave loading:

$950 × 17.5% = $166.25

Total pay for the week of annual leave:

$950 + $166.25 = $1,116.25

Therefore, John will receive $1,116.25 for her week of annual leave, which includes $166.25 in leave-loading.”

In some cases, you’ll need to calculate an employee’s normal rate plus weekend penalty rates (or shift loading for shift workers). For employees not covered by awards or agreements, their leave loading entitlement and rate are determined by their employment contract.

When is leave loading paid?

Holiday leave loading is typically paid at the same time as an employee’s annual leave payment. Some agreements may require payment before the leave is taken, so checking the relevant award or agreement is crucial. 

If an employee cashes out their annual leave, any applicable leave loading is usually included.

Is leave loading paid on termination?

If an employee leaves their job with unused annual leave, they are usually entitled to have leave loading included in their final payout. Most awards require final payments (including leave loading) to be made within seven days of termination.  

Who is entitled to annual leave loading? 

While all permanent employees are entitled to paid annual leave, leave loading is not a universal benefit. An employee can access leave loading only if their award, enterprise agreement or employment contract includes it.

Employees should check their specific agreements or consult HR, an employment law specialist, a union, or the Fair Work Ombudsman for clarification.

Other common questions on leave loading 

Do you get leave loading on salary?

It depends on the employment agreement. Some salaried employees have leave loading incorporated into their annual salary or all-inclusive hourly rate. Employees under modern awards or enterprise agreements may have specific leave-loading entitlements.

Is super payable on annual leave loading? 

Yes, superannuation is usually payable on annual leave loading. 

What are the consequences of underpaying leave loading? 

From January 1, 2025, underpaying leave loading can result in Fair Work Ombudsmen investigating non-compliance and severe penalties such as:

• Civil penalties: fines up to three times the underpayment or up to $4.7m per contravention for large companies.
• Criminal charges: intentional underpayment can lead to fines, up to 10 years in prison, and company penalties of up to $7.8m.
• Reputational damage: underpayment cases can cause public trust issues.
• Legal action: employees can lodge claims for unpaid entitlements or contact breaches. 

Read about “I think I’ve underpaid my employee.”

Tips to ensure compliance with Annual Leave Loading 

Employers should:

• review awards and agreements regularly to ensure compliance; 
• clearly define entitlements in employment contracts to provide transparency across requirements, calculation and termination;   
• implement accurate payroll systems to prevent miscalculations and ensure timely payments; 
• keep detailed records of contracts, payroll summaries, leave balances and loading payments;
• train your staff, ensuring they understand leave loading calculations and obligations;
• conduct audits to identify and correct errors; 
• stay updated on relevant legislation; and
• seek legal advice from business lawyer specialists to ensure well-drafted agreements and policies that are aligned with legal requirements and mitigate potential liabilities.

Alternatives to Leave Loading 

Alternative benefits instead of leave loading include:

• Time off in lieu (TOIL) for extra hours worked; 
• all-inclusive salary packages with no separate leave loading; 
• higher base wages instead of leave loading; 
• flexible leave arrangements like unpaid leave or additional paid time off; 
• employee wellness programs to support work-life balance; and 
• performance-based bonuses as an incentive.

Read more about “What is Time Off in Lieu (TOIL): explanation and comprehensive guide.”

Maximising your annual leave benefits

Employees can make the most of their leave by:

• planning leave around public holidays to extend breaks;
• booking leave in advance to secure preferred dates;
• scheduling leave during quieter work periods to reduce stress; and
• using leave for relaxation and personal growth to ensure a smooth transition back to work. 

Final thoughts

Annual leave is an important aspect for both employees and employers. For annual leave loading, employees must understand their entitlements and how to maximise them, while employers must ensure compliance to avoid financial and legal risks.

If you’re a business owner or employer needing legal guidance on employment contracts or disputes, our team at H+A Legal can help. Contact us today to discuss your requirements.