Can Employees Use Annual Leave For Sick Leave Under Fair Work?

When a staff member wakes up unwell and has no sick leave left, many small business owners ask the same question: can we let them use annual leave instead?

It’s a practical scenario that pops up in rostering, payroll and HR conversations all the time. And the answer matters - both for compliance with the Fair Work system and for keeping your team culture fair and consistent.

In this guide, we’ll step through when annual leave can (and can’t) be used for sickness, what the National Employment Standards (NES) require, and how to set up clear policies so your managers handle these requests consistently across your business.

We’ll also cover grey areas like sick during pre-booked annual leave, shutdowns, notice periods and casual employees - plus the records, evidence and documents you should have in place to protect your business.

What Does Fair Work Say About Sick Leave Vs Annual Leave?

Under the NES, full-time and part-time employees accrue two different types of leave that often get confused:

• Personal/carer’s leave (often called sick leave): paid leave for illness or injury, and caring responsibilities.
• Annual leave: paid time off for rest and recreation.

They are separate entitlements with different purposes. If an employee is unfit for work due to illness or injury, the default position is that they should use their paid personal/carer’s leave balance first. If you need a refresher on entitlements and accruals, see our explainer on Sick Leave.

Annual leave isn’t designed to replace personal/carer’s leave. However, the Fair Work framework allows flexibility by agreement in certain circumstances - which is where most employers land when a team member has run out of sick leave.

Can You Let An Employee Use Annual Leave When They’re Sick?

In short: yes, by agreement.

If an employee has no paid personal/carer’s leave left, you can agree with them to use paid annual leave to cover a period of illness so they still get paid. You can also agree to unpaid personal/carer’s leave or unpaid leave if that suits the situation and any applicable award or enterprise agreement.

What you generally can’t do is force an employee to use annual leave for a sick day, unless a modern award or enterprise agreement expressly allows direction in limited situations (e.g. managing excessive annual leave balances) - and even then, strict rules apply.

Good practice is to offer options when sick leave is exhausted:

• Take unpaid personal/carer’s leave (or general unpaid leave) for the period.
• Use accrued annual leave balance by mutual agreement.
• Make up time later (only if the award/EA permits and it’s safe and reasonable).

If this comes up often, it’s worth having a clear policy that sets out these pathways and when you’ll approve annual leave substitution. For recurring issues or complex cases, our overview on managing sick leave when entitlements run out is a helpful reference.

When Can You Refuse Annual Leave For A Sick Day?

Annual leave is taken at a time agreed between you and the employee. So, if the request is operationally unreasonable, you can refuse (for example, during a critical period where you’d be left understaffed). However, you should act reasonably and consistently with any award or enterprise agreement rules about refusing annual leave.

Be cautious about refusing where the only reason is that the employee is sick. The fairer approach is to assess the request like any other annual leave request (considering operational needs and reasonableness) and document your decision-making. If you decline annual leave and the employee has no sick leave, offer unpaid leave as the fallback.

Importantly, if an employee still has paid personal/carer’s leave available, you shouldn’t refuse that entitlement or require them to use annual leave instead.

Evidence Rules: Medical Certificates And Notice

Employees must give notice as soon as practicable and let you know the expected duration of the absence. You can ask for evidence that would satisfy a reasonable person the leave is taken because of illness or injury.

Most businesses require medical certificates or statutory declarations for absences, either at all times or after a set number of days. Whatever you require, make sure it’s clearly set out in a policy and applied consistently.

Reasonable evidence expectations don’t change if the absence is ultimately paid out of annual leave by agreement. If the employee is sick, you can still require evidence. For details on what you can ask for and when, see our guide to medical certificates.

Where an employee can’t provide evidence, you may treat the day as unpaid leave (or another appropriate category consistent with your policy and any award). If the employee is seeking to convert annual leave to personal/carer’s leave for that day, the evidence requirement becomes even more important.

