When it comes to payroll, there are plenty of little details that can catch business owners off guard, and leave loading is one of the big ones.
It’s a term that pops up often in awards and contracts, but not everyone is clear on what it is, when it applies, how much it should be, or whether it needs to be paid at all.
As bookkeepers, we see confusion around leave loading all the time. The good news? Once you understand the basics (what it is, when it’s required, and how to process it), it’s actually quite straightforward.
This guide will walk you through everything you need to know so you can pay your staff correctly and stay compliant.
What Is Leave Loading?
Leave loading (also known as annual leave loading) is an extra payment on top of an employee’s base pay while they’re on annual leave.
Its aim? To compensate for the overtime or penalty rate earnings someone might lose when they take holiday time.
The standard rate across most modern awards is 17.5% of the base pay, though some agreements may offer a higher percentage or specify alternative calculations.
Think of it as a financial buffer that lets your employees enjoy their well-deserved break without losing out on earnings.
“Base Formula:
Leave Loading = Base Pay × Leave Loading Rate (e.g. 17.5%)
Add that to the standard leave pay to arrive at the total leave payment.”_____________________________
Fast Facts on Leave Loading
- When the relevant modern award, enterprise agreement, or employment contract includes it. If leave loading is mentioned in these instruments, it’s compulsory.
- Not everyone gets it. If the award or contract doesn’t mention leave loading, or if the employee’s pay already includes it via an all-inclusive salary rate, then it isn’t an additional payment.
- It applies to annual leave only. Leave loading is not applicable to other leave types (like personal, long service, or unpaid leave).
- Casual employees are usually excluded. Casual workers typically receive a higher hourly (‘casual’) rate in lieu of benefits like leave or leave loading. Casuals employees aren’t entitled to leave, so leave loading is a non-issue.
How Do You Calculate Leave Loading?
Base Formula:
Leave Loading = Base Pay × Leave Loading Rate (e.g. 17.5%)
Add that to the standard leave pay to arrive at the total leave payment.
Example (full-time):
Annual salary: $80,000 → Weekly pay: $80,000 ÷ 52 = $1,538.46
Two weeks of leave: $1,538.46 × 2 = $3,076.92
Leave loading (17.5%): $3,076.92 × 0.175 = $538.46
Total leave pay including loading: $3,615.38 (before tax)
Part-Time or Pro-Rata Calculation
Use the same formula, but scale it based on hours worked. Many awards also provide for pro-rata
leave loading according to actual hours or weeks worked.
Penalty-Rate Consideration
Some awards let you pay the higher of:
Base pay + 17.5% leave loading; or
The normal penalty (e.g., weekend) pay rates.
Industry Examples
Construction, healthcare, aged care, mining, hospitality, transport, security, and education frequently include leave loading in their awards, with varying rates.
When Is Leave Loading Not Necessary?
- If no leave loading is specified in the applicable award, agreement, or contract, you don’t need to pay it.
- If the employee’s total remuneration already bundles in leave loading, it’s built into their pay and doesn’t require separate calculation.
- When paying casual employees.
- It’s only for annual leave. Other leave types are excluded.
Processing Leave Loading in Your Bookkeeping
Here’s how to make sure everything’s compliant and accurate:
- Check entitlements: Before paying leave loading, confirm entitlements via modern awards, agreement, or contract.
- Calculate leave loading correctly: Use the formula appropriate to the employee’s award. 17.5% is typical unless otherwise specified or if penalty rates apply. Provide examples in your notes or payroll tool for transparency.
- Process through payroll software: If your software supports it (e.g. Xero or QuickBooks), set up leave loading as a separate allowance or pay component. This ensures tax, super, and payslip information is captured correctly.
- Include on payslip: Break out the loading amount separately. This ensures clarity for both employee and employer.
- Superannuation obligations: Leave loading generally counts as Ordinary Time Earnings (OTE), so calculate and pay super accordingly, unless you have documentation classifying it otherwise.
- Tax treatment: Leave loading is taxable income. Note: the first $320 may be tax-free in certain cases.
- Termination pay: If an employee leaves and hasn’t taken accrued annual leave, their final pay must include both the leave and applicable leave loading.
Leave loading may seem like another line item in payroll, but it’s an important part of ensuring fair compensation, especially in industries where employees rely on penalty or overtime rates. As an employer, your job is to make sure it’s handled correctly, transparently, and compliantly.
We are here to help.
Need help understanding your employees’ entitlements or setting up leave loading in Xero? Let us know, we’re happy to help!