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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Sick leave questions often come up at the trickiest time - right when someone is leaving your business, or when long-term illness has impacted rosters and cash flow.
If you’re wondering whether unused sick leave must be paid out in Australia, you’re not alone. The answer depends on the National Employment Standards (NES), any applicable award or enterprise agreement, and what your employment contracts say.
In this guide, we’ll walk through when sick leave payouts are (and aren’t) required, how the rules work on termination, and the practical steps employers can take to stay compliant and fair.
By the end, you’ll have a clear roadmap for handling sick leave balances with confidence - and with the right documents, you can reduce disputes and admin stress along the way.
What Is Sick Leave Under Australian Law?
Under the NES, full-time and part-time employees are entitled to paid personal/carer’s leave (commonly called “sick leave”). It’s designed to cover:
- When an employee is unfit for work due to illness or injury, and
- When they need to care for or support an immediate family or household member who is ill or impacted by an unexpected emergency.
Paid sick leave accrues progressively during the year and carries over if unused. Permanent full-time staff typically accrue the equivalent of 10 days per year (pro rata for part-time), based on their ordinary hours.
Casual employees do not receive paid sick leave under the NES, so there is no sick leave balance or payout for casuals.
If you’re across the basics but want a quick refresher, it’s worth revisiting how sick leave accrues in Australia and what counts as personal/carer’s leave. Getting those foundations right helps you make good decisions later on.
Do Employers Have To Pay Out Unused Sick Leave?
In most cases, no. Under the NES, employers are not required to pay out unused paid personal/carer’s leave when employment ends. This is different to annual leave, which must be paid out on termination.
However, there are two important caveats:
- An award or enterprise agreement might include a specific entitlement to cash out or pay out sick leave in defined circumstances (less common, but worth checking).
- An employment contract or workplace policy might promise a payout. If your contract or policy goes beyond the NES, you’ll need to honour it.
Because of these exceptions, it’s essential to review the relevant industrial instrument and your contracts before finalising any termination payment. This is also why having a clear, up-to-date Employment Contract and supportive policies is so important - you set expectations from day one.
For employees who ask “what happens to my balance?” the short answer is that unused sick leave isn’t usually paid out, unless an agreement or policy says otherwise.
How Sick Leave Works At Termination: Key Scenarios
When someone leaves, you’ll need to look at the circumstances to work out both entitlements and communication. The rules below assume the NES applies and no extra benefits have been agreed in an award, enterprise agreement or contract.
Resignation
If an employee resigns, they’re generally not entitled to a payout of any unused sick leave. They may need to work through their notice period, or you might choose to provide payment in lieu of notice (if allowed by the contract or applicable instrument).
If the employee becomes unfit for work during the notice period, they can usually access paid sick leave (if they have a balance). Whether notice extends or not depends on the terms that apply to your business - sick leave during a notice period is a nuanced area, so check your contracts and any award or enterprise agreement.
Dismissal (Including Poor Performance or Misconduct)
As with resignation, unused sick leave is not paid out on dismissal unless an applicable instrument or contract provides for it.
For serious misconduct, notice or payment in lieu may not be required, but you still need to ensure procedural fairness and provide the correct termination documentation. A structured process and a clear paper trail help reduce risk - many employers rely on an Employee Termination Documents Suite to keep this consistent.
Genuine Redundancy
Redundancy can involve multiple moving parts: consultation duties, redeployment considerations, notice or payment in lieu, and redundancy pay (if eligible). Sick leave entitlements are separate to redundancy pay - and generally, unused sick leave isn’t payable on redundancy either, unless an agreement or contract says so.
Because people often ask how these pieces fit together, it can help to review a practical explainer on redundancy and sick leave before you start planning timelines and payroll.
Termination On Medical Grounds
Ending employment due to long-term illness or injury requires care. You need to balance operational needs with obligations under the Fair Work Act, anti-discrimination laws, and any applicable workers compensation framework. It’s not just a sick leave issue - it’s also about process and evidence.
If you reach the point where termination is contemplated, seek specialist advice early. Our guide to termination on medical grounds steps through the common pitfalls and employer obligations.
Frequently Confused Issues About Sick Leave Payouts
Because “sick leave payout” is often discussed alongside other entitlements, it’s easy for wires to get crossed. Here are the most common points of confusion, clarified.
Is Sick Leave The Same As Annual Leave?
No. Sick leave and annual leave are different NES entitlements. Unused annual leave must be paid out when employment ends. Unused sick leave generally is not.
Can Sick Leave Be Cashed Out During Employment?
The NES does not provide a general right to cash out paid sick leave while employed. Some awards or enterprise agreements may allow limited cashing out in specific circumstances. If your industrial instrument is silent, you should not cash out sick leave.
Does Sick Leave Accrue While Someone Is Off Sick?
Paid sick leave and annual leave continue to accrue based on an employee’s ordinary hours when they are on paid leave (including paid sick leave). If their absence is unpaid, leave accrual may pause. The details depend on the type of absence and any applicable instrument - confirm these settings with your payroll system and, if needed, your employment lawyer.
What Evidence Can You Ask For?
You can require reasonable evidence such as a medical certificate or a statutory declaration. Make sure your requirement is set out in your contracts and policies, applied consistently, and respects privacy obligations. For day-to-day management, many employers document their approach in a Staff Handbook and a simple sick leave policy to set expectations and reduce disputes.
What About Long-Term Illness And Fitness To Work?
For longer absences, it’s reasonable to seek further evidence, workplace adjustments, or medical clearance to return to work. Just ensure your process aligns with discrimination law and privacy requirements. Having clear wording in your Employment Contract and aligning it with your policies will help you navigate these conversations with care.
