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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Long service leave (LSL) is a significant entitlement for many employees in New South Wales. As an employer, you’ll likely field questions about whether staff can “cash out” their LSL instead of taking time off - especially during peak periods or when someone is leaving.
The short answer in NSW is that cashing out long service leave during employment is generally not permitted. However, there are important exceptions at termination, plus detailed rules about eligibility, calculation, tax and payroll.
In this guide, we walk through what the Long Service Leave Act 1955 (NSW) requires, when payment in lieu is allowed, and how to manage requests and payroll compliantly - so you can plan staffing, avoid penalties, and keep everything running smoothly.
What Is Long Service Leave In NSW?
In NSW, most employees covered by the Long Service Leave Act 1955 (NSW) accrue paid long service leave after a long period of continuous service with the same employer. The standard entitlement is 2 months’ (8.6667 weeks) leave after 10 years’ continuous service, with additional leave for further years of service.
“Continuous service” can be complex. It usually includes ordinary paid leave and some unpaid absences, and in some cases can include certain transfers of business. If you’re unsure, it’s best to check your industrial instrument and seek advice before making a decision on eligibility.
Enterprise agreements and modern awards can sometimes deliver more generous entitlements than the Act, but they cannot lawfully reduce minimum entitlements. Always apply whichever is more beneficial to the employee.
Can You Cash Out Long Service Leave In NSW?
Generally, no - you cannot cash out long service leave during employment in NSW.
Under the NSW LSL Act, employees are expected to take LSL as paid time off. Paying out the entitlement instead of allowing leave is not permitted while employment continues, even by mutual agreement, unless a limited statutory or regulatory exception applies.
There have been temporary measures at times (for example, during the COVID-19 period) to provide flexibility around how LSL can be taken, but as a rule of thumb, plan for LSL to be taken as leave and avoid offering “cash out” during employment.
Two key practical steps help here:
- Plan LSL proactively with staff to balance operational needs and employee wellbeing.
- Adopt a clear internal process for LSL requests and approvals to avoid last-minute “cash out” pressure.
When Must Long Service Leave Be Paid Out On Termination?
Payment in lieu becomes relevant when employment ends. In NSW, an employee may be entitled to a payout of their accrued LSL (including pro-rata in some cases) on termination.
After 10 Years’ Service
If an employee has 10 or more years’ service, any untaken LSL entitlement must be paid out on termination, regardless of the reason for leaving.
Between 5 And 10 Years’ Service (Pro-Rata)
An employee with at least 5 but less than 10 years’ service may be entitled to a pro-rata LSL payout if employment ends due to:
- Illness, incapacity, or domestic or other pressing necessity (e.g. caregiving responsibilities).
- Dismissal for any reason other than serious and wilful misconduct.
- Death (in which case, payment goes to the employee’s estate).
If an employee resigns for other reasons within 5-10 years, a pro-rata payout typically won’t apply under the Act. However, check any applicable enterprise agreement, award or contract - if it’s more generous, you must honour the more beneficial terms.
When paying out LSL as part of an exit, build it into your final pay process alongside wages, unused annual leave, notice or payment in lieu, and any redundancy entitlements (if relevant). Where termination is due to organisational change, review your obligations around redundancy carefully to ensure compliance.
How Should Employers Handle “Cash Out” Requests?
It’s common for employees to ask if they can “cash out” their LSL, particularly during busy seasons or when they want extra funds. In NSW, the safest approach is to have a consistent, well-communicated process.
1) Have A Clear Leave Policy
Set out how and when employees can request LSL, the notice you need, and how rostering factors will be balanced. A documented workplace policy makes your position transparent and reduces ad hoc decisions that could breach the Act.
2) Use Your Employment Contracts To Set Expectations
While contracts can’t undercut LSL minimums, they can set out processes for requesting extended leave and confirm that cashing out LSL during employment isn’t available in NSW. If you’re updating your templates, consider whether your Employment Contract and staff handbook align with current law and your operational needs.
3) Plan Rosters Early
LSL is predictable - most entitlements vest at 10 years. Build longer-term leave planning into your workforce model, and keep an eye on peak operational periods. Good planning helps you say “yes” to leave and avoids pressure to “cash out.” If extended absences affect shifts or minimum hours, make sure your rostering processes meet the legal requirements for employee rostering.
4) Respond Consistently
Train managers to respond to cash-out requests with the same message: in NSW, LSL is generally taken as leave during employment, and payout is only available on termination (subject to eligibility). Consistency reduces disputes and risk.
