Do You Pay Superannuation On Long Service Leave?

Long service leave (LSL) is a major milestone for many Australian employees - it recognises long-term service and loyalty. If you’re running a business or managing payroll, a common question is whether you need to pay superannuation on long service leave.

In short: superannuation is generally payable when long service leave is taken as paid leave during employment, but not when it’s paid out as a lump sum at the end of employment. There are nuances, though, especially when you compare LSL to other types of leave, or if an award or enterprise agreement adds extra obligations.

Below, we break down when super applies, how to process it correctly, and where employers often get caught out - so you can stay compliant and keep payroll accurate.

What Is Long Service Leave?

Long service leave is a statutory entitlement that rewards employees who have worked for the same employer over a long period (often 7–10+ years, depending on your state or territory). It accrues over time and can be taken as paid leave during employment, or paid out when employment ends if it hasn’t been used.

LSL rules are set by state and territory legislation, so eligibility and accrual rates can vary. Most full-time and part-time employees are covered, and many casuals may also accrue LSL if they meet continuity requirements in their jurisdiction.

Because LSL can be taken or paid out in different ways, understanding when super applies is essential for correct payroll treatment.

When Is Superannuation Paid On Long Service Leave?

Superannuation contributions are generally required when long service leave is taken as paid leave during employment. The Australian Taxation Office (ATO) requires employers to pay super on an employee’s “ordinary time earnings” (OTE). Payments for LSL taken while the employee remains employed are treated as OTE, similar to how you treat annual leave or paid sick leave that’s actually taken.

Practically, that means if an employee goes on long service leave and you pay them their usual wages for that period, you add those amounts to OTE and calculate super accordingly.

If you’d like a refresher on how OTE works across different scenarios, it’s worth revisiting a simple overview of ordinary time earnings and how they drive your super obligations.

Is Super Payable On Long Service Leave Payouts?

This is where we often see confusion. If long service leave is paid out as a lump sum on termination (for example, on resignation, redundancy, retirement or dismissal), superannuation is generally not payable on that amount.

The reason is that unused leave paid out at the end of employment is not considered OTE. This treatment aligns with how unused annual leave payouts are handled when someone leaves. For example, if an employee doesn’t take their LSL and you pay it as a lump sum in their final pay, you don’t include that amount in OTE and you don’t calculate super on it.

When processing termination pays, it’s also helpful to double-check how you handle other components like notice payments and leave balances. Related scenarios - such as payment in lieu of notice and superannuation - can follow different rules, so it’s important to separate each component correctly in your payroll system.

How Do You Calculate And Process Super On LSL?

Here’s a straightforward way to approach it:

• When LSL is taken and paid during employment, include the payments in OTE and calculate super at the Superannuation Guarantee (SG) rate that applies to that period.
• When LSL is paid out as a lump sum on termination, exclude the payout from OTE - no SG is payable on that component.

The current SG rate is 11.5% (from 1 July 2024). Rates can change, so always confirm the applicable rate on the ATO’s site for the relevant period you’re paying.

Example: LSL Taken During Employment

Chris takes four weeks of long service leave after 11 years of service. You pay their usual weekly wages during this period. Those amounts count as OTE, so you calculate super at the SG rate on the paid leave, just as you would for ordinary weeks of work.

Example: LSL Paid Out On Exit

Priya resigns with an unused LSL balance. You pay the accrued LSL as a lump sum with her final pay. You do not include that LSL payout in OTE, so no SG is payable on that component. Her final payslip should clearly show the breakdown.

Set Up Your Payroll Correctly

• Configure your payroll categories so LSL taken during employment is treated as OTE, and LSL payouts on termination are excluded from OTE.
• Double-check how the system handles other termination items to avoid errors. A quick review alongside your process for calculating final pay can help you stay consistent.
• Keep clear records and payslips that separate ordinary pay, paid leave and lump sum payouts - this helps with audits and employee queries.

Important note: Superannuation obligations are administered by the ATO and depend on the OTE classification. Always verify the SG rate and OTE definitions for the period you’re paying, and seek tax or payroll advice for complex scenarios.

Special Cases: Parental Leave, Sick Leave, Awards And Employment Types

Parental Leave

Superannuation is generally not payable on parental leave. This includes government-funded paid parental leave and most employer-funded parental leave arrangements, as these payments are not OTE. If your business offers a special top-up or paid arrangement and you’re unsure whether it attracts SG, get advice before processing.

Sick Leave And Other Leave Types

• Paid sick leave taken during employment is usually OTE, so super applies.
• If sick leave is paid out at termination (less common these days), it generally does not attract super, consistent with unused leave payout rules.
• Annual leave follows the same principle: super applies when taken as paid leave during employment, but not when paid out on exit.

Awards And Enterprise Agreements

Most modern awards and enterprise agreements align with the general position above. However, some instruments can impose additional obligations (for example, higher super contributions or different treatment for certain allowances).

If your team is covered by an award or enterprise agreement, it’s wise to reconcile those terms with your payroll settings. Where you’re navigating complex coverage or changes, consider targeted award compliance support to make sure your settings match your legal obligations.

Casuals And Contractors

Casuals can accrue long service leave in many jurisdictions if continuity requirements are met, and super treatment follows the same rules set out above (super on LSL taken; no super on LSL paid out on termination).

Contractors are different. While most genuine independent contractors won’t accrue LSL, you can still have super obligations to contractors in some cases (for example, if they are paid mainly for their labour). If you’re unsure how to classify a worker or whether super applies, it’s sensible to get tailored employee vs contractor advice before you set them up in payroll.

Key Takeaways

• Superannuation is payable when long service leave is taken as paid leave during employment because it counts as OTE.
• Superannuation is generally not payable on long service leave paid out on termination because it isn’t OTE.
• Paid sick leave taken during employment typically attracts super, but payouts of unused leave at termination do not. Parental leave generally does not attract SG.
• The SG rate is currently 11.5% - always confirm the current rate and OTE definitions with the ATO for the relevant pay period.
• Awards or enterprise agreements can add extra obligations, so align your payroll rules with your applicable instrument and consider targeted award compliance support where needed.
• Use clear contracts and policies to set expectations and support payroll accuracy, such as an Employment Contract and a practical staff handbook, and keep robust records for final pays and terminations (you can also streamline documentation with an employee termination documents suite).

If you’d like a consultation about superannuation on long service leave, awards and enterprise agreements, or payroll compliance, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.