Handling Sick Leave Around Notice Periods
Notice periods are where sick leave questions come to a head. Here’s how the moving parts typically interact.
Taking Sick Leave During a Notice Period
Employees who are unfit for work during their notice period can usually access any available paid sick leave balance. Whether the notice period extends will depend on what your contract, award or enterprise agreement says. It’s a good idea to cross-check your documents with this overview of sick leave during a notice period to avoid misunderstandings.
Payment In Lieu Of Notice
Sometimes it’s simpler to pay out the notice rather than require work. If you choose that option, make sure you calculate the amount correctly and record it clearly in your termination letter. This is covered in more detail under payment in lieu of notice - a common tool for managing clean separations while meeting your legal obligations.
Can An Employee Use Sick Leave To “Extend” Employment?
Generally, no - sick leave is not used to extend employment by default. It’s paid leave that replaces work during the notice period if the employee is unfit for work. The end date remains the same unless an award, enterprise agreement or contract states otherwise.
Practical Steps For Employers: Policies, Payroll And Risk Management
Even if sick leave isn’t paid out on termination, getting your settings right from the start will reduce confusion, prevent disputes and save time.
1) Lock In Clear Contracts And Policies
Make sure your Employment Contract explains leave entitlements, evidence requirements, notice, and how termination payments are calculated. Pair it with practical workplace policies (for example, a sick leave policy within your Staff Handbook) so everyone knows the process to follow when they’re unwell.
Good documents won’t remove every grey area, but they set expectations and give you a consistent framework for decision-making. If your team doesn’t have a policy suite yet, we can help you implement a Staff Handbook and, when needed, an Employee Termination Documents Suite to support managers through the end-to-end process.
2) Configure Payroll To The NES (And Your Instruments)
Ensure your payroll system is set to accrue personal/carer’s leave correctly for permanent staff, not at a flat “10 days up front” unless that matches your instrument and payroll methodology. Confirm carryover rules and check that termination pay codes do not include sick leave unless required by an award, enterprise agreement or contract.
3) Train Managers On Evidence And Communication
Most issues arise from uncertainty: “Do I need a certificate?”, “Can I work from home while sick?”, “What happens if I’m unwell during my notice?”. Training managers to follow your policy, request reasonable evidence, and keep clear records will prevent small issues from becoming disputes.
4) Plan For Edge Cases Early
Where illness is prolonged, or performance questions overlap with health issues, don’t wait until the end. Consider whether reasonable adjustments are possible, keep consistent records, and get legal guidance on milestones such as independent medical assessments or potential termination. Our article on termination on medical grounds outlines the key steps and legal risks to watch.
5) Communicate Payouts At Exit - Clearly And In Writing
In your termination letter or separation pack, clearly list what will be paid (e.g. annual leave, long service leave if applicable, notice or payment in lieu) and note that unused sick leave does not get paid out unless the contract or an applicable instrument says otherwise.
Where Sick Leave And Other Entitlements Interact
As you finalise an exit, remember that sick leave sits alongside other entitlements with different rules. Understanding how they interact helps you get payroll right the first time.
- Annual Leave: Must be paid out on termination, including leave loading if applicable.
- Long Service Leave: State and territory laws differ. Payouts may apply depending on service length and jurisdiction.
- Redundancy Pay: Separate from sick leave; check eligibility under the NES and any applicable instrument.
- Personal/Carer’s Leave: Generally not paid out; check any contractual promises to the contrary.
If you’re working through a redundancy or complex exit, this overview of redundancy and sick leave is a handy starting point for your checklist and comms plan.
Employer FAQs About Sick Leave Payouts
Can We Offer A Discretionary Payout Of Sick Leave As A Gesture Of Goodwill?
Some employers choose to provide a discretionary amount in a settlement or deed as goodwill. If you do, make it clear in writing that it’s a discretionary ex gratia payment and not a precedent or entitlement, and ensure payroll and tax are handled correctly.
We Promised Sick Leave Payout In An Old Policy - Are We Stuck With It?
If a policy or contract promises payout, you’ll generally need to honour it for affected staff. You can update the policy for the future, but take care with consultation, communication and any contractual variation requirements. It’s best to align your policy with the NES and any applicable award or enterprise agreement.
What If An Employee Is Sick For The Entire Notice Period?
They can usually use paid sick leave if they have a balance (and provide reasonable evidence). Whether the end date changes depends on the instrument or contract terms for your workplace. If business needs require an earlier finish, consider whether payment in lieu of notice is appropriate.
Do Casuals Ever Get A Sick Leave Payout?
No, casuals don’t accrue paid sick leave under the NES, so there’s no balance to pay out at termination. Casual loading compensates for this and other entitlements they don’t receive.
Key Takeaways
- Unused sick leave is generally not paid out on termination in Australia - unless an award, enterprise agreement, contract or policy clearly provides for it.
- Check the correct framework every time: the NES, any applicable instrument, and what your Employment Contract and policies say.
- Sick leave during a notice period can usually be taken if the employee is unfit for work, but whether notice extends depends on your instrument and contract terms.
- Separate sick leave from other termination entitlements: annual leave is paid out; sick leave usually isn’t; redundancy pay and long service leave follow different rules.
- Clear contracts, a consistent policy, correct payroll settings and documented processes reduce disputes and help you stay compliant.
- For complex cases like medical incapacity or redundancy, get tailored advice early to manage risk and communicate with confidence.
If you’d like a consultation about managing sick leave payouts and exit entitlements for your workplace, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
