Alex is Sprintlaw's co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
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Yes, annual leave gets paid out when an employee resigns in Australia. As an employer, you must pay all accrued but unused annual leave up to the employee's final day, generally at the amount they would have received if they had taken the leave, including annual leave loading if it applies.
Resignations can be bittersweet for everyone involved. You're trying to arrange a smooth handover, protect your business knowledge, run payroll correctly and keep the relationship positive. The annual leave payout is one of the most common final pay questions, and it's also one of the easiest to get wrong if your records, award checks or contracts aren't up to date.
The key is to treat annual leave as a minimum employment entitlement, not a discretionary benefit. Once employment ends, the unused balance needs to be dealt with under the National Employment Standards and any applicable modern award, enterprise agreement or employment contract.
What Annual Leave Means On Resignation
Annual leave, sometimes called holiday leave, is paid time off that full time and part time employees accrue based on their ordinary hours of work. Under the National Employment Standards, most full time employees accrue four weeks of paid annual leave for each year of service. Part time employees accrue annual leave on a pro rata basis according to their ordinary hours.
Some shiftworkers are entitled to five weeks of annual leave under the Fair Work Act 2009 or an applicable modern award or enterprise agreement. If your business employs shiftworkers, check the specific instrument that covers them, because the extra week can materially change final pay.
Annual leave accrues progressively during employment and accumulates from year to year if it isn't taken. It also continues to accrue while an employee is on paid leave, including paid annual leave and paid personal or carer's leave. It generally doesn't accrue during unpaid leave unless an award, enterprise agreement, contract or specific law says otherwise.
Because annual leave is a statutory entitlement, you can't simply write it out of an employment contract or staff policy. If a clause says an employee forfeits unused annual leave when they resign, that clause won't override the National Employment Standards.
Two practical reminders often prevent mistakes:
- Check whether the employee is covered by a modern award or enterprise agreement before calculating final pay.
- Confirm the employee's final day first, because annual leave continues accruing up to the end of employment.
Does Annual Leave Get Paid Out When You Resign In Australia?
Yes. When employment ends for any reason, including resignation, redundancy, dismissal, serious misconduct or the expiry of a fixed term contract, you must pay out accrued but unused annual leave.
This rule applies even where the resignation is inconvenient, the employee gives short notice or the employment relationship has ended badly. You may have separate rights if an employee fails to give the notice required by an award or contract, but be careful before making deductions from final pay. Deductions from wages or entitlements are tightly regulated and aren't something to apply automatically.
In practice, annual leave on resignation means you need to:
- calculate the employee's accrued but unused annual leave balance up to their last day of employment
- pay that balance in the employee's final pay
- include any annual leave loading or other amount the employee would have received if they had taken the leave, where required by the NES, an award, enterprise agreement or contract
- show the payout clearly on the final payslip and keep payroll records
The payout is usually handled alongside other termination amounts, such as outstanding wages and any payment in lieu of notice if you decide to end employment immediately rather than having the employee work their notice.
Casual employees are different. Genuine casual employees don't accrue paid annual leave, so there's usually no annual leave payout when a casual engagement ends. If a worker has been treated as a casual but their arrangements look more like ongoing full time or part time employment, get advice early because misclassification can create back pay and leave entitlement issues.
How Does Annual Leave Get Paid Out?
Annual leave is paid out through the employee's final pay. The calculation is simple once you have accurate payroll records and know which industrial instrument applies.
Step 1: Confirm The Final Day
Start with the date employment actually ends. This may be the end of the notice period, an earlier date agreed between you and the employee, or the date you make a payment in lieu of notice. The final day matters because annual leave accrues until employment ends.
Step 2: Confirm The Leave Balance
Use your payroll system to identify the accrued but unused annual leave balance as at the final day. Check whether any approved annual leave during the notice period has already been deducted from the balance.
Step 3: Apply The Correct Pay Rate
Under the Fair Work Act, untaken annual leave must be paid at the amount the employee would have been paid if they had taken the leave. For many employees, this will be their current base rate for ordinary hours. If an award, enterprise agreement or contract gives the employee annual leave loading, commonly 17.5%, or another payment while on annual leave, you need to include it where required.
Step 4: Apply PAYG Withholding And Check Super
PAYG withholding applies to unused annual leave payouts. Tax treatment can depend on the type of termination payment and timing, so your payroll system or accountant should confirm the correct withholding. For superannuation, the Superannuation Guarantee generally doesn't apply to unused annual leave paid on termination because it isn't ordinary time earnings. If you're unsure, compare the payment against Ordinary Time Earnings rules and check with your payroll adviser.
Worked Example: Mia Resigns With Unused Annual Leave
Mia works full time for a retail business and earns $35 per hour for a 38 hour week. She resigns and works her two week notice period. On her final day, payroll confirms she has 76 hours of accrued but unused annual leave. Her award requires 17.5% annual leave loading on annual leave payouts.
Mia's base annual leave payout is 76 hours x $35, which equals $2,660. Her leave loading is 17.5% x $2,660, which equals $465.50. Her gross unused annual leave payout is $3,125.50, before PAYG withholding. Because this is unused annual leave paid on termination, superannuation is generally not payable on that $3,125.50.
Final pay often includes more than annual leave. A broader final pay calculation should also cover ordinary wages to the final day, allowances, notice, redundancy if relevant, long service leave if payable and any lawful deductions.
Can You Resign While On Annual Leave Or Take Leave During Notice?
Employees can resign while they're on annual leave. If the resignation is validly given and specifies a final day, the notice period can usually run while the employee is on approved leave, unless an employment contract, award or enterprise agreement creates a different rule.
