Annual leave liability: Managing large leave balances & balance sheet impact

Published 13 July 2026

Table of contents

• What is annual leave accrual in Australia?
• How much annual leave accrues per week and per hour?
• How to value annual leave on the balance sheet
• Why large leave balances create business risk
• How you can reduce large leave balances compliantly
• Manage leave with confidence in Xero
• FAQs on annual leave accrual and liability

Key takeaways

• Annual leave accrues on ordinary hours worked for all permanent employees, including full-time, part-time, and shift workers.
• Leave liability is valued using current pay rates and includes relevant oncosts such as leave loading and superannuation.
• Large leave balances can strain cash flow and create compliance and wellbeing risks, so plan ahead and encourage regular time off.

What is annual leave accrual in Australia?

Annual leave accrual is how some employees earn their entitlement to paid time off. Under the Fair Work Act 2009 and the National Employment Standards (NES), most full-time employees accrue four weeks of annual leave per year. Shift workers who regularly work Sundays or public holidays accrue five weeks.

Accrual applies to ordinary time earnings (OTE), but not overtime, bonuses, commission, and some other types of earnings. It even accrues during periods of paid leave, but not unpaid leave. Casual employees do not qualify for this entitlement but earn 25% casual loading instead. Part-time permanent employees accrue on the same basis as full-time staff, but earn less leave overall as they work fewer hours.

Holiday leave accrual continues throughout employment and there’s no official carryover policy or law that limits how much annual leave an employee can accumulate. However, you may be able to avoid excessive leave accruing and becoming a liability on your books. For example, most modern awards consider a balance of eight weeks’ annual leave to be excessive, and allow you to direct an employee to take time off. You can find more detail in this modern award payroll guide for hybrid teams.

How much annual leave accrues per week and per hour?

Exactly how much annual leave accrues per week depends on a few different factors, including employment type, hours worked, shift worker status, and your award or enterprise agreement.

Here’s how you can calculate annual leave accrual for a full-time employee working standard 38-hour weeks:

• 38 hours x 4 weeks = 152 hours
• 152 hours / 52 weeks per year = 2.923 hours per week
• 4 weeks / 52 weeks per year = 0.07692 hours of leave accrued per hour worked

Part-time employees have the same annual leave accrual rate as full-time employees, so you apply the same per-hour rate to their contracted hours. Shift workers have a different entitlement of five weeks and accrue at 0.09615 hours per hour worked. Employees on casual contracts don’t accrue annual leave.

Some modern awards and enterprise agreements provide more generous leave entitlements than the NES minimums based on length of service, but it will be explicit in the agreement. Use the Fair Work Award Finder to see which award covers your employees.

How to value annual leave on the balance sheet

When employees accrue leave they haven’t taken yet, it sits as a liability in your books. You owe the leave to your employees whether they choose to take time off or leave the business. You value leave at the current pay rate, not the rate when the employee accrued it, according to AASB 119.

That means the value updates every time the employee gets a pay rise. Beyond base wages, the liability should also include the oncosts you might incur when they take the leave or you pay it out. Those might include superannuation, payroll tax, workers compensation, and leave loading if applicable.

Here’s an example of how to value annual leave for an employee who earns $30 per hour and has 80 hours of unused annual leave:

• Base liability: 80 hours x $30 = $2,400
• Superannuation (12%): $288
• Leave loading (17.5% where applicable): $420
• Total leave liability: $3,108

So $3,108 should appear on your balance sheet. Additionally, if that employee gets a pay rise to $32 per hour before they take any leave, the liability grows. With a new base of $2,560, $307.20 superannuation, and $448 leave loading, the liability becomes $3,315 for that one employee.

For small business owners with 10 or more employees, these costs can add up quickly. Payroll software can help you track accrued leave balances in real time, but oncost calculation is often a manual step you should review every pay period.

Why large leave balances create business risk

Large leave balances are easy to overlook, but they represent a real and growing financial liability. Here are some aspects of the business large leave balances can affect.

