Resignations can be bittersweet for everyone involved. As an employer, you’re focused on a smooth handover, accurate final pay and keeping the relationship positive.
A key question that always comes up is what happens to annual leave when an employee resigns. Do you need to pay it out? How do you calculate it? And what if the employee wants to use leave during their notice period?
Getting annual leave entitlements right isn’t just good business practice - it’s required under the National Employment Standards (NES). In this guide, we’ll walk through your legal obligations in Australia, how payouts work in practice, and practical steps to keep your processes clean, compliant and fair.
What Is Annual Leave And Why It Matters On Resignation
Annual leave (sometimes called holiday leave) is a core entitlement under the NES. Full-time and part-time employees accrue paid annual leave based on their ordinary hours of work - usually four weeks per year for most employees.
Because annual leave is a statutory entitlement, what you do with unused balances when employment ends is not optional. If a worker still has annual leave when they resign (or their employment ends for any other reason), the law requires you to deal with it correctly.
Two quick reminders that often trip businesses up:
- You cannot “contract out” of the NES. An employment contract, policy or clause that tries to remove or reduce an employee’s minimum annual leave entitlement on termination won’t override the law.
- Final pay rules can be affected by awards or enterprise agreements. Always check whether a modern award or EA applies to your workplace alongside the NES.
Do Employees Get Paid Annual Leave When They Resign?
Yes. When employment ends for any reason - including resignation, redundancy, dismissal or the end of a fixed-term contract - an employee must be paid out all accrued but unused annual leave.
This obligation applies regardless of how the employment ended. Even where a termination is for serious misconduct, any accrued annual leave must still be paid out in line with the NES. Put simply: unused annual leave is not discretionary.
Here’s what that means in practice:
- You calculate the employee’s annual leave balance up to (and including) their last day of employment.
- You pay that balance at the employee’s current base rate for their ordinary hours of work.
- Where applicable under a modern award, enterprise agreement or contract, you also include annual leave loading on the payout.
As part of the final process, include the leave payout with any outstanding wages and other termination amounts that may be due (for example, payment in lieu of notice if you choose to end employment immediately rather than having the employee work their notice).
How To Calculate Annual Leave Payout Correctly
The calculation is straightforward once you have the correct inputs. Build the following checks into your process to reduce errors and disputes.
1) Confirm The Accrued Balance To The Last Day
Pull the latest payroll records to confirm how much annual leave the employee has accrued but not taken as at their final day. Remember that accrual continues to the end of employment.
2) Apply The Current Base Pay Rate
Unused annual leave must be paid at the employee’s current base rate for their ordinary hours. This means the hourly or weekly rate that would have applied if they had worked those hours (not including overtime, allowances or penalties unless their industrial instrument says otherwise).
3) Add Leave Loading (If It Applies)
If a modern award, enterprise agreement or contract provides for annual leave loading (commonly 17.5%), check whether it applies to termination payouts. Many instruments require loading to be paid on untaken leave when employment ends - always verify the specific wording before you run payroll.
4) Include The Payout In Final Pay
Process the annual leave payout with the employee’s final pay. It’s good practice to provide a clear itemisation showing hours or weeks of leave paid out, the rate used, any loading, and tax withheld.
5) Withholding And Superannuation
PAYG withholding applies to annual leave payouts in the same way as other termination payments. As to superannuation, the Superannuation Guarantee generally does not apply to unused annual leave paid on termination because it is not considered Ordinary Time Earnings (OTE). If you’re unsure about a particular scenario, review your obligations against Ordinary Time Earnings rules and check with your payroll advisor.
Final pay often includes more than annual leave. Depending on the circumstances you may need to account for notice (worked or paid in lieu), outstanding wages or allowances, and any applicable redundancy pay. A short pre-payment review can save you time and re-runs later, and this checklist approach pairs neatly with a broader final pay calculation process.
Notice Periods, Taking Leave And Timing Of Final Pay
Resignations frequently involve questions about using leave during notice and when the final payment is due. Here’s how to handle the common scenarios clearly and lawfully.
Can An Employee Take Annual Leave During Their Notice Period?
Employees can request annual leave during notice, and you can approve or decline that request in line with your usual process. There is no automatic right to take annual leave after handing in a resignation unless it has already been approved or required by an applicable instrument.
- If you approve the leave, the notice period generally continues to run.
- If you decline the leave, the unused leave is paid out on termination instead.
Some employees also ask whether they can “use up” leave to shorten their notice. That’s something you can agree to mutually, but employees generally can’t insist on doing so. For clarity on notice obligations overall, it helps to align requests with your employment contract and any relevant award; our guide to resignation notice periods explains typical settings in Australia.