5) Watch Your Industrial Instruments
Always check the applicable modern award, enterprise agreement or contract for more beneficial terms. If terms are unclear or potentially inconsistent with the Act, pause and seek advice before acting - variations can’t diminish the statutory minimums.
Calculating LSL, Tax And Superannuation
Getting the numbers right matters. Errors in LSL calculations or payroll treatment can be costly and time-consuming to fix.
How To Calculate The Entitlement
In NSW, LSL is calculated by reference to the employee’s “ordinary pay.” For employees with variable hours or pay, you may need to look at averages over a specified period as outlined in the Act. Be careful with casuals and part-timers - their historical service patterns can affect the calculation.
Key steps:
- Confirm total “continuous service” and entitlement (full or pro-rata based on years and termination reason).
- Determine ordinary pay or relevant averaging method for variable hours/earnings.
- Calculate weeks owed and multiply by the applicable ordinary weekly pay.
- Check any more generous terms under the relevant award or agreement.
Tax Treatment
LSL payouts are taxable, but tax rates depend on when the leave was accrued and the reason for termination. Payouts on termination are usually treated as employment termination payments or as unused leave payments. Confirm the correct ATO category in your payroll system and issue the right payment summary data.
Superannuation On Long Service Leave
Generally, superannuation is payable on LSL that is taken during employment because it forms part of ordinary time earnings, while LSL paid out on termination is typically not ordinary time earnings. Always check your instrument and current ATO guidance. If you need a refresher on what counts as OTE, our guide to ordinary time earnings is a useful reference.
Step-By-Step: Managing LSL And Complying With NSW Law
To pull this together, here’s a practical workflow you can apply across your business.
1) Map Your Workforce And LSL Risks
Identify who will reach 10 years within the next 12-24 months and start conversations early. Consider operational coverage, backfilling and cross-training.
2) Document Your Process
Ensure your LSL request and approval process is reflected in your workplace policies and staff handbook, and that managers know the NSW position on cashing out during employment.
3) Check The Right Instrument Every Time
Before you approve leave or make a payout, verify the applicable modern award or enterprise agreement and any relevant contractual terms. Where there’s a conflict, the more beneficial entitlement for the employee applies.
4) Calculate Correctly
Confirm service length, eligibility for pro-rata (if relevant), the correct pay rate or averaging, and super/tax treatment. If termination is involved, factor LSL into your notice periods and overall exit timetable to avoid surprises.
5) Process Final Pay Accurately
When employment ends, include any LSL payout in your final pay, apply the correct tax settings, and provide payslips and any required summaries on time. If termination is due to restructure or role redundancy, revisit your obligations around redundancy and consultation.
6) Keep Good Records
Maintain detailed records of service, leave accruals and approvals. Clear records reduce disputes and support your position if there’s a claim.
7) Refresh Contracts And Training
Review your Employment Contract templates and onboarding materials so new hires understand how long service leave is handled at your business. Provide managers with a short cheat sheet to standardise responses to cash-out requests.
Common Pitfalls (And How To Avoid Them)
Even with the best intentions, LSL can go off track. Here are common issues we see - and quick fixes.
- Agreeing to “cash out” during employment. In NSW, this is generally not allowed. Ensure managers know to decline these requests and offer leave planning instead.
- Misapplying pro-rata rules between 5 and 10 years. Not every resignation in this window triggers pro-rata. Check the reason for termination against the Act before paying out.
- Incorrect averaging for variable hours. Apply the correct averaging rules where hours or pay have fluctuated, especially for part-time and casual staff.
- Wrong tax and super settings. LSL taken is usually OTE; LSL paid on termination generally isn’t. Confirm current guidance and update your payroll configuration if needed.
- Forgetting the instrument hierarchy. If an enterprise agreement offers a more generous entitlement than the Act, you need to apply it.
- Poor rostering and communication. Last-minute rejections increase disputes. Use your planning cycle and the legal requirements for employee rostering as the framework for approvals.
Key Takeaways
- In NSW, you generally cannot cash out long service leave during employment - employees are expected to take LSL as paid time off.
- LSL must be paid out on termination after 10 years’ service, and may be paid pro-rata between 5-10 years if specific conditions are met.
- Build LSL into your workforce planning, set clear processes in your workplace policies, and keep managers aligned on the NSW rules.
- Calculate entitlements carefully, apply the right tax and super rules, and include LSL in final pay where required.
- Always check the applicable award or enterprise agreement - more generous entitlements than the Act must be honoured.
- If you’re unsure about eligibility, calculation, or how your contracts interact with the LSL Act, getting advice early can prevent costly mistakes.
If you’d like a consultation on managing long service leave in your NSW business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
