This is a general guide to the basics of annual leave payout on resignation in Australia. If you want to know more, seek legal advice from an expert lawyer.
In Australia, annual leave, also known as holiday pay, is a fundamental right granted to all employees (except casuals) by the Fair Work Act 2009 and the National Employment Standards (NES). This is a set amount of paid time off work each year, allowing employees to rest, recharge, and pursue personal interests.
Annual Leave Payout on Resignation
Leaving a job in Australia often raises questions about accrued employee benefits. One key concern is the fate of unused annual leave.
When an employee resigns or their employment is terminated, the employer is required to pay out all of their unused annual leave as part of their final pay. This includes any accumulated annual leave and annual leave loading if it would have been paid during employment.
The final payment for annual leave is based on the employee’s current base pay rate for all hours of leave taken, and it doesn’t include extra payments such as overtime rates, penalties, allowances, and bonuses.
Additionally, other entitlements in the employee’s final pay may include accrued or pro rata long service leave, payment instead of notice, and redundancy pay. Sick or carer’s leave is generally not paid out when employment ends, unless an award, registered agreement or employment contract says otherwise.
It is considered best practice for an employee to be paid within 7 days of their employment ending. Here’s the link to the annual leave factsheet from the Fair Work Ombudsman.
Calculating Annual Leave Payout on Resignation
Annual leave payout on resignation is calculated based on the National Employment Standards (NES), which provides for a minimum of four weeks of paid annual leave per year for full-time and part-time employees. However, casual employees do not accrue annual leave.
The amount of your annual leave payout depends on several factors:
- Accrued leave. This refers to the number of annual leave days you haven’t taken throughout your employment period. Most full-time employees accrue 4 weeks (152 hours) of paid annual leave per year.
- Ordinary hourly rate. Your payout will be calculated based on your base rate of pay at the time of resignation.
- Annual leave loading. Many awards and agreements in Australia entitle employees to an additional percentage (usually 17.5%) on top of their annual leave payment, known as annual leave loading.
The formula to calculate annual leave entitlements is Annual Leave Entitlement = Accrued Hours × Employee’s Hourly Rate.
The hourly rate used to calculate annual leave entitlements is the employee’s base rate of pay, and it doesn’t include extra payments such as overtime rates, penalties, allowances, and bonuses.
Example: Let’s say you’re a full-time employee with an ordinary hourly rate of $25 and have accrued 10 days (40 hours) of unused annual leave. Your annual leave payout would be:
(40 hours x $25/hour) + (40 hours x $25/hour x 17.5%) = $1,000 + $175 = $1,175
Annual Leave Payout on Resignation: Notice Period
When you intend to resign from your current job, it is a standard practice that you should give a written notice to your employer. The notice period starts the day after the employee gives notice that they want to end the employment and ends on the last day of employment.
Generally, the amount of notice (if any) that an employee must give before leaving their position may be specified in the employment contract, award, enterprise agreement, or the employee’s registered agreement.
However, workers should review the conditions of those documents before taking any action related to resignation.
But what happens if the employee does not give the right amount of notice required? Can the employer deduct from their annual leave payout on resignation? The answer is no. Although employers can deduct pay from outstanding wages owed under the award, they can’t deduct from other entitlements owed to the employee, such as accumulated leave or other over-award payments.
Annual Leave Payout on Resignation: Taxation
Annual leave payout on resignation are taxable income for the employee. The tax rate applied to the payout depends on the employee’s marginal tax rate (the rate at which they pay tax on their income.)
Moreover, the tax is calculated on the total amount of the payout, which includes the base pay rate for all hours of leave taken, and any annual leave loading that would have been paid during employment.
The tax you pay on unused leave, termination of employment, or redundancy payments may be different from the tax you pay on your normal income. If an employee receives any lump sum payments from their employer for unused annual leave or long service, they may pay tax at a lower rate than their other income.
The employee must be aware of their tax obligations when receiving annual leave payouts and adjust their tax withholdings accordingly. Employers generally withhold the right amount of tax based on the employee’s income tax bracket, but there can still be a shortfall or an unexpected tax liability.
Annual Leave Payout on Resignation: Tips for Employees
Here are some tips for employees to consider when receiving annual leave payouts:
1. Be prepared for the tax liability and adjust your tax withholdings accordingly. That is why you need to have a basic understanding of the tax implications.
2. Maintain records of your annual leave accrual, usage, and payouts to ensure accurate tracking and avoid confusion.
3. Plan for the payout. If you plan to take time off after your resignation, discuss with your employer whether they can pay out your unused annual leave before your notice period begins.
4. Ensure that your employer is aware of your plans to resign and that you have used your annual leave entitlements. This will help them accurately calculate your final pay, including the annual leave payout.
5. If you have a large amount of unused annual leave, cashing out the payout may result in a significant tax liability due to the tax rate applied to the payout. Be prepared for this tax liability and plan accordingly.
6. Familiarise yourself with your company’s annual leave policy and local labour laws too. Employees should ensure they are aware of their entitlements and any requirements for using or cashing out unused leave. Moreover, employees should check their award and/or employment contract. Here they can find out how much notice they need to give when resigning from their job.
Is Your Employer Trying to Shortchange You?
If your employer is trying to shortchange you on your hard-earned leave, don’t let your hard-earned leave go to waste. Our employment lawyers at JB Solicitors can fight for your fair and rightful annual leave payout.
Take action today and get the full annual leave payout you deserve. Contact us.
