Is Annual Leave Included in Salary in Australia?

If you pay your team on a salary, it’s natural to ask whether annual leave is “included” in that salary or whether you need to budget separately for it.

Getting this right matters. It affects payroll, superannuation, award compliance and your final pay obligations when someone leaves.

In this guide, we’ll explain how annual leave works for salaried staff in Australia, what you can and can’t “roll into” a salary, and the simple steps to keep your business compliant and your team informed.

What Does “Included In Salary” Actually Mean?

When business owners ask if annual leave is included in salary, they usually mean one of two things:

• Can I pay a single higher salary that covers everything (including annual leave) so I don’t have to accrue or track leave separately?
• When an employee takes annual leave, do I keep paying their normal salary, or something different?

These are different questions, and the law treats them differently. One relates to “rolling in” entitlements (generally not allowed for annual leave), and the other relates to how you pay when leave is taken (which the law sets out clearly).

Is Annual Leave Included In Salary Under Australian Law?

The short answer for permanent employees (full-time and part-time) is: annual leave is a separate entitlement under the National Employment Standards (NES). You can’t absorb or replace it with a higher salary.

Permanent employees must accrue annual leave and, when they take it, be paid correctly for that time off. Casuals do not accrue annual leave.

So while you may pay an employee an annual salary, you still need to:

• Accrue and track their annual leave balance.
• Pay their leave correctly when approved.
• Pay out any untaken accrued annual leave on termination (including any applicable leave loading).

Modern awards or an enterprise agreement can set extra rules (for example, leave loading or annualised salary provisions). It’s a good idea to check any relevant Modern Awards that might apply to your employees so your payroll settings match those obligations.

How Should You Pay Annual Leave For Salaried Staff?

For permanent employees taking paid annual leave, payment is generally at their base rate for ordinary hours during the period of leave, plus any additional amounts required by an applicable instrument (for example, leave loading under a modern award or enterprise agreement).

Base Rate For Ordinary Hours

When an employee takes annual leave, pay their base rate for the ordinary hours they would have worked (excluding overtime). For salaried employees, this typically means continuing their usual salary for the leave period, calculated at the base rate underpinning that salary.

Annual Leave Loading

Some modern awards and agreements require annual leave loading (often 17.5%) during annual leave. If applicable, your payroll should add that on top of the base rate when the leave is taken.

If you’re unsure whether your team is entitled to loading, review the award or agreement that covers them. You can also brush up on how loading works in practice by reading about Annual Leave Loading.

Superannuation On Paid Leave

Superannuation is generally payable on ordinary time earnings, which includes periods of paid annual leave. If you’re updating your payroll rules, confirm how your software treats “paid leave” to ensure super contributions flow correctly. For context on how super applies to paid leave and other payments, see Ordinary Time Earnings (OTE).

Public Holidays During Annual Leave

If a public holiday falls during a period of annual leave, that day is usually treated as a paid public holiday, not deducted from the employee’s annual leave balance. Your payroll should pay the correct rate and preserve the leave hours for that day.

Part-Time Employees

Part-time employees accrue annual leave on a pro-rata basis, and payment when they take it is based on their ordinary hours and base rate. If you have a mix of full-time and part-time staff, make sure your settings reflect Annual Leave Entitlements For Part-Time Employees.

Payout On Termination

When employment ends, you must pay out any untaken accrued annual leave. If the employee would have received leave loading during leave under an applicable instrument, it generally applies to the payout too.

This is a common area for payroll errors, so it’s smart to revisit your processes and, if needed, review your obligations around Annual Leave On Resignation and your broader approach to Calculating Final Pay.

Can You “Roll In” Annual Leave Or Offset It With A Higher Salary?

No. Annual leave is a minimum entitlement under the NES. You can’t contract out of it, and you can’t “roll it into” a salary so that leave doesn’t accrue or isn’t tracked separately.

What you can do is ensure your employment contracts are clear about how a salary is set and what it covers (for example, certain allowances or penalties, where lawful). But this won’t remove the need to accrue and grant annual leave.

Be careful with offset clauses. Even where lawful, they do not allow you to offset core NES entitlements like annual leave. If you want clarity, build it into a well-drafted Employment Contract that aligns with any applicable award or agreement and your payroll settings.

