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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Getting annual leave right matters. It keeps your team happy, helps you comply with the Fair Work Act 2009 (Cth), and avoids headaches at audit or exit time.
The good news? Once you understand the rules and the formula, calculating annual leave is straightforward - whether you’re paying leave, accruing it each pay cycle, or finalising balances when someone leaves.
Below, we’ll walk through how annual leave is calculated in Australia, simple formulas you can apply in your payroll system, worked examples, and the common edge cases employers ask us about.
What Counts As Annual Leave Under The Fair Work Act?
Under the National Employment Standards (NES), full-time employees are entitled to 4 weeks of paid annual leave for each year of service based on their ordinary hours. Certain “shiftworkers” (as defined in the relevant award or enterprise agreement) are entitled to 5 weeks.
Key points to keep in mind:
- Annual leave accrues progressively based on ordinary hours of work and accumulates year to year.
- It accrues during paid leave (for example, paid annual leave or paid personal/carer’s leave).
- It generally does not accrue on periods of unpaid leave (e.g. unpaid parental leave) or on overtime hours.
- Casual employees usually don’t get paid annual leave (they receive a casual loading instead), unless an enterprise agreement or contract provides otherwise.
It’s best practice to set expectations about leave in your Employment Contract and in a clear leave policy (for example, how requests are made, notice required, busy periods, and how you’ll handle disputes).
Annual Leave Accrual: The Formula Employers Can Use
Employers often ask, “What is the annual leave formula?” Here’s the simple way to think about it.
The Core Concept
Annual leave accrues at 4 weeks of the employee’s ordinary hours over a year (or 5 weeks for eligible shiftworkers).
For a standard full-time employee working 38 ordinary hours per week:
- 4 weeks x 38 hours = 152 hours per year of annual leave (for non-shiftworkers)
- 5 weeks x 38 hours = 190 hours per year (for shiftworkers)
The Universal Accrual Rate
If you want a rate to apply each pay cycle, convert 4 weeks to a fraction of ordinary hours worked:
- Annual leave accrual rate (non-shiftworker) = 4 weeks ÷ 52 weeks = 0.076923 (7.6923%) of ordinary hours.
- Shiftworker accrual rate = 5 ÷ 52 = 0.096154 (9.6154%) of ordinary hours.
That rate can be applied to weekly, fortnightly or monthly ordinary hours to automate accrual in your payroll system.
Per-Period Formulas
- Weekly accrual (non-shiftworker) = ordinary hours in the week × 0.076923
- Fortnightly accrual (non-shiftworker) = ordinary hours in the fortnight × 0.076923
- Part-time = the same rate × the employee’s part-time ordinary hours
- Shiftworker = use 0.096154 instead of 0.076923
Important: use ordinary hours only - do not include overtime.
Rounding And Record-Keeping
- Accrue to at least two decimal places for transparency (e.g. 2.92 hours), but try not to round each cycle too aggressively. It’s better to store the exact decimal in your payroll system and only round when leave is taken or paid out.
- Track leave in hours, not days. This avoids confusion for staff working different shift lengths.
- Show balances on payslips and keep clear records to meet Fair Work record-keeping requirements.
Worked Examples: Weekly, Fortnightly And Part-Time Accrual
Example 1: Full-Time, 38 Hours Per Week (Non-Shiftworker)
- Weekly accrual: 38 × 0.076923 = 2.923 hours per week
- Fortnightly accrual: 76 × 0.076923 = 5.846 hours per fortnight
- Annual total: approx. 152 hours (4 weeks)
Example 2: Part-Time, 24 Hours Per Week
- Weekly accrual: 24 × 0.076923 = 1.846 hours per week
- Over a year: approximately 96 hours (which is 4 weeks of their ordinary 24-hour week)
Example 3: Shiftworker, 38 Hours Per Week
- Weekly accrual: 38 × 0.096154 = 3.654 hours per week
- Annual total: approximately 190 hours (5 weeks)
Example 4: Variable Hours
If a part-time employee works variable ordinary hours (for example, 20 hours one week, 28 the next), apply the same rate to each pay period’s ordinary hours. Over time, they’ll still accrue the right proportion for their actual hours worked.
When Accrual Pauses
Annual leave typically does not accrue during periods of unpaid leave (for example, leave without pay). Accrual continues during paid leave. Workers’ compensation rules can be more complex and may depend on your state or territory law - get advice if you’re unsure.
How To Calculate Annual Leave Pay (And Leave Loading)
When an employee takes annual leave, you need to calculate what to pay them. Start with these basics:
1) Pay At The Employee’s Base Rate
Annual leave is paid at the employee’s base rate for their ordinary hours during the period of leave (not including overtime or allowances), unless an award or enterprise agreement says otherwise.
For example, if an employee earning $30 per hour takes a standard 7.6-hour day of annual leave, the daily leave payment is 7.6 × $30 = $228 (before any loading).
2) Add Annual Leave Loading (If Applicable)
Some awards and agreements require a loading on top of the base rate during annual leave (commonly 17.5%). Leave loading isn’t automatic - it must be provided for in an award, enterprise agreement or contract. You can read more about how Annual Leave Loading works and when it applies.
