Annual leave loading is an additional payment (typically 17.5%) on top of an employee’s base pay rate during annual leave periods in Australia. It compensates employees for lost overtime opportunities while on holiday.

What is annual leave loading?

A supplementary payment made to employees in Australia when they take annual leave. Typically calculated as an additional 17.5% of an employee’s ordinary wage, this loading is paid on top of their regular salary for the period they are on annual leave.

Origin and purpose

Was introduced in Australia in the 1970s to compensate employees, particularly shift workers, for the potential loss of overtime, penalty rates, and allowances they would have received had they been working. The concept acknowledges that while on holiday, employees miss out on these additional earnings opportunities that would normally form part of their expected income.

Eligibility and entitlement

Eligibility is determined by:

• The applicable modern award
• Enterprise agreement
• Employment contract
• Company policy

Not all employees in Australia are entitled. The entitlement depends on the terms outlined in the employee’s industrial instrument or employment contract.

Standard rate and calculation

The standard rate in Australia is 17.5% of an employee’s base pay rate for their period of leave. For example:

• If an employee’s weekly wage is $1,000
• For a week of annual leave, they would receive their regular $1,000 plus $175 (17.5%) in leave loading
• Total payment: $1,175

Some awards or agreements may specify different rates or calculation methods.

Payment methods

Can be paid:

1. At the time the employee takes annual leave
2. As an annual lump sum (regardless of when leave is taken)
3. Included in the employee’s hourly rate (annualised arrangement)

The method of payment should be clearly stipulated in the relevant industrial instrument or employment contract.

Legal framework

Covered under:

• The Fair Work Act 2009
• Modern Awards
• Enterprise Agreements
• Employment Contracts

The Fair Work Commission and Fair Work Ombudsman oversee and provide guidance on entitlements.

Taxation of annual leave loading

Generally taxable as ordinary income. However, there may be a tax-free threshold of up to $320 per year if the loading demonstrably relates to a notional loss of opportunity to work overtime. Employers should consult with the Australian Taxation Office for current advice.

Frequently asked questions for annual leave loading

Is annual leave loading mandatory in Australia?

Not universally mandatory. It depends on the applicable award, enterprise agreement, or employment contract. Many employees are covered by arrangements that include annual leave loading, but it is not a statutory requirement for all workers.

What happens to unused annual leave loading when employment ends?

If an employee has accrued but unused annual leave when their employment terminates, typically applies to the payment for that unused leave. This should be included in the employee’s final pay.

Can annual leave loading be ‘cashed out’?

Generally, should be paid when annual leave is taken or paid out. If annual leave is cashed out (where permitted), the loading component should also be included in the payment.