Annualised Salaries And Modern Awards: What You Can And Can’t Do

Some modern awards allow employers to pay an annualised wage to full-time employees instead of calculating certain award entitlements each pay period. This can simplify payroll in award-covered roles but comes with strict conditions.

Critically, annualised wage arrangements do not let you ignore minimum entitlements or stop leave from accruing. You must still:

• Ensure the annualised wage is sufficient to cover award entitlements that it is intended to absorb, over the relevant period.
• Keep required records and conduct reconciliations as the award specifies.
• Accrue and grant annual leave in line with the NES and any award requirements (including leave loading where applicable).

If you’re considering an annualised wage approach, double-check the conditions in the specific award and reflect those rules clearly in your contracts and payroll. It can be helpful to align your documentation with your obligations under Modern Awards so there’s no mismatch between what you promise and what you pay.

Cashing Out Annual Leave

Cashing out annual leave is allowed in limited circumstances, and only if strict rules are followed (for example, the employee must retain a minimum balance and written agreements are required). Many awards and agreements set additional conditions.

If you receive a request to cash out, confirm the rules that apply to that employee and document the arrangement properly. For a quick refresher, see Cashing Out Annual Leave.

Managing Leave In Practice: Contracts, Policies And Payroll Tips

Getting annual leave right is easier when your paperwork and systems align. Here are practical steps we recommend.

Set Clear Employment Contracts

• Confirm the engagement type (full-time, part-time or casual) and the applicable award or agreement.
• State how annual leave accrues and is approved, and whether leave loading applies (if relevant).
• Explain notice and evidence requirements, and how public holidays interact with leave.

A tailored Employment Contract helps keep expectations aligned and reduces disputes.

Adopt Practical Policies

• Create a simple leave policy that outlines how to request leave, how much notice is needed, peak blackout periods (if any) and your approach to cashing out (if permitted).
• Ensure managers know how to approve or refuse leave consistently and lawfully.
• Keep your handbook consistent with the contract and any award or agreement.

Bringing these rules together in a staff handbook makes day-to-day management smoother. If you don’t have one yet, consider putting your rules in a clear policy or a comprehensive Staff Handbook.

Align Your Payroll Settings

• Check accrual rates for full-time and part-time staff are correct and pro rata where required.
• Confirm leave loading is added when applicable and appears clearly on payslips.
• Set super rules to treat paid annual leave as ordinary time earnings.
• Create a simple process for paying out leave on termination, including any loading and tax treatment.

It’s also wise to assign responsibility for award updates and to review your setup annually. A small tweak now can prevent larger underpayment risks later.

Common Pitfalls To Avoid

• “Rolling in” leave and not accruing it separately for salaried staff.
• Missing leave loading requirements under an applicable instrument.
• Paying the wrong super on paid leave due to incorrect payroll settings (revisit your approach to Ordinary Time Earnings if unsure).
• Forgetting to pay out accrued leave (and any applicable loading) in final pay. A quick check against your process for Calculating Final Pay helps here.

How Does This Relate To Super-Inclusive Salaries?

Many employers set salaries on a “plus super” basis (for example, $80,000 plus super) or as “inclusive of super”. Annual leave sits separately from this question. Whether you quote salaries inclusive of superannuation or not, you still need to accrue, track, and pay annual leave correctly and apply super to paid leave as required. If you’re currently reviewing salary settings, it can help to revisit your position on super-inclusive pay using your policies and contracts alongside payroll guidance on OTE.

Key Takeaways

• Annual leave is a separate NES entitlement for permanent employees - it must accrue and cannot be “rolled into” a higher salary.
• When an employee takes annual leave, pay their base rate for ordinary hours and add any applicable leave loading required by an award or agreement.
• Superannuation generally applies to paid annual leave as ordinary time earnings, so check your payroll settings and confirm your approach to OTE.
• If permitted, cashing out annual leave requires strict compliance and proper documentation - review the rules for your team before agreeing to it.
• Use clear contracts, aligned policies and up-to-date payroll rules to manage accruals, loading and final payouts (including on resignation).
• Award coverage and annualised wage arrangements don’t remove annual leave obligations - ensure your documentation matches any relevant Modern Awards.

If you’d like a consultation on setting up your annual leave and salary arrangements correctly, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.