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Any employer with full time staff may offer (or be required to offer) what’s known as ‘annual leave loading’ to boost the base rate of pay for workers when they take leave.
Annual leave loading, often referred to as ‘leave loading’, is an additional payment made to employees operating under most modern awards but is not necessarily compulsory for all employees.
So how exactly does leave loading work and what do you need to know as an employer?
What does annual leave loading mean?
In Australia, annual leave loading is an extra payment made to employees when they take annual leave.
It’s designed to compensate employees for any lost opportunity or additional expenses they might incur when they take time off work, such as missing out on overtime or other work-related benefits.
How does leave loading work?
So how does leave loading function, what’s the purpose, what’s the rate, and which employees are eligible?
· Eligibility
Not all employees are entitled to annual leave loading. It is associated with many awards and agreements in certain industries or job roles. However, many employees either don’t operate under an applicable award, or under an award at all.
To find out whether or not leave loading applies to an employee, check directly with the Fair Work Ombudsman.
· Purpose
The primary purpose of annual leave loading is to provide additional income to employees during their paid annual leave, making their time off more financially beneficial. (This extra payment is meant to compensate for the potential loss of income or benefits that employees might experience while away from work, such as overtime or penalty rates.)
· Payment rate
The rate at which annual leave loading is paid varies depending on the employee’s employment agreement, industry award, or enterprise agreement.
In many cases, however, it’s set at 17.5% of the employee’s base pay, but it can be higher or lower depending on the specific employment terms.
Many awards dictate that the higher of 17.5% or the weekend penalty rate will be payable.
· Calculation of leave loading rate
To calculate annual leave loading for an employee, you typically multiply their base rate of pay or wage by the agreed-upon loading rate (e.g., 17.5%).
For example, if an employee earns $1,000 per week, their annual leave loading at 17.5% would be an additional $175 for each week of annual leave they take.
· Taxation
Annual leave loading is usually subject to income tax in the same way as regular income. However, it can vary depending on the individual’s circumstances, so it’s essential to consult with a tax advisor or the Australian Taxation Office (ATO) for specific details.
Who is eligible for annual leave loading? Is it compulsory?
It’s important to note that not all employees in Australia are entitled to annual leave loading. The specific terms and conditions governing paid annual leave, including whether leave loading is applicable and at what rate, can be found in the relevant industrial awards, enterprise agreements, or employment contracts that apply to each employee.
If it’s a part of the employee’s modern award or enterprise agreement, then it’s compulsory. If leave loading is not a part of the employee’s award or enterprise agreement, or they aren’t employed under an award, then it’s not compulsory.
It’s crucial for both employers and employees to be aware of the terms of their employment agreements to understand their entitlements regarding annual leave and leave loading.
What happens to annual leave loading on termination?
When an employee is terminated in Australia, they are entitled to have their full annual leave balance paid out. You must pay annual leave loading balances out upon the exit of an employee.
If the employee was entitled to paid annual leave loading during their employment, then you must pay leave loading upon termination, or when they resign.
So, if an employee had two weeks of annual leave owed to them upon termination, they will receive that leave at their normal rate of pay, plus the additional 17.5% leave loading. It will be as if they took the leave during employment.
Normal annual leave allowances and rules
As we’ve learned, not everyone is entitled to leave loading. All full time and part time employees, however, are entitled to annual leave. Such employees are entitled to 4 weeks of paid annual leave per year.
In calculating annual leave, you base this on the employee’s normal hours of work. You can offer more than this in your agreement or employment contract, but never less.
