Is Leave Loading Paid On Termination?

If you’re an employer processing a final pay or an employee leaving a role, one of the first questions that comes up is whether annual leave loading is included in the payout. It’s a common area of confusion, and getting it wrong can lead to underpayments, disputes and penalties.

In this guide, we’ll break down how leave loading works on termination in Australia, when it must be paid, how to calculate it correctly, what to know about tax and super, and the practical steps you can take to stay compliant. We’ll also point you to the key documents and processes that make final pays smoother and lower-risk.

What Is Leave Loading?

Leave loading (often 17.5%) is an additional amount paid to some employees when they take annual leave. It’s intended to compensate for the fact that employees on leave may miss out on overtime, penalty rates or other loadings they might otherwise have earned.

Not every employee is entitled to leave loading. Entitlements come from the applicable modern award, enterprise agreement or an individual Employment Contract. If an award or registered agreement applies to your workplace and provides for leave loading on annual leave, that entitlement usually carries through to termination for any accrued but unused annual leave.

Is Leave Loading Paid On Termination In Australia?

In most cases, yes. When employment ends (resignation, redundancy or dismissal), unused paid annual leave must be paid out. Under the National Employment Standards in the Fair Work Act, that payment is made at the employee’s base rate of pay for their ordinary hours at the time of termination.

Importantly, if an award, enterprise agreement or contract would have paid leave loading when the leave was taken, that loading is generally included when paying out the unused leave on termination. In other words: if the employee would have received leave loading during employment, you should include it in the final annual leave payout.

Two quick checks will keep you on the right side of the rules:

• Confirm what the applicable industrial instrument (award or agreement) says about annual leave loading; and
• Check whether the instrument is silent, excludes loading on termination, or specifies a different percentage.

If there’s no entitlement to leave loading at all (for example, a senior employee not covered by an award and no contractual loading), you only pay out the accrued annual leave at base rate. For more on overall final pay inclusions and timing, see our guide to calculating final pay.

How To Calculate Leave Loading In A Final Pay

If leave loading applies, build it into the annual leave component of the final pay. A simple approach looks like this:

Step-by-step calculation

1. Determine the total hours (or weeks) of accrued, unused annual leave at the termination date.
2. Multiply by the employee’s base rate of pay for ordinary hours at termination.
3. Apply the leave loading percentage (often 17.5%) to that base calculation if the instrument or contract provides for it.
4. Withhold tax in line with ATO rules for unused annual leave paid on termination (more below).

Worked example

Say Alex has 100 hours of unused annual leave at $32 per hour, and the award provides for 17.5% leave loading:

• Base annual leave payout: 100 × $32 = $3,200
• Leave loading (17.5%): $560
• Total before tax: $3,760

Remember that this is just the annual leave component. You may also need to factor in other entitlements in the final pay (for example, payment in lieu of notice or redundancy if applicable under an award or agreement).

What if the award or agreement is silent?

If the applicable award or agreement doesn’t mention leave loading, or it expressly excludes it on termination, you usually only pay the base annual leave amount. Always read the exact wording of the instrument and the employee’s contract. Where there’s any uncertainty or overlap (for example, contractual benefits that go beyond the award), get advice before you finalise the payout.

Is superannuation payable on annual leave paid out on termination?

Generally, superannuation is not required on unused annual leave that’s paid out on termination because it is not treated as ordinary time earnings. Some employers choose to contribute anyway under company policy or a contract, but it’s not typically a Superannuation Guarantee obligation. You can read more in our overview on super on termination payments and how this differs from super on leave taken during employment, which is usually part of ordinary time earnings.

Tax, Super And Record-Keeping For Annual Leave Payouts

Tax treatment: not an Employment Termination Payment

Unused annual leave paid on termination is generally not an Employment Termination Payment (ETP). The ATO treats it as a separate lump sum in the final pay (commonly referred to as a “lump sum A”), with specific withholding and reporting rules.

The exact withholding rate and how it appears on the employee’s income statement depend on the reason for termination and the period the leave accrued. Because tax settings change and individual circumstances vary, it’s best to confirm the correct treatment with your payroll provider or accountant before processing the final pay.

Practical tip: keep your payroll system up to date and ensure your termination categories are set correctly so that unused leave and any leave loading are reported in the right box for year-end tax.

Superannuation

As noted above, unused annual leave paid out on termination is typically not OTE, so Superannuation Guarantee does not usually apply. If a contract or policy requires super to be paid on these amounts, follow that requirement and record it clearly on the final payslip.

Payslips and records

To stay compliant and avoid disputes:

• Itemise the annual leave payout and the leave loading component separately on the final payslip.
• Show the hours or weeks of leave, the base rate used, and the loading percentage if applicable.
• Retain evidence of the applicable award or agreement clause that supports the loading.

Clear documentation is your best defence if a former employee challenges their payout. If you need a broader process view, our guide to annual leave on resignation steps through common employer obligations at exit.

Note: Tax and superannuation are complex and fact-specific. For tax rates, concessional treatments and reporting, speak with a qualified accountant.

Common Edge Cases And Mistakes To Avoid

Assuming loading never applies on termination

A common mistake is thinking leave loading is only ever paid when leave is taken. If the employee would have received leave loading during employment, most awards and agreements require that loading to be included in the payout of unused annual leave on termination.

Using the wrong rate

Final pays must use the employee’s base rate of pay for ordinary hours at the time of termination (not an older rate). If there’s been a recent increase or promotion, update the rate before you calculate the payout.

Overlooking the instrument hierarchy

If a modern award applies, a contract can add benefits but not undercut minimums. Clauses that seek to exclude leave loading on termination where an award says it is payable are unlikely to be effective. Always start with the award or registered agreement, then check the contract for any additional benefits.

Confusing different termination components

Annual leave (and any leave loading) is just one piece of a final pay. You may also need to consider:

• Notice or payment in lieu of notice
• Redundancy entitlements under an award or the NES (where applicable)
• Outstanding wages, allowances or time in lieu

Building a simple checklist and running every termination through the same process will help you catch these items consistently.

Not aligning contracts and policies

Clarity up front makes terminations easier. Ensuring your Employment Contract and workplace policies are consistent with the relevant award or agreement reduces disputes later. Many businesses also formalise expectations in a staff handbook to support consistent decision-making across HR and payroll teams.

Timeframes and communication

Employees are entitled to receive their final pay promptly. Give a written breakdown of the calculation and the instrument clause you relied on. Good communication goes a long way to preventing disagreements about entitlements.

If you’re ever unsure whether loading applies or how to structure the payout, it’s worth getting help before you process the payment. It’s much easier to get it right once than to correct an underpayment later.

Key Takeaways

• Unused paid annual leave must be paid out on termination at the employee’s base rate for ordinary hours; if leave loading would have been paid during employment, include it in the payout.
• Check the relevant award, enterprise agreement and contract before you calculate; where an award applies, it sets the minimum standards.
• Unused annual leave paid on termination is generally not an ETP; it’s typically reported as a lump sum in the final pay with specific ATO withholding and reporting rules - confirm treatment with your accountant.
• Superannuation is usually not payable on unused annual leave paid on termination (not OTE), unless a contract or policy says otherwise.
• Itemise the base leave amount and leave loading on the payslip, keep clear records, and use a consistent process to avoid underpayments.
• Where terminations are more complex (e.g. redundancy, mixed accruals or award ambiguity), get advice before you finalise the payment to reduce risk.

If you would like a consultation on leave loading, final pays or employment offboarding processes, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.