Question: What needs to be considered when calculating annual leave loading?
Answer: When considering how annual leave loading is calculated, it is usually determined by the appropriate modern award.
Do we calculate annual leave loading on the award rate or over award rates?
Modern awards will usually prescribe that a day worker is entitled to a 17.5% loading when annual leave is paid to the employee. Employers should be aware that the calculation of annual leave loading may vary depending on the wording of the modern award.
Example 1: Manufacturing and Associated Industries and Occupations Award 2020 (Manufacturing Award)
The Manufacturing Award prescribes that annual leave loading is to be calculated based on the employee’s ordinary wage rate. This is defined in the award as “the wages they would have received in respect of the ordinary hours the employee would have worked had the employee not been on leave during the relevant period.” Therefore, the ordinary wage rate is inclusive of any over-award payments and allowances, loadings, and penalties paid for all purposes of the award.
Hence, annual leave loading would be calculated on over-award payments.
Example 2: Clerks – Private Sector Award 2020 (Clerks Award)
In contrast, the Clerks Award provides that the loading is to be calculated on the appropriate minimum rates in clause 16 based on the employee’s award classification. This means annual leave loading will be calculated based on the award rate, not including any over-award payment.
For shift workers, how do we calculate the higher of leave loading and the weekend and shift penalties?
When comparing, it is calculated over the whole period of leave the employee will be taking, not on a daily basis.
Example 3
Tim works 8 ordinary hours from Wednesday to Saturday, which is a total of 32 hours each week. The minimum hourly rate is $20 per hour. On Saturday he gets paid a 50% weekend penalty. On Saturday his pay is therefore $30.
Tim will take one week of annual leave and will be paid the higher of the annual leave loading, or his weekly rate plus the weekend penalties.
Step 1: Calculate the minimum weekly pay without penalties
32 hours x $20= $640
Step 2: Calculate the minimum weekly pay plus leave loading
$640 + 17.5%= $752
Step 3: Calculate the minimum weekly pay plus the weekend penalties
24 hours x $20= $480
8 hours x $30= $240
$480 + $240= $720
Can you absorb the leave loading?
Employers will consider paying employees over-award payments to avoid various payments an employee may be entitled to under the modern award, such as annual leave loading, and include it in an employee’s total wage or salary.
Where employers wish to include leave loading in an employee’s ordinary pay, they should ensure this inclusion is explicitly referenced in the employee’s contract of employment – usually in what is referred to as an offset clause. In this case, the leave loading becomes part of the employee’s ordinary pay and will be paid whether the employee is on annual leave or not.
Where the contract of employment is silent that the over-award payment or salary compensates the employee for leave loading, the employer may be liable to pay annual leave loading when the employee takes annual leave depending on the terms of the modern award. This exposes the employer to double dipping.
The bottom line: The calculation of leave loading is dependent on the applicable industrial instrument, usually modern awards, and should be referred to in the first instance.
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Disclaimer: While all due care has been taken in the preparation of this information, it is believed to be accurate but no warranty of accuracy or reliability is given and no liability is accepted for errors or omissions or loss or damage suffered as a result of a person acting in reliance thereon. This information is not legal advice. If a legal opinion is sought please contact your legal advisor.
