Annual leave is a standard part of working life that has significant impacts on planning and running a business with employees. As an employer, you’ll want to have a keen understanding of leave entitlements.

The National Employment Standards ( NES) sets out the minimum requirements, such as four weeks paid leave, per year.

But there are also other agreements, Awards, and various aspects of annual leave entitlement that you should know about. Failing to comply with regulations can lead to penalties in excess of $13,000 (for an individual) or $66,000 (for a company).

In this guide, you’ll learn everything you need to know about annual leave in Australia, including how you accrue and calculate annual leave, when you can direct employees to take annual leave, and how to pay annual leave.

What is annual leave?

Annual leave, also known as recreation leave or holiday pay, entitles employees to take paid time off work. The National Employment Standards (NES) states that employees are entitled to a minimum of four weeks paid leave per year, plus an additional week for some shift workers.

Who is entitled to annual leave?

All employees, except for casual employees, are entitled to receive annual leave.

When can annual leave be taken?

You can take annual leave as soon as you accumulate it. But you don’t have to take it each year, and there’s no minimum or maximum amount to take each year. 

Each employer and employee must agree on when and for how long annual leave can be taken. But, the employer must not unreasonably refuse an employee’s request to take annual leave.

An employee isn’t considered to be on annual leave when:

• A day or part-day is a public holiday

• They are on community service leave

• They are on any other type of leave (other than unpaid parental leave)

For example, suppose an employee takes five days annual leave, and a public holiday falls within that period. In that case, the public holiday won’t count as annual leave, and you would only reduce their annual leave balance by four days.

Likewise, if an employee is sick during annual leave, they can use their paid sick leave entitlement instead of using their annual leave for the time they are unwell.

How much annual leave are employees entitled to?

Full-time and part-time employees get four weeks of annual leave for each year of completed service, based on their ordinary hours of work.

For example:

• A full-time employee who works the maximum 38 hours per week for a year would be entitled to 152 hours of annual leave.

• A part-time employee who works 20 hours per week for a year would be entitled to 80 hours of annual leave – the equivalent of four weeks of work.

How much notice is needed to take annual leave?

There are no specific rules on how much notice is needed to take annual leave. Each employer and employee should follow the agreed company policies for annual leave.

For example, an annual leave policy might include rules on how much notice is needed to take annual leave, how soon employees can take annual leave after accumulating it, and how to cash out annual leave.

How does annual leave accumulate?

Annual leave accumulates from the first day of employment, including any probation period. It increases gradually during the year based on the number of ordinary hours an employee works.

For example, annual leave accumulates when an employee is on:

• paid leave, such as paid annual leave and paid sick and carer’s leave

• community service leave, including jury duty and long service leave

But does not accumulate when an employee is on:

• unpaid annual leave

• unpaid sick or carer’s leave

• unpaid parental leave

• unpaid family and domestic violence leave

How do you calculate annual leave entitlements?

You calculate annual leave entitlements pro-rata based on an employee’s ordinary working hours.

For example, a full-time employee working a 38-hour week throughout the year accrues annual leave at the rate of 2.923 hours per completed week of service (152/52 = 2.923), which equals 0.7308 hours of annual leave per working day. 

Use the formula:

• 152 hours of annual leave ÷ 52 weeks = 2.923 hours

• 2.923 hours ÷ 5 days = 0.7308 hours per working day

However, a part-time employee who works a 20-hour week (four hours a day, five days per week) for a whole year accrues annual leave at the rate of 1.538 hours per completed week of service (80/52 = 1.538), which equals 0.3076 hours of annual leave per working day. 

Use the formula:

• 80 hours of annual leave ÷ 52 weeks = 1.538 hours

• 1.538 hours ÷ 5 days = 0.3076 hours per working day

How is annual leave paid to employees?

There are some circumstances when you pay annual leave to employees instead of taking time off.

1. Employee cashes out annual leave

Some agreements allow employees to cash out or get paid their annual leave instead of taking time off even when they are still employed. These agreements generally require the employee:

• Signs a written agreement with the employer

• Gets paid as much as if they had taken the annual leave

• Cashes out a maximum of two weeks of annual leave in any 12-month period

2. Pay annual leave when employment ends

Employers must pay their employees for any unused annual leave they’ve accumulated when employment ends. The annual leave payment must be the same amount that the employee would have received if they’d taken the annual leave during their employment. 

3. Annual leave when sick or injured

If an employee is sick or injured while on annual leave, they can use their paid sick leave entitlement instead of their annual leave.

The employer can still request the employee provide notice and evidence when taking sick leave while on annual leave. But they can’t force an employee to take annual leave while on sick leave.

Do you need to give a reason for annual leave?

No, as long as you’ve accrued sufficient annual leave, you don’t have to give a reason for requesting time off.

Can an employer refuse annual leave?

An employer can refuse an employee’s request to take annual leave if: 

• The employee does not have any accrued leave to take.

• The employee does not give reasonable notice of wanting to take leave.

• The business can’t meet operational requirements during the requested leave period.

• The requested leave would be detrimental to the business.

Can an employer force an annual leave?

Under most modern Awards, Australian employers can enforce annual leave when the business shuts down. For example, if the business doesn’t operate over Christmas and New Year, they could notify employees that they must take annual leave at that time.

For those employees not covered by a modern Award, employers can enforce “reasonable” annual leave. For example, if the employee has accrued an excessive amount of paid annual leave or the business is being shut down for a period (for instance, between Christmas and New Year).

Can shift workers accrue annual leave?

Depending on their industry and occupation, shift workers may get up to five weeks of annual leave per year.

For example, to get five weeks of annual leave in the Hair and Beauty industry, a shift worker would have to be: 

• Classed as a seven-day shift worker

• Regularly rostered to work shifts in a business where shifts are continuously rostered 24 hours a day, seven days a week

• Regularly rostered to work on Sundays and public holidays

Do you accrue annual leave on overtime?

You cannot accrue annual leave on overtime worked or on unpaid breaks. Employers must pay annual leave at the employee’s current base pay rate for all hours of leave taken.

What is excessive annual leave?

Excessive annual leave refers to an excessive amount of unused annual leave.

Generally, an employee’s annual leave balance is considered “excessive” if they have more than eight weeks of annual leave in their balance. Or in the case of a shift worker, they have more than 10 weeks of annual leave in their balance.

What is annual leave loading?

Annual leave loading is an entitlement provided in specific modern Awards. Usually, it’s an extra payment of 17.5 percent on top of an employee’s regular wage to compensate for expenses when they take annual leave.

Calculate and manage annual leave with MYOB

With all the rules and regulations surrounding annual leave, businesses can benefit enormously from using cloud payroll software that manages rosters and staff availability, automatically accrues annual leave, and processes annual leave requests.

MYOB automatically calculates payroll variables like superannuation, tax, and annual leave within your workflow. And if something’s not quite right, like a negative annual leave balance, you’ll get a helpful warning message.

Forget about manually calculating annual leave and try MYOB Business’s automated payroll software free for 30 days.