Carrying over and buying leave in Australia
Reviewed by Mellow Editorial Team, HR & payroll content team
Most Australian employees can carry over unused annual leave indefinitely — it simply accumulates — but there is no statutory right to buy extra leave or cash it out unless an award, enterprise agreement or employment contract specifically allows it.
How annual leave accumulates and carries over
Under the National Employment Standards, full-time employees accrue four weeks of paid annual leave per year. Part-time employees accrue leave on a pro-rata basis. There is no federal rule that caps how much leave an employee can accumulate, and there is no "use it or lose it" rule in Australia.
Unused leave rolls over from one year to the next automatically. An employee who takes no leave for two years simply has eight weeks sitting in their balance. That balance is a financial liability on your books — when an employee leaves, you must pay out all accrued but untaken annual leave at their current rate of pay.
This is worth keeping an eye on. High leave balances create cash-flow risk, particularly if a senior, higher-paid employee resigns with months of accrued leave outstanding.
Can employees be directed to take leave?
Yes, within limits. Most modern awards and the Fair Work Act allow employers to direct employees to take annual leave if the balance has reached a defined excessive level — commonly eight weeks, or ten weeks for shift workers. The direction must be in writing, give reasonable notice (often at least eight weeks' notice of the leave start date), and be reasonable in all the circumstances.
Check the specific modern award or enterprise agreement that covers your employees, because the exact thresholds and notice requirements vary. If your employees are award-free, the Fair Work Act's general provisions apply.
Employers and employees can also agree in writing for an employee to take leave at a mutually convenient time. This is often the simplest way to manage a ballooning balance without a formal direction.
Cashing out annual leave
Some employees can cash out a portion of their annual leave — that is, receive a payment in lieu of taking the actual time off. This is not available by default. It requires one of the following:
- The applicable modern award or enterprise agreement expressly permits it, or
- The employee is award-free and there is a genuine written agreement between the employer and employee.
Even where cashing out is permitted, the rules are strict. The employee must retain a minimum balance of four weeks of accrued leave after any cash-out. Each cash-out arrangement must be a separate written agreement — you cannot have a standing policy that automatically cashes out leave above a certain threshold. The payment must be at least the full amount the employee would have received had they taken the leave.
It is illegal for an employer to pressure an employee to cash out leave, and agreements made under duress are not valid.
Purchased leave (buying extra leave)
Purchased leave — sometimes called bought leave — is an arrangement where an employee takes additional unpaid leave (typically one to four extra weeks per year) and has the cost spread across their salary over the full year. In effect, the employee agrees to a temporary salary reduction in exchange for more time off.
There is no statutory entitlement to purchased leave. It only exists if your award, enterprise agreement or employment contract provides for it, or if you introduce it as a voluntary workplace policy. Some public sector enterprise agreements include purchased leave provisions; it is less common in the private sector.
If you want to offer purchased leave, you need to think through a few practical questions:
- Tax treatment. The reduced salary is what gets taxed; there is no separate tax concession for the arrangement. Payroll and PAYG withholding should reflect the adjusted salary for the relevant period.
- Superannuation. The Superannuation Guarantee — currently 12% of ordinary time earnings — is generally calculated on the reduced salary during the purchased-leave period, though the detail can depend on how the arrangement is structured in the contract.
- Leave accrual. You need to define in the policy whether the employee accrues annual leave and other entitlements at their usual rate or at the reduced-salary rate during the additional leave period.
- Continuity of employment. Purchased leave is typically treated as unpaid leave and does not break continuity of employment.
Keeping records straight
Whatever arrangement applies — accumulated leave, a directed draw-down, a cash-out, or a purchased-leave scheme — you must keep accurate records and report correctly through Single Touch Payroll. STP requires you to report each pay event as it happens, and any leave-loading components or adjusted salary amounts need to be reflected accurately. The ATO and Fair Work Ombudsman both have access to payroll data, so errors or inconsistencies are increasingly easy to detect.
Maintaining a real-time view of each employee's leave balance also helps you manage the liability on your balance sheet, which your accountant will thank you for at year-end.
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