Managing people

How do you calculate annual leave loading?

Should an annual leave loading be calculated on an employee's award rate of pay, or their actual over-award rate of pay? Read more about annual leave loading here.

The method of calculating annual leave loading is usually determined by the terms of the applicable modern award.

Day workers are usually entitled to a 17½% annual leave loading calculated on the ordinary weekly rate of pay defined by the instrument, including over award payments, or the relevant weekend penalty rates, whichever is the greater.

In the case of shift workers, an employee who would have worked shift work had they not been on leave is paid a 17½% loading or the shift loading including the relevant weekend penalty rates, whichever is the greater, but not both. The loading is not normally payable on pro rata payment of annual leave on termination of the employee’s employment.

Annual leave loading

For example, the Health Professional & Support Services Award 2010 (cl 31.2) provides that “in addition to their ordinary pay, an employee, other than a shift worker, will be paid an annual leave loading of 17 ½% of their ordinary rate of pay”.

It also provides that these provisions are in addition to annual leave provided for in the National Employment Standards. This would mean the loading is calculated on the ordinary pay for annual leave as defined by the National Employment Standards, i.e. the employee’s base rate of pay.

The Fair Work Act defines ‘base rate of pay’ to mean the rate payable to an employee for their ordinary hours of work, excluding allowances, bonuses, loadings, overtime and penalty rates, and any other separately identifiable amounts.

This means the award would require the annual leave loading to be calculated on an employees’ ordinary rate of pay (which would include the over-award payment), not the relevant award rate of pay.

Clerks – Private Sector Award

Conversely, the Clerks – Private Sector Award 2010 (cl 29.3) provides that the annual leave loading is calculated on the rate of pay prescribed by the relevant wage for the classification under the award. This means the loading is calculated on the award rate of pay, not the over-award payment.

Absorption of award entitlements

In many instances, an employer pays an over-award payment to avoid the hassle of having to calculate various payments prescribed by the relevant award, e.g., annual leave loading, allowances, rostered overtime, etc. Compensating for an entitlement under an industrial instrument may not necessarily achieve the purpose the employer had originally intended. For example, annual leave loading is payable under a specific circumstance, i.e. in addition to an employee’s ordinary pay when taking annual leave.

Many employers have incorporated this entitlement into an employee’s total wage or salary, meaning it is no longer an ‘annual leave loading’ because it is now payable each week, regardless of an employee’s absence on paid annual leave. In the absence of a written contract of employment stating that the over-award payment compensates for it, an employer would be liable to pay annual leave loading when an employee takes annual leave. Employers in this situation may be exposed to a ‘double-dip’ by their employees.

Unless specific reference is made in an employee’s contract of employment, ordinary pay includes annual leave loading, the nature of the loading changes and, subsequently, could form part of the employee’s ordinary pay. 

The bottom line: The method of calculating annual leave loading is determined by the terms of the relevant modern award.

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