Continuing our example, if a 17.5% loading applies: $228 × 17.5% = $39.90 loading, so the total paid for that day of leave would be $267.90.
3) Confirm Any Award-Specific Requirements
Some awards include specific rules about pay rates, allowances or penalties while on leave. Always check the applicable award or agreement for your employee’s classification. If you’re unsure, it’s better to double-check than to underpay.
4) Public Holidays During Annual Leave
If a public holiday falls when an employee is on annual leave, they’re generally entitled to be paid for the public holiday and the day does not deduct from their annual leave balance.
5) Keep It Consistent With Contracts And Policies
Align your payroll treatment with the terms in your Employment Contract and your leave policy. If you’re updating how you calculate or approve leave, consider whether you also need to review any terms before changing employment contracts.
Managing Leave Balances Throughout Employment
Beyond accrual and payment, employers need workable settings for approving, directing and cashing out leave. Here’s a practical overview.
Approving And Directing Leave
- Approval: Employees usually request leave, and you approve it if reasonable. Consider operational needs, peak periods, and any black-out dates outlined in your policy.
- Direction to take leave: You may be able to direct an employee to take annual leave if their balance is excessive and the direction is reasonable (many awards define “excessive” and set process requirements).
- Close-downs: Some workplaces shut down during quiet periods (for example, over Christmas). Awards often set rules for these “close-downs”, including notice requirements.
Cashing Out Annual Leave
Many employers and employees like the flexibility of cashing out. This is allowed in limited circumstances and usually requires a written agreement, minimum balances to remain, and compliance with the applicable award or enterprise agreement. Our overview of cashing out annual leave explains the guardrails you must follow.
Leave In Advance
You can agree to employees taking annual leave in advance of it accruing, but put it in writing. Your agreement should specify what happens if employment ends with a negative balance (typically, you can offset the overpayment against final pay where lawful).
Carryover And Caps
Annual leave accumulates year to year. There’s no “use it or lose it” rule under the NES, though awards and agreements often include processes to manage excessive leave. A clear policy and regular conversations help prevent ballooning balances that cause operational issues.
Unpaid Leave Periods
Annual leave generally does not accrue during unpaid leave unless a specific law or instrument says otherwise. This is why documenting rules around workplace policies and approvals is useful for both sides.
Final Pay, Record-Keeping And Employer Tips
When employment ends, you’ll need to pay out any unused annual leave.
Paying Out Unused Annual Leave
On termination (resignation, redundancy, dismissal), you must pay any accrued but unused annual leave at the employee’s base rate for their ordinary hours. If an award or agreement entitles the employee to leave loading, it generally applies on payout. See our guide to annual leave on resignation and how it interacts with other entitlements in calculating final pay.
Payroll And Compliance Tips
- Track in hours, not days: This handles different shift lengths and makes pro-rata calculations far simpler.
- Exclude overtime from accrual: Only ordinary hours count.
- Automate with the accrual rate: Use 0.076923 (non-shiftworkers) or 0.096154 (shiftworkers) × ordinary hours each period.
- Check the correct instrument: Confirm which award or enterprise agreement applies to avoid underpayments.
- Document your approach: Make sure your methodology is reflected in your Employment Contract and leave policy so everyone understands how leave accrues and is paid.
- Be consistent and keep evidence: Accurate timesheets, payslips, and leave approvals reduce disputes.
Common Edge Cases
- Changing hours or roles: If an employee’s ordinary hours change, your accrual rate doesn’t change - it still tracks 7.6923% of ordinary hours (or 9.6154% for shiftworkers). What changes is the pay rate for leave taken and any award obligations. Update contracts and systems as needed.
- Long service leave: Separate from annual leave with different rules (state-based). Keep them distinct in your payroll system.
- Public holidays in leave periods: Don’t deduct a public holiday from an annual leave balance if it falls on a day that would otherwise be a work day.
- Negative balances: If you allow leave in advance, ensure written authorisation so you can lawfully reconcile any negative balance on termination.
If you’re refining your processes, this is a good time to review related entitlements such as annual leave payments and how your payroll engine handles leave loading, penalty rates and allowances.
Key Takeaways
- Annual leave accrues based on ordinary hours at 4 weeks per year for most full-time employees (5 weeks for eligible shiftworkers), and part-time staff accrue on a pro-rata basis.
- A practical formula is 0.076923 (7.6923%) of ordinary hours each period for non-shiftworkers (0.096154 for shiftworkers).
- Pay annual leave at the employee’s base rate for ordinary hours, adding Annual Leave Loading if an award or agreement requires it.
- Accrual usually pauses on unpaid leave and does not include overtime; it continues during paid leave.
- On termination, pay out unused annual leave at the base rate (and loading where applicable), as part of calculating final pay.
- Put clear settings in place for approvals, cashing out and close-downs, and align your approach with your Employment Contract and workplace policies.
If you’d like a consultation on setting up compliant annual leave processes for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