Cash flow

The most immediate risk is cash flow. If a long-tenured employee resigns, you need to pay it out in full with their final pay, a significant unplanned expense. For example, if an employee on $35 per hour with 10 weeks of accrued leave were to quit, it would require $13,300 in a single pay run, and that’s before oncosts like superannuation and leave loading. The longer balances grow, often tied to length of service, the bigger the potential hit to cash flow becomes.

Balance sheet impact

Large leave balances represent a growing liability on your balance sheet. During an audit or when seeking finance, these liabilities are a considerable factor and could work against you. Additionally, if you’re ever looking to sell the business, large leave liabilities could affect your position.

Operational risk

Employees that have the biggest holiday leave accrual balances are often senior staff with higher salaries and significant influence over day-to-day operations. If they take an extended block of leave all at once it can put pressure on the rest of the team. Fortunately, this risk is easier to manage with some strategic planning and the right approach.

Employee wellbeing and burnout

Beyond financial risk, employees who rarely take paid time off are more likely to experience burnout and reduced productivity. Higher turnover is another common side effect. Encouraging employees to take regular leave isn’t just good for them, it also benefits the business by keeping your balances and liability in check.

How you can reduce large leave balances compliantly

Keeping a close eye on annual leave accrual balances gives you more options and time to reduce them compliantly. It’s easier to manage large leave balances proactively, before they become a business risk. Here are some strategies you may be able to use, depending on your modern award:

• Encourage employees to take leave regularly. Build a workplace culture where employees feel comfortable booking time off, and leave with advance notice gives the team time to prepare to cover the absence.
• Allow employees to cash out leave. Employees may be able to cash out leave in lieu of taking time off, but only where a modern award or enterprise agreement permits it, and a minimum balance of four weeks must remain after any cash-out.
• Use excessive leave provisions. Once an employee’s balance exceeds eight weeks, many awards let you direct them to take leave, though you must confer with the employee first, you can’t reduce their balance below six weeks, and you generally give between 8 weeks’ and 12 months’ notice.
• Consider leave shutdown periods. If you have a shutdown clause, you can require all employees to take leave during a temporary closure, such as over the Christmas and New Year holiday period.

Manage leave with confidence in Xero

Xero helps you calculate annual leave accrual based on each team member’s employment type, hours, pay rate, and modern award. You can view each employee’s current leave balance and accrual rate right in your payroll software.

Leave liability forecasting and tracking can be especially useful at financial year end, if you’re trying to sell the business, or any time you need to monitor cash flow closely.

Get one month free

FAQs on annual leave accrual and liability

Here are answers to some frequently asked questions about annual leave accrual and liability in Australia.

How much annual leave accrues per 38-hour week?

Full-time employees accrue 2.923 hours of annual leave per 38-hour workweek. It works out to roughly one hour for every 13 hours worked. Over a full year, that adds up to 152 hours, or four weeks of paid leave.

Do casuals accrue annual leave?

No, casual employees do not get holiday leave accrual under the NES. Instead, employers pay casual staff 25% casual loading on top of their base hourly rate. This is to compensate for the lack of entitlements like paid annual leave, sick leave, notice of termination, or redundancy pay.

Does annual leave attract leave loading?

Whether annual leave attracts leave loading depends on your modern award or enterprise agreement. Leave loading of 17.5% is common in Australia but isn’t a universal entitlement. Check your relevant award, enterprise agreement, employee handbook, or contract to confirm whether it applies to your employees.

If it does apply, factor it into your leave liability on the balance sheet. Employees with large leave balances and leave loading entitlements represent a significantly bigger liability than base hours might suggest. They’re more expensive to resolve, which can affect your cash flow if you need to pay out leave or termination pay.

Do I include super in annual leave liability?

Yes, superannuation is payable on annual leave, so it should be a part of your annual leave liability valuation. Annual leave counts as OTE under the Superannuation Guarantee (SG). Excluding super from your liability calculation understates what you’ll actually owe. You can learn more in this superannuation compliance guide for small businesses.

Do employees accrue annual leave while on leave?

Yes, employees continue to accrue annual leave when they’re on paid leave. However, if they’re taking unpaid leave, they do not accrue further annual leave. This is worth keeping in mind when managing leave balances, as taking paid leave doesn’t reduce an employee’s annual leave accrual rate.