Summary
Annual leave loading is an extra payment — usually 17.5% — on top of an employee's ordinary pay while they are on annual leave. The single most important fact about it is this: it is not a National Employment Standards entitlement. Nothing in the NES requires it. It is owed only where an award, an enterprise agreement, a contract or an established policy says so.
That is why the answer to "do we have to pay leave loading?" is always "check the instrument", and why so many employers pay it when they need not, or fail to pay it when they must. This guide covers who is actually entitled, the greater-of rule that catches out businesses with weekend trade, what happens on termination, and the superannuation question almost everyone gets wrong.
Where the entitlement comes from
Leave loading is a legacy of the era when annual leave was expected to cost more than an ordinary week — the holiday itself was the expense. It survives in most modern awards, in a great many enterprise agreements, and in plenty of individual contracts.
So there are only three questions:
- Is the employee covered by an award or agreement? If so, read its annual leave clause. Most say 17.5%, some say something else, a few say nothing at all.
- Does their contract or your policy promise it? A contractual promise is enforceable regardless of the award. So is a consistent, long-standing practice — paying it for eight years and then stopping is a change to a term of employment, not a correction.
- Are they award-free with no contractual term? Then there is no entitlement, and paying it is a choice.
Casuals do not get leave loading, for the simple reason that they do not accrue paid annual leave. Their casual loading is the compensation for that. If a casual converts to permanent, loading applies to leave accrued from conversion onwards — see casual conversion obligations.
The greater-of rule
Here is the provision that costs businesses money quietly. Many awards do not simply say "17.5%". They say the employee is paid the greater of:
- their ordinary rate plus 17.5% loading, or
- the rate they would have received had they worked — that is, including the weekend, evening or shift penalty rates that would have applied to those rostered shifts.
For a Monday-to-Friday office worker these are never close, and 17.5% always wins. For anyone who regularly works weekends or evenings — hospitality, retail, care, security — the penalty calculation frequently wins, and by a lot. A shift worker whose ordinary roster includes Saturday and Sunday can easily be entitled to more than 17.5%.
The trap is that most payroll systems apply a flat 17.5% by default, because that is the simple case. If your staff work penalty-rate shifts, a flat 17.5% is a systematic underpayment, small per instance and continuous. Our penalty rates guide covers how the underlying loadings work.
To apply the rule you need to know what someone would have been rostered to work during the leave — which means the roster for the leave period has to exist, and the leave has to be recorded against it rather than as a bare block of days.
What it is calculated on
Loading is paid on ordinary hours of leave taken, at the employee's base rate of pay for those hours. It is not paid on overtime — you cannot take leave from overtime, because overtime is not ordinary hours.
Worked example. A full-time employee on a base of $1,200 per week takes two weeks' annual leave, is award-covered with a plain 17.5% clause, and works Monday to Friday:
- Ordinary pay for the leave: $2,400
- Loading at 17.5%: $420
- Total: $2,820
Now the same employee under a greater-of clause, whose ordinary roster includes two Saturday shifts in that fortnight attracting a weekend penalty. You calculate the penalty-inclusive figure for the shifts they would have worked, compare it to $2,820, and pay whichever is higher. Not both — it is the greater of, not the sum.
Termination: the question with a real answer
When employment ends, accrued but untaken annual leave must be paid out. Whether loading is paid on that balance is a genuinely common dispute, and the resolution is straightforward once you know where to look.
The Fair Work Act requires payment of untaken accrued leave at the employee's base rate for the ordinary hours. Base rate does not include loading. But — and this is the part that decides most cases — if the award, enterprise agreement or contract says loading is payable on termination, then it is payable, and many awards say exactly that.
So the answer is not "no". The answer is: read the instrument, and if it is silent, the base-rate position applies. Assuming "no" across the board is how employers end up with a small underpayment on every single departure, compounding across years of staff turnover.
The superannuation question everyone gets wrong
Is superannuation payable on annual leave loading? The default answer is yes, and most employers who assume otherwise have an accruing liability.
Leave loading is ordinary time earnings, and therefore attracts super, unless it is demonstrably referable to a notional loss of the opportunity to work overtime. That exception is narrow and it is evidentiary. The ATO's position is that you need written evidence — the award, agreement or a contemporaneous document — showing the loading is for that purpose. An after-the-fact assertion does not qualify, and neither does the historical origin of loading in general.
In practice, for the overwhelming majority of employers, the loading is not documented that way, so super is payable on it. If you have been excluding leave loading from your super calculations without a document that supports the exclusion, that is worth checking this week rather than at an audit — particularly now that Payday Super lines your reported earnings up against your contributions every pay cycle.
Tax treatment, briefly
Leave loading paid while an employee takes leave is taxed as ordinary salary and wages, through normal PAYG withholding. An older concession that treated part of it differently no longer applies to ordinary leave loading. Leave paid out on termination has its own withholding treatment, which depends on the reason for termination — worth confirming against current ATO schedules rather than reusing last year's spreadsheet.
A short audit
- Identify the instrument for every employee and read its annual leave clause. Not the summary — the clause.
- Check whether it is flat 17.5% or greater-of. If greater-of, confirm your payroll actually performs the comparison.
- Check your termination practice against what the instrument says about loading on termination.
- Confirm super is being paid on loading, or that you hold a document establishing the overtime exception.
- Check casuals are not receiving it and that converted employees started receiving it at conversion.
- Look at what you have actually done for years. Established practice can create an entitlement even where the award does not.
Where the roster comes in
Everything difficult here — the greater-of comparison, the ordinary hours figure, the accrual — depends on knowing what someone was rostered to work and what they actually worked. NestedClock records leave against the roster rather than as a standalone note, so the hours a period of leave covers are the hours the person would have worked, and leave and roster stay in step rather than being reconciled by hand at pay time.
Where to check the detail
Annual leave sits in the National Employment Standards in the Fair Work Act 2009; loading sits in your award, agreement or contract. The superannuation treatment is set out in the ATO's ruling on ordinary time earnings for superannuation guarantee purposes. Awards are varied regularly — read the current version on the Fair Work Commission website, not a saved copy.
This article is general information, not legal or tax advice.