Are you paying your employees too much when it comes to annual leave loading and super contributions?

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Jul 26, 2019 | Posted in Business Advice, Human Resources Services
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Often I’m asked questions about annual leave loading 

Why are my staff paid more when they are on holidays than when they are at work?  
Is superannuation payable on annual leave loading? 
Why is annual leave loading considered to be ordinary time earnings? 

So what’s the science behind annual leave loading?

Overview of annual leave loading

Historically, many employees would regularly work overtime (more than 38 hours per week) and receive payment for overtime and penalty rates. As such, the employee received more pay each week than their ordinary base wage.

When an employee is on annual leave, they lose their ability to work overtime. The payment of 17.5% annual leave loading that is paid in addition to paid annual leave entitlements, provided the employee with some compensation while they were on annual leave and only paid their ordinary base wage.

What if employees are not required to work regular overtime?  Are employees still entitled to annual leave loading?

If annual leave loading is a provision of an award or an enterprise agreement, an employer must comply with the terms and conditions set out in the industrial instrument.

Likewise, if an employer pays its employees the minimum award rate of pay and annual leave loading is a provision of the award, then the employer must pay annual leave loading.

Some employers choose to pay their employees an above award rate of pay and off-set the payment of annual leave loading.  Other employers choose to continue to pay annual leave loading even though they pay their employees above the award. It’s considered an employee benefit.

Is annual leave loading a provision of the National Employment Standards (NES) or a modern Award?

Annual leave loading is not a provision of the NES. Most modern awards now provide for annual leave loading.  Although there are still a few awards that do not.  

Is annual leave loading classified as ordinary time earnings?  

The ATO has recently clarified that annual leave loading will be classified as ordinary time earnings unless an employer can prove otherwise.  This means annual leave loading is included when calculating superannuation contributions for employees.
This may impact on the superannuation contributions you are required to pay to your employees.   

When is annual leave loading not classified as ordinary time earnings? 

Annual leave loading would not be classified as ordinary time earnings, if the employer is able to demonstrate otherwise and provide written evidence that:
  • the employee regularly has the opportunity to work overtime and is paid penalty rates; and
  • due to the employee being on annual leave, the employee was paid annual leave loading to compensate for the lost opportunity for the employee to work overtime and to be paid penalty rates.

Do employers need to back pay superannuation contributions on annual leave loading for their employees before April 2019?

Due to all the uncertainty about annual leave loading, the ATO will not penalise an employer for making past assessments that annual leave loading payments were not ordinary time earnings.

For the quarter April – June 2019 and from 1 July 2019
What must employers do?   
  1. Check the relevant Award(s) or enterprise agreement.  Does it provide for employees to receive annual leave loading?
  2. Do your employees work overtime (and receive payment for overtime and penalties) on a regular basis?
  3. Obtain written evidence that payment of annual leave loading is to compensate for an employee’s lost ability to work overtime and paid penalty rates.  
If this evidence is not obtained, annual leave loading will be considered ordinary time earnings and superannuation contributions will need to be made on the annual leave loading payments to the employee.

Ulton is here to help

For further information about annual leave loading or if you have any questions about the payment of superannuation on annual leave loading, Christine Guy our Human Resources Consultant, is happy to talk with you. Call Christine on (07) 4154 0413.


References
ATO https://www.ato.gov.au/Business/Super-for-employers/How-much-to-pay/Checklist--salary-or-wages-and-ordinary-time-earnings/#awardsandagreements
Cooper Grace Ward Lawyers https://www.cgw.com.au/publication/ato-clarifies-its-position-for-employers-on-superannuation-and-annual-leave-loading/


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