Specific Scenarios Employers Ask About

The Employee Is Sick During Pre‑Booked Annual Leave

If an employee falls ill during a period of approved annual leave, and they provide satisfactory evidence that they were unfit for work for one or more days, they can generally ask to have those days reclassified as paid personal/carer’s leave and have the annual leave re-credited.

This switch is not automatic - ask for evidence and apply your policy consistently. If their sick leave is exhausted, you can agree to leave the days as annual leave, or convert to unpaid personal/carer’s leave.

The Employee Has No Sick Leave Left

As noted above, you can agree to use accrued annual leave to cover the absence. Alternatively, you can treat it as unpaid personal/carer’s leave or another type of Unpaid Leave if that’s more appropriate for the circumstances.

Make sure your payroll classification matches the decision (e.g. unpaid personal leave vs unpaid leave) so your records remain accurate for audits and for any future disputes.

Casual Employees

Casuals don’t have paid personal/carer’s leave or paid annual leave. They’re entitled to unpaid carer’s leave and unpaid compassionate leave in certain circumstances.

Some employers offer additional benefits to long-term regular casuals in policy or contract, but that’s discretionary. If you offer any paid sick-like entitlements to casuals, document them clearly and apply them consistently to avoid claims of adverse action or unfairness.

Sick Leave During the Notice Period

Employees can take paid personal/carer’s leave during a notice period if they’re genuinely ill and have a balance available. That time doesn’t extend the notice period unless the contract or award says otherwise.

If they have no sick leave left, you can consider approving annual leave during notice by agreement, or using unpaid leave. For a deeper dive on these edges, check our guide on sick leave during notice periods.

Business Shutdowns And Directed Annual Leave

Some awards allow you to direct employees to take annual leave during a temporary shutdown (e.g. a Christmas closure), subject to minimum notice and other conditions. If an employee becomes sick during a shutdown and provides evidence, they’re generally entitled to substitute personal/carer’s leave for those days (and have annual leave re-credited), provided they have a sick leave balance.

Always check the specific award or EA clauses for shutdowns, excessive leave and direction rights before issuing notices.

Public Holidays Falling In The Period

Public holidays are not deducted from annual leave. If an employee is sick on a public holiday they would otherwise have worked, they’re entitled to be absent and be paid the public holiday, not have it deducted from leave. Evidence may still be requested per your policy.

Workers’ Compensation Interactions

You generally can’t double-pay an employee with both workers’ compensation and paid leave for the same absence. However, rules vary by state and award, and some employees may elect to use annual leave in certain circumstances while on compensation. This area is technical - seek specific advice for your jurisdiction and policy settings before approving.

Policies, Contracts And Payroll Compliance

A robust, documented approach helps your team handle leave consistently and reduces the risk of disputes. Consider the following controls.

Spell Out Leave Rules In Contracts And Policies

• Employment Contract: Include a clear clause on entitlements, evidence requirements and how leave is requested and approved. If you’re updating template terms, ensure your Employment Contract aligns with the NES and any applicable award.
• Workplace Policy: Adopt a leave policy covering personal/carer’s leave, annual leave, substitution rules, evidence, late notice, and what happens when balances are exhausted. A practical, plain-English Workplace Policy helps supervisors act consistently.

Build A Clear Decision Path For Managers

Provide a step-by-step checklist so line managers know how to triage leave requests, including when to ask for evidence, how to handle no balance, and when to escalate.

Where an employee has exhausted paid leave, make sure managers understand the options (annual leave by agreement, unpaid personal leave, or other arrangements permitted by the award/EA) and the need to record the outcome accurately in payroll.

Protect Privacy And Handle Evidence Properly

Ask for only what’s reasonably necessary to verify the absence. Store certificates securely and limit access to those who need to know. You don’t need detailed diagnoses - a medical certificate stating the employee was unfit for work suffices in most cases. If there are return-to-work concerns, you can request appropriate fitness-for-duty evidence; our guide on medical certificates sets out the boundaries.

