Are you Paying Your Employees Correctly? Changes to Annual Leave Loading

What is Annual Leave Loading
Annual leave loading is an entitlement contained within most modern awards and covers employees in industries such as building and construction, manufacturing, mining, horticultural, agricultural, hospitality, retail, administration, banking, finance, and insurance.

Annual leave loading is an additional payment of 17.5% provided to an employee on top of their base rate of pay during periods of annual leave. Annual leave loading was initially incorporated into modern awards to compensate employees who usually receive overtime and penalty rates during work periods for the shortfall in wages during periods of annual leave.

Over the years changes to modern awards has seen annual leave loading extended to cover employees who would not normally perform tasks that require overtime payments.

Paying Superannuation
Superannuation guarantee payments are paid on Ordinary Time Earnings for all Australian employees and previously per the ATO's description of ordinary time earnings annual leave loading was not classified as an ordinary time earning.

However, the ATO has recently clarified their position on annual leave loading, stating that it will be deemed ordinary time earnings unless an employer can give evidence that the payment is due to an employee’s lost opportunity to work overtime.

This evidence could include:

wording in the relevant modern award or enterprise bargaining agreement clarifying the reason for the entitlement; or
other written evidence, such as a documented policy, that clarifies the reason for the entitlement, and reflects the mutual understanding of both parties to the agreement that gives rise to the entitlement.

Superannuation on Historical Payments
The ATO has acknowledged that there is uncertainty around the treatment of annual leave loading. In addition, modern awards and enterprise agreements generally do not state the reason for the annual leave loading payment being made to the employee.

The ATO has stated that it won’t scrutinise the purpose of annual leave loading payments made in historical quarters where:

the employer self-assessed that annual leave loading payments were not ordinary time earnings because it was in relation to an employee’s loss of opportunity to work overtime; and
there is no evidence to suggest the entitlement was for something other than overtime.

Moving forward, for annual leave loading to be excluded from calculations of ordinary time earnings, employers must, as soon as practicable, obtain written evidence that the entitlement is ‘demonstrably referrable’ to a lost opportunity to work overtime.

If you require further assistance with complying with ATO leave loading requirements, do not hesitate to contact your Client Service Manager. In complex cases your CSM will be able to refer you to a qualified HR professional who can help to define your requirements and where applicable implement written evidence.

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