Annual Leave Payout When You Resign: Everything About Your Final Entitlements

Published: December 2024 | Reading time: 9 minutes

Leaving a job is a significant decision, and understanding what you're entitled to receive in your final pay is crucial. One of the most valuable components of any final payment is the payout for accrued annual leave. In Australia, this isn't a discretionary bonus but a legal entitlement that employers must honor.

This comprehensive guide explains everything you need to know about annual leave payouts when leaving employment, helping you verify that you receive every dollar you're owed.

Is Annual Leave Paid Out When You Leave?

Yes. Under Australian law, all accrued but untaken annual leave must be paid out when employment ends, regardless of why it ends. This applies whether you:

• Resign voluntarily
• Are made redundant
• Are terminated (with or without cause)
• Retire
• Complete a fixed-term contract

This entitlement is protected under the National Employment Standards in the Fair Work Act 2009. There are no circumstances in which an employer can withhold payment for accrued annual leave, even if an employee is dismissed for serious misconduct.

How is the Payout Calculated?

Your annual leave payout is calculated based on your current rate of pay and your accrued leave balance at the time of termination. The basic formula is:

Leave Payout = Accrued Leave Hours x Current Hourly Rate

For example, if you have 80 hours of accrued leave and earn $35 per hour, your leave payout would be:

80 hours x $35 = $2,800 (before tax)

Use our annual leave calculator to determine exactly how much leave you've accrued based on your employment dates and hours worked.

What About Leave Loading?

Whether leave loading (typically 17.5%) is payable on termination depends on your specific award or enterprise agreement. Many awards do require leave loading to be included in the termination payout, while others specify that loading is only payable when leave is actually taken.

Check your award or agreement carefully, or ask your employer's HR department to confirm. If leave loading applies, your payout calculation becomes:

Leave Payout = Accrued Leave Hours x (Hourly Rate x 1.175)

When Should You Receive Your Payout?

Under the Fair Work Act, your final pay (including annual leave payout) should be received on your last day of employment or within 7 days. Different states may have specific requirements, but the principle remains that payment should not be unreasonably delayed.

If you don't receive your correct entitlements within a reasonable timeframe, you should first raise the issue with your employer. If unresolved, you can seek assistance from the Fair Work Ombudsman.

Leave in Lieu of Notice

Some employees choose to use their annual leave during the notice period, essentially leaving earlier while the leave covers their remaining time. This is possible but requires mutual agreement. If you take this approach:

• Your actual termination date extends to the end of the leave period
• You continue to accrue leave during this time (though minimally)
• You won't receive a payout for the leave used during notice

Alternatively, you can work your notice period and receive a payout for all accrued leave. Which option is better depends on your circumstances, though many employees prefer the certainty of knowing their exact final payment.

What About Long Service Leave?

Long service leave is separate from annual leave and has its own payout rules. The entitlement and payout for long service leave vary by state and territory. Generally, you need to have worked for the same employer for a minimum period (often 7-10 years) to receive any pro-rata payout on termination.

This guide focuses on annual leave, but if you've been with your employer for many years, check your long service leave entitlements as well.

Tax on Annual Leave Payouts

Annual leave paid out on termination is taxed as income, but your employer doesn't simply apply your normal PAYG withholding. The ATO sets specific maximum withholding rates for unused leave payments, based on why your employment ended:

• Resignation, retirement, or standard dismissal: Withheld at a maximum rate of 32% (30% income tax plus 2% Medicare levy)
• Genuine redundancy, invalidity, or an early retirement scheme: Withheld at a maximum rate of 17% (15% income tax plus 2% Medicare levy)

These are maximum rates for payroll purposes only. If your actual marginal tax rate is lower, your employer should withhold at the lower rate instead. Either way, your true tax liability is only finalised when you lodge your tax return, based on your total taxable income for the year — a large leave payout can temporarily push your withholding higher than what you'll ultimately owe, with the difference refunded (or reconciled) at tax time.

The Australian Taxation Office publishes the exact tax schedule for these payments, and your employer should apply the correct withholding rate automatically. Use our annual leave payout & tax calculator to estimate your net payout before you resign. If you receive a significant payout, consider consulting a tax professional about how it affects your overall tax position for the year.

Verifying Your Payout is Correct

Before accepting your final pay, verify that the annual leave payout is accurate. Check:

1. Your leave balance: Compare the balance on your final payslip with your own records or previous payslips
2. The rate used: Ensure the calculation uses your current hourly rate
3. Leave loading: If applicable under your award, confirm it's included
4. Recent leave taken: Ensure any leave taken close to termination is correctly reflected

Many employees never check their final pay calculations, potentially missing out on money they're owed. Take the time to verify everything.

What If Your Employer Doesn't Pay?

If your employer fails to pay your accrued annual leave, they are breaking the law. Steps to recover your entitlements include:

1. Raise it formally: Put your concern in writing to your employer
2. Contact Fair Work: The Fair Work Ombudsman can provide advice and assist with disputes
3. Small claims: For amounts under certain thresholds, small claims procedures may be available
4. Legal action: For significant amounts, legal proceedings may be necessary

The Fair Work Ombudsman has strong powers to investigate and enforce workplace entitlements, and employers who fail to pay correct entitlements can face significant penalties.

Planning Your Resignation

When planning to resign, your accrued leave balance is an important consideration:

Timing Your Resignation

Consider whether to resign before or after taking a planned holiday. If you take leave then resign, you'll use your leave balance. If you resign first, you'll be paid out but won't get the actual time off.

Negotiating Your Exit

Some employers offer enhanced termination packages that might include additional leave payouts or payments in lieu of notice. Understanding your baseline entitlements helps you evaluate any offers.

Record Keeping

Keep copies of your payslips and leave balance records. If any disputes arise about your final pay, these records are essential evidence.

Conclusion

Your accrued annual leave is a valuable entitlement that must be paid out when your employment ends. Understanding how this payout is calculated and what to expect ensures you receive everything you're owed. Before resigning, take time to calculate your expected payout and verify the figures when your final pay arrives.

If something doesn't look right, don't hesitate to question it. Your annual leave is money you've earned through your work, and you have every right to receive full payment for it.