Align Your Systems And Record‑Keeping

Payroll categories should match the leave type actually taken (paid personal/carer’s, annual leave by agreement, or unpaid). Keep records of approvals, evidence, and any conversions (e.g. when annual leave is re-credited due to illness).

Accurate records aren’t just best practice - they’re required under the Fair Work Act and help you respond quickly if an issue is raised.

How To Handle A “Sick But No Balance” Request (Step‑By‑Step)

1) Ask For Notice And Evidence

Request the employee notify you as soon as possible and provide evidence consistent with your policy. Keep the tone supportive and consistent.

2) Check Balances And Applicable Industrial Instrument

Confirm personal/carer’s leave and annual leave balances, and check the relevant award/EA for any special rules (e.g. substitution, shutdown, excessive leave clauses).

3) Offer Options And Agree The Path

Where sick leave is exhausted, offer choices: unpaid personal/carer’s leave, annual leave by agreement, or another option allowed by the award/EA. Make sure the agreement is clear and, if practical, confirmed in writing (even a short email trail helps).

4) Record The Decision Accurately In Payroll

Apply the correct leave category and note any re-crediting if evidence later changes the classification (e.g. converting pre-booked annual leave to personal/carer’s leave upon receiving a certificate).

5) Follow Up On Return To Work

For longer absences or safety-sensitive roles, consider whether you need appropriate evidence of fitness to return. Be reasonable and proportionate; for guidance on what you can request, revisit the rules around medical certificates.

Common Pitfalls To Avoid

• Forcing Annual Leave: Don’t compel annual leave for a sick day if the employee still has paid personal/carer’s leave available.
• Inconsistent Evidence Standards: Apply your policy evenly across teams to avoid claims of unfair treatment.
• Misclassifying Leave In Payroll: Mixing up leave types can cause underpayments or disputes down the track.
• Ignoring Award/EA Rules: Many instruments contain specific clauses on annual leave direction, shutdowns and substitution - always check before deciding.
• Poor Communication: Employees appreciate clarity. A short, empathetic explanation of options goes a long way to maintaining trust.

FAQs Employers Raise About Annual Leave And Sick Leave

Can I ask an employee to swap a sick day to annual leave if they still have sick leave available?

No - if they are genuinely unfit for work and have a paid personal/carer’s leave balance, they should use that entitlement. Annual leave substitution is a by-agreement option when paid personal/carer’s leave has run out.

What if an employee wants unpaid leave instead of using their annual leave?

That’s fine by agreement, and often sensible if they want to preserve annual leave for future holidays. Make sure you’re classifying it correctly as unpaid personal/carer’s leave or another category of Unpaid Leave.

Can we require a medical certificate for a single sick day?

Usually yes, if your policy or the award/EA allows it and it’s reasonable in the circumstances. Consistency is key.

Does sick leave extend the notice period?

Typically no - taking paid personal/carer’s leave during notice doesn’t extend the end date unless the contract or instrument says otherwise. See our guidance on sick leave during notice periods for the nuances.

Should we include these rules in our HR documents?

Yes. Build them into your Employment Contract templates and your Workplace Policy so managers have a clear playbook to follow.

Key Takeaways

• Sick leave and annual leave are different NES entitlements; use paid personal/carer’s leave first when an employee is unfit for work.
• When sick leave is exhausted, you can agree to use annual leave, or approve unpaid personal/carer’s leave - avoid forcing outcomes.
• Set clear evidence rules and apply them consistently; reasonable medical certificates support substitution or re-crediting decisions.
• Watch the tricky scenarios: pre-booked annual leave, shutdowns, public holidays, notice periods and workers’ compensation.
• Document your approach in an Employment Contract and a practical Workplace Policy, and classify leave accurately in payroll.
• When in doubt, check the relevant award or enterprise agreement and seek legal guidance before making a directional decision.

If you’d like a consultation on setting up practical leave policies and contracts for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.