What If Someone Resigns While Already On Annual Leave?
If an employee resigns during a period of approved leave, their notice can start running from the date specified in their resignation. Leave being taken at that time counts as used and is not paid out again. You’ll still need to pay any additional unused balance that accrues up to their final day.
When Is Final Pay Due?
The NES requires payment of entitlements, but the exact timing of final pay can also be set by a modern award, enterprise agreement, employment contract or your payroll cycle. Some instruments require final pay within a specified number of days; others are silent, in which case payment within the next usual pay run is commonly accepted practice. Always check any applicable award or agreement first, then apply your internal policy consistently.
Special Scenarios, Employer Obligations And Best Practice
Most resignations follow a predictable process. These edge cases are worth having on your radar - and your template documents and policies should address them.
Casual Employees
Genuine casuals do not accrue annual leave and therefore won’t receive an annual leave payout on termination. If there’s any doubt about classification (for example, a long-term, regular casual), get advice and review your records promptly. Where an engagement was misclassified, you may face back-pay obligations, so early checks are prudent.
Redundancy, Dismissal Or Serious Misconduct
Regardless of whether employment ends by resignation, redundancy, dismissal with notice or even serious misconduct, the rule about annual leave is the same: any accrued but unused annual leave must be paid out under the NES. While other entitlements may differ depending on the reason employment ends, annual leave is not something an employer can withhold.
Cashing Out Annual Leave Versus Payout On Termination
Cashing out during ongoing employment follows strict rules and is only allowed in limited circumstances with a written agreement and minimum balances remaining. By contrast, when employment ends, all accrued annual leave must be paid out - there’s no minimum balance requirement. If you’re exploring policies around cashing out during employment, review the separate rules in our overview on cashing out annual leave.
Other Leave Types At Exit
Employees might also be entitled to other payouts or adjustments at termination, such as long service leave depending on state or territory law and years of service. To sense-check entitlements quickly, use tools like our long service leave calculator and then confirm against the legislation that applies to your location.
Records, Payslips And Transparency
Clear documentation reduces disputes. Provide a final payslip that itemises:
- Outstanding wages/ordinary hours
- Annual leave hours or weeks, rate used and any leave loading
- PAYG withholding (and super if any is payable on other components)
- Any other termination amounts (for example, payment in lieu of notice, redundancy)
Keep copies of the resignation letter, final calculation worksheets and proof of payment with your payroll records.
Essential Documents And Policies To Support Compliance
A few well-drafted documents make managing exits more consistent and legally robust across your business:
- Employment Contract: Sets out notice obligations, leave entitlements and payout mechanics, and allows you to align processes with any applicable award or enterprise agreement.
- Termination Checklist or Procedure: Standardises how you calculate and pay entitlements, return property and remove access, and who signs off on the numbers.
- Payroll Policy: Documents timing for final pay in line with any award or EA obligations and your usual pay cycle.
- Staff Handbook and Leave Policies: Clarify how leave requests are managed during notice, when leave may be declined due to operational needs, and how payouts are shown on final payslips.
If you’re establishing or updating your employment suite, it’s worth ensuring your contracts and policies work together and reflect your operational reality from day one.
Practical Tips To Reduce Risk
- Run an early check. As soon as a resignation is received, pull balances and confirm any award/EA timing for final pay so the payroll team can plan ahead.
- Be consistent. Apply your leave approval process the same way you would for non-resigning employees unless a documented business need says otherwise.
- Communicate in writing. Confirm the last day, notice arrangements and how leave will be handled in a short email to avoid misunderstandings.
- Audit regularly. Spot-check how recent exits were processed to make sure leave loading and award timing are being applied correctly.
Key Takeaways
- All accrued but unused annual leave must be paid out when employment ends, including on resignation, redundancy, dismissal and even serious misconduct.
- Calculate the payout to the last day of employment at the employee’s current base rate and include annual leave loading where an award, enterprise agreement or contract requires it.
- Handle requests to take leave during notice through your usual approval process; if leave is not taken, it is paid out on termination instead.
- Final pay timing can be set by a modern award, enterprise agreement, contract or payroll cycle - check any applicable instrument before you process payment.
- Include annual leave in your broader final pay calculation alongside wages, notice and any redundancy to avoid rework.
- Long service leave may also be payable on termination depending on location and service; use a tool like the long service leave calculator to sense-check.
- Clear documents - from your Employment Contract to leave and payroll policies - make exits smoother and reduce the risk of disputes.
If you’d like a consultation about annual leave on resignation or a review of your employment contracts and exit processes, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