An employee can also ask to take annual leave after resigning. However, resignation doesn't give them an automatic right to use up their annual leave during the notice period. You can approve or decline the request using your usual leave approval process, as long as you act reasonably and consistently with any award, enterprise agreement, contract and policy.
Common outcomes include:
- If you approve annual leave during notice, the notice period generally continues to run and the leave taken reduces the unused balance paid out at the end.
- If you decline the request, the employee usually works the notice period and the unused annual leave is paid out on termination.
- If you and the employee agree to an earlier finish date, record the agreement in writing and confirm how final pay will be calculated.
Employees sometimes ask whether they can use annual leave to avoid working their notice. Usually, they can't insist on this without your approval. Your employment contract and any relevant award should be aligned with your process for leave requests and notice. For more detail on notice settings, our guide to resignation notice periods explains common rules in Australia.
If you want the employee to stop working immediately after they resign, you may be able to pay out the notice period instead of having them work it, depending on the contract and applicable instrument. That's separate from the annual leave payout and should be itemised separately in payroll.
What Should Employers Check Before Final Pay?
Before processing final pay, pause and check the legal and payroll settings that can change the amount or timing. This is where many underpayments happen, especially where a business has grown quickly and old contract templates haven't kept pace with current awards.
Final Pay Timing
The National Employment Standards require employment entitlements to be paid, but the exact timing for final pay is often set by a modern award, enterprise agreement or employment contract. Some awards require final pay within a set number of days after employment ends. Others are less specific, in which case payment in the next usual pay run is commonly used. Always check the instrument that applies to the employee before relying on your standard payroll cycle.
Long Service Leave
Long service leave is separate from annual leave and is mainly governed by state and territory laws. Whether it's payable on resignation depends on the jurisdiction, the employee's length of service and the reason employment ends. Use tools like our long service leave calculator to sense check potential entitlements, then confirm the rule that applies in your state or territory.
Serious Misconduct And Poor Performance
Even if employment ends because of serious misconduct or poor performance, accrued but unused annual leave is still payable. Other entitlements, such as notice, may differ depending on the situation, but annual leave isn't something you can withhold as a penalty.
Cashing Out Annual Leave
Cashing out annual leave during employment is different from paying it out on termination. During employment, cashing out is only allowed in limited circumstances, usually with a written agreement and a remaining minimum leave balance. When employment ends, all accrued but unused annual leave must be paid out. If you're considering a policy for employees who want to cash out leave while still employed, review the separate rules on cashing out annual leave.
Records And Payslips
Your final payslip should be clear enough that the employee can see how the payout was calculated. Include the annual leave hours or weeks, rate used, any leave loading, tax withheld, ordinary wages and any other termination payments. Keep the resignation letter, leave balance report, calculation notes, final payslip and proof of payment with your employment records.
Annual Leave Payout Checklist For Employers
A consistent checklist helps you avoid rushed decisions when a resignation lands in your inbox. Build these steps into your offboarding process:
- Confirm The Resignation In Writing: Record the resignation date, required notice period and proposed final day.
- Check The Applicable Instrument: Identify any modern award, enterprise agreement, contract or policy that affects leave, loading, notice or final pay timing.
- Calculate Accrual To The Final Day: Update the annual leave balance to include accrual up to the end of employment.
- Review Leave During Notice: Confirm whether any annual leave is approved during the notice period and deduct it from the final unused balance.
- Apply The Correct Rate And Loading: Pay the amount the employee would have received if they had taken the leave, including loading where required.
- Check Other Termination Amounts: Add unpaid wages, allowances, payment in lieu of notice, redundancy pay if relevant and any long service leave entitlement.
- Process PAYG And Super Correctly: Withhold tax correctly and confirm which components attract superannuation.
- Issue A Clear Final Payslip: Itemise each component so the employee and your records tell the same story.
If there's any disagreement about the leave balance, go back to the records rather than estimating. Timesheets, payroll reports, approved leave requests and employment contracts are usually the starting point.
Documents That Make Resignations Cleaner
Good documents make annual leave payouts easier because they set expectations before anyone resigns. Your documents should match your actual operations and the awards or agreements that apply to your team.
- Employment Contract: Sets out notice obligations, employment status, ordinary hours, leave entitlements and whether payment in lieu of notice is available.
- Leave Policy: Explains how employees request annual leave, how approvals work and how leave requests during notice will be handled.
- Termination Or Offboarding Checklist: Gives managers and payroll a step by step process for final pay, return of property, systems access and handover.
- Payroll Policy: Confirms your usual payroll cycle and how final pay timing is managed alongside award or enterprise agreement obligations.
- Final Pay Confirmation Email: Records the final day, approved leave during notice, expected final pay timing and who to contact with questions.
A simple final pay confirmation email can confirm the date you received the resignation, the employee's final day, whether notice will be worked or paid in lieu, any approved leave during notice, the expected payment date, and handover arrangements.
Clear written communication doesn't remove your legal obligations, but it significantly reduces misunderstandings and last minute payroll disputes.
Key Takeaways
- Unused annual leave must be paid out when employment ends, including when an employee resigns in Australia.
- The payout should include accrued annual leave up to the final day and any annual leave loading or other amount required by the NES, award, enterprise agreement or contract.
- Employees can resign while on annual leave, and they can request annual leave during notice, but they generally need employer approval to take new leave during the notice period.
- Final pay timing may be set by an award, enterprise agreement, contract or payroll cycle, so check before you process the payment.
- Unused annual leave paid on termination generally doesn't attract superannuation, but PAYG withholding applies and payroll should confirm the correct treatment.
- Strong employment contracts, leave policies and offboarding checklists make resignation payments easier to calculate and explain.
If you'd like help with final pay processes, employment contracts, leave policies and resignation handover documents, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
