Are You Paying Annual Leave Correctly? The 6 Mistakes That Generate the Most FWO Complaints

Annual leave is four weeks a year. Every permanent employee gets it. It is one of the oldest and most understood entitlements in Australian employment law.

And yet, the Fair Work Ombudsman's enforcement data shows, year after year, that annual leave payment errors are among the most common sources of underpayment complaints in Australia. Not because employers are deliberately underpaying - but because the rules are more layered than most people realise, and the common shortcuts that feel reasonable in practice are often legally wrong.

Since 1 January 2025, intentional underpayment of employee entitlements - including annual leave - is a criminal offence carrying penalties of up to $1.65 million for individuals and $8.25 million for corporations. The criminal threshold requires proof of intent. The civil penalties - up to $19,800 per contravention for individuals and $99,000 for corporations - do not.

Here are the six mistakes the FWO's enforcement activity highlights most consistently.

---

Mistake 1: Not paying leave loading - or paying it only sometimes

The rule: Under most modern awards, employees are entitled to a 17.5% annual leave loading in addition to their base rate of pay when they take annual leave. This loading must also be paid out on termination of employment for the balance of unused annual leave - if the applicable award provides for it.

The mistake: Many employers pay leave loading when leave is taken but not when leave is paid out at termination. Or they pay it for full-time employees but not part-time employees. Or they apply it to annual leave taken but not to cashing out arrangements.

Why it matters now: Leave loading omitted from a final pay is an underpayment. Since the wage theft provisions commenced in January 2025, a pattern of omitting leave loading from final pay across multiple employees - especially if it appears systematic - will attract scrutiny beyond the civil penalty regime.

---

Mistake 2: Deducting annual leave when a public holiday falls within leave period

The rule: Under section 116 of the Fair Work Act, an employee does not take annual leave on a day that would be a public holiday. If a public holiday falls during a period of annual leave, the employee is not debited for that day.

The mistake: Payroll systems that run leave deductions automatically often deduct for every calendar day in the leave period, including public holidays. Unless the system is configured to exclude public holidays, the employee's leave balance is understated - and the employer owes the difference.

The practical check: Run a leave deduction report for any leave period that included a public holiday. Confirm the system excluded the holiday day from the deduction. If it did not, the underpayment needs to be corrected.

---

Mistake 3: Annual leave accrues from day one - not after probation

The rule: Under the National Employment Standards, annual leave accrues progressively from the first day of employment at the rate of 4 weeks per year for full-time employees (pro-rated for part-time). This means it begins accruing during the probationary period. There is no minimum service period before accrual starts.

The mistake: Many employers run their HR or payroll systems with a "probation period hold" on leave accrual - meaning leave does not accrue (or is not visible to the employee) for the first three or six months. This is not permitted under the NES. Any leave that accrued during the probation period must be available to the employee and must be paid out on termination if it is unused.

Why it catches employers off guard: The employee who is terminated during or at the end of probation has accrued leave entitlements even if they have never taken a day of leave. That leave must be paid out in the final pay.

---

Mistake 4: Not keeping records - which reverses the burden of proof

The rule: Section 535 of the Fair Work Act and the Fair Work Regulations 2009 require employers to maintain employee records - including leave accruals, leave balances, and leave taken - for seven years. The records must be available to the Fair Work Ombudsman on request.

The mistake: Employers who do not keep accurate leave records cannot demonstrate what was accrued and what was taken. Under the Fair Work Act, the absence of records does not help the employer - it creates a reverse onus. The employee's claim about their leave entitlements is presumed correct unless the employer can disprove it.

“

Failing to keep leave records does not protect an employer from an underpayment claim. It makes an underpayment claim harder to defend.

This is a practical compliance imperative that goes beyond technical record-keeping. If an employee claims they had 12 days of unused annual leave when their employment ended and you have no record to contradict that, the claim stands.

---

Mistake 5: Forcing annual leave without the correct procedure

The rule: Employers can direct employees to take annual leave in some circumstances - but only in accordance with the applicable modern award or enterprise agreement provisions. The direction must be reasonable and must give adequate notice.

The mistake that the FWO newsletter specifically flags: You cannot start using an employee's annual leave - by directing them to take it - without the employee's agreement if they have run out of sick or carer's leave. Substituting annual leave for exhausted sick leave requires the employee's written consent. Directing an employee to take annual leave in this situation without consent is a breach of the NES.

Also note: any policy, clause, or workplace practice that purports to forfeit accrued annual leave is void. Annual leave balances accumulate indefinitely under the Fair Work Act. Employers can manage excessive balances through the direction-to-take-leave process, but they cannot simply wipe or cap them.

---

Mistake 6: Calculating annual leave incorrectly for part-time and irregular-hours employees

The rule: Annual leave accrues at 4 weeks per year pro-rated for ordinary hours worked. For a part-time employee working 20 hours per week, that is 80 hours of leave per year. The calculation is based on ordinary hours, not calendar weeks.

The mistake: Using "days" instead of "hours" for part-time leave calculations is a persistent and common error. A part-time employee working 3 days of 8 hours (24 hours/week) has a different entitlement from one working 3 days of 6 hours (18 hours/week). Applying a blanket "3 days of leave" per week is wrong for one of them.

For employees with variable or irregular hours, the leave entitlement is calculated on the ordinary hours actually worked. Leave must be recorded and managed in hours, not days, to be accurate.

---

The annual leave payment rate - what "full rate of pay" actually means

When an employee takes annual leave, they must be paid at their full rate of pay. This is not just the base rate. It includes:

• Base rate of pay
• Incentive-based payments and bonuses (where applicable)
• Loadings
• Monetary allowances that are usually received
• Overtime or penalty rates that the employee would have otherwise worked

For employees covered by modern awards that include leave loading, the 17.5% loading is paid on top of the base rate - not on top of the full rate.

---

Key Takeaways

1. Annual leave loading of 17.5% applies under most modern awards - and must be paid on termination as well as when leave is taken. Check your specific award.
2. Public holidays do not count as annual leave. A public holiday falling within a leave period is not deducted from the employee's balance.
3. Annual leave accrues from day one - including probation. Probationary employees have accrued leave entitlements payable on termination.
4. Absent records reverse the burden of proof. The employer cannot disprove an employee's leave claim without records. Keep leave records for seven years.
5. You cannot substitute annual leave for exhausted sick leave without the employee's written consent.
6. Part-time leave is calculated in hours, not days. Using days creates systematic errors for employees working different hour combinations across their working days.

---

Sources

1. [1] Fair Work Ombudsman (2026). Paying Annual Leave Correctly - Employer Newsletter, May 2026. fairwork.gov.au
2. [2] Fair Work Ombudsman (2026). Annual Leave Fact Sheet. Content last updated 16 January 2026. fairwork.gov.au/tools-and-resources/fact-sheets/minimum-workplace-entitlements/annual-leave
3. [3] Fair Work Act 2009 (Cth) ss.87–93 (annual leave NES); s.116 (public holidays and annual leave); s.535 (record-keeping obligations).
4. [4] Leave Balance (2026). Annual Leave in Australia: The Complete Employer's Guide for 2026. Criminal penalties from 1 January 2025: individuals up to $1.65M; corporations up to $8.25M. leavebalance.com
5. [5] Sprintlaw (2026). An Employer's Guide to Leave Loading in 2026. Classification and calculation errors; final pay risks. sprintlaw.com.au
6. [6] ScaleSuite (2026). Australian Public Holidays 2026–27. Interaction of public holidays, annual leave and payroll - including Payday Super from 1 July 2026. scalesuite.com.au