When deciding on the termination of an employee, you need to apply procedural fairness and maintain their necessary track records to streamline the decision-making process. Once you have reached a fair decision, it's time to work on your employee's final pay. Now, most employers will get confused and often wonder - do I need to pay the terminating employee annual leave loading? 

We are sure most employers will have questions about annual leave payout on termination and accrue employees' annual leave on annual leave payout. In this article, we will answer all the  questions related to annual leave loading payable upon termination, such as "Is it compulsory to pay leave loading?" and "Do you accrue annual leave on annual leave payout?."

But first, let's understand:

What is Annual Leave Loading?

Annual leave loading is a type of payment that allows employees to receive bonuses or overtime pay missed due to holidays. In simple words, it is an additional payment made to an employee on top of their basic salary for actual hours worked. The annual leave loading payout is usually 17.5% of the employee's base salary. However, the percentage for annual leave loading may vary based on the employee's registered agreements, employment contracts, or modern awards. Employers paying annual leave loading based on their industrial instruments must pay them for all annual leave taken. Annual leave loading is usually paid based on accrued annual leave balances upon employee termination. The tax on annual leave payout on resignation is subject to payroll tax.

Who Is Eligible For Annual Leave Loading?

Both full-time and part-time employees are entitled to receive annual leave loading payment. However, you must understand that annual leave loading is a manual entitlement. Meaning if an employee's registered agreement, contract, or modern award does not cover such benefits, their annual leave loading might be paid at the base salary. Additionally, you must also understand that leave loading paid to employees will be only for annual leave. Annual leave loading excludes public holidays or other leaves, such as personal leave or compassionate leave. If eligible, full-time or part-time employees will receive a leave loading amount with their annual leave pay.

Is It Compulsory To Pay Leave Loading?

Now that you understand the actual meaning and eligibility of annual leave loading, let's come back to the critical topic - Does the employer have to pay annual leave loading if they terminate an employee entitled to annual leave? 

To answer your question - Yes! In case of employee termination, all employers are obliged to pay annual leave loading to employees. The only fair reason is that employees can get both their accrued annual leave and leave loading payment. As mentioned earlier, employers are supposed to pay 17.5% annual leave loading as part of annual leave payouts on termination. The annual leave loading amount payable to employees is similar to how employers paid when they took their leave.

Is It Law To Pay Leave Loading?

It is a legal requirement that all employers pay their employees for any unused annual leave upon employment termination. As per the National Employment Standards, no agreements can reduce the annual leave entitlements of an employee. 

Further, section 90(2) of the Fair Work Act 2009 (Cth) states that the employee must be paid for all the unused annual leaves upon the termination of employment. The court provides that the employee should be given the actual leave payment during their employment period. Most full-time employees can take 20 days of accrues based annual leaves every year. Accrues based annual leaves allow employees to leave their jobs with untaken annual leaves.

Let's take an example of the famous case of Stephen Edward Ryan vs Whitehaven Coal Mining Pty Ltd:

The contract of employment and terms of enterprise agreement referenced leave entitlements for the employee. The employee was entitled to receive either annual leave payment plus 20% leave loading or estimated roster earning. The prime confusion was whether the employee is entitled to receive annual leave loading payment on termination. Upon considering such confusion, the court stated that all full-time or part-time employees are entitled to receive payment for their unused annual leave plus leave loading.

Further, it stated that all accrued leave and annual loading requires employers to pay employees as per the legislation. The case also explained what to do when award, employee contract, or agreement skips the annual leave loading payable on termination. 

Get Started on Annual Leave Payment With Our Cloud Payroll Software 

With our cloud payroll software, employers can easily manage their employees' leave records all 365 days. Our payroll software automates the process of accruing annual leave, managing leave requests, viewing annual leaves, and rostering annual leave taken by your employees.

If you want to learn about the advantages of using our cloud payroll software, get in touch with us today. Let us match your payroll needs with the best cloud payroll software for your business.