No. In Australia, paid annual leave accrues on your ordinary hours of work only, so overtime hours do not build up extra annual leave. The Fair Work Ombudsman is unambiguous: an employee’s entitlement accumulates based on the number of ordinary hours they work, and it does not accrue on overtime — including overtime worked under an averaging arrangement.
That single rule gets tangled with two other questions almost every time it comes up. Overtime and accrual is one thing. What you’re paid while on leave is a second thing. The 17.5% annual leave loading is a third. Confusing them is the most common way an annual leave payment goes wrong in Australian payroll.
Key Takeaways
- Annual leave accrues on ordinary hours only. Overtime hours add pay, not leave balance.
- “Ordinary hours” is defined by your award, agreement or contract — it is not automatically 38 a week.
- Annual leave is paid at your base rate of pay for ordinary hours, which excludes overtime, penalties, allowances and bonuses unless the award says otherwise.
- The 17.5% annual leave loading is a separate award entitlement layered on top. It is not in the National Employment Standards.
The A-P-L Test: Three Questions, Not One
Before touching a payroll setting, split the problem into three ordered questions. We call it the A-P-L test, and running it in order stops nearly every overtime-and-leave error.
| Layer | Question | Governed by |
|---|---|---|
| A — Accrual | How many leave hours did this person earn? | NES: ordinary hours only |
| P — Payment | What rate is a leave hour paid at? | NES: base rate for ordinary hours |
| L — Loading | Is an extra percentage owed on top? | The modern award or agreement |
Overtime only ever affects layer A by not being in it. Shift loadings sit in layer P. The 17.5% sits in layer L. Once they’re separated, the arithmetic is easy.
Layer A: Why Overtime Doesn’t Accrue Annual Leave
Section 87 of the Fair Work Act 2009 gives full-time and part-time employees four weeks of paid annual leave, accruing progressively during a year of service according to the employee’s ordinary hours of work.
Overtime, by definition, is work outside ordinary hours. So it falls outside the accrual base. Work 45 hours in a week where your ordinary hours are 38, and you accrue leave on 38.
Two consequences follow that people miss:
- A big overtime year does not grow your leave balance. It grows your income. The two are decoupled by design.
- Averaging arrangements don’t change this. Where an award averages ordinary hours over a roster cycle, the FWO’s guidance is that annual leave still doesn’t accrue on the overtime portion of those hours.
The “ordinary hours” trap
Here’s the nuance that catches employers out. “Ordinary hours” is not a synonym for 38. It’s whatever your award, enterprise agreement or contract of employment defines as ordinary hours.
Several awards set ordinary hours at up to 40 in a week, or average them across a cycle so a 12-hour rostered shift is entirely ordinary time. In those workplaces, hours 39 and 40 are ordinary hours, and they do accrue annual leave — even though a payroll system configured to a flat 38 would treat them as overtime and accrue nothing.
Getting this wrong under-accrues leave for exactly the shift-heavy workforces where balances matter most. Check the hours-of-work clause in the award before you trust the default.
Layer P: What You’re Actually Paid While on Leave
Under the NES, paid annual leave is paid at your base rate of pay for the ordinary hours you would have worked. The Fair Work Ombudsman’s guidance on payment for annual leave confirms the base rate excludes overtime, penalty rates, allowances, bonuses and incentive-based payments.
This is the floor, not the ceiling. An award or agreement can require more, and for shift workers it very often does.
Many awards contain a “greater of” clause: the employee taking annual leave receives whichever is higher — the 17.5% loading, or the shift and weekend penalties they would have earned had they worked those rostered shifts. That clause exists precisely because a night-shift worker on base rate during leave would take an effective pay cut for going on holiday.
Layer L: The 17.5% Annual Leave Loading
Annual leave loading is an extra 17.5% on top of your annual leave payment. It is not part of the National Employment Standards. It comes from your modern award, enterprise agreement or contract, and it appears in the majority of Australia’s modern awards (Fair Work Ombudsman: calculating annual leave loading).
Three rules govern it:
- It’s calculated on the base rate, not on gross earnings. Overtime you happened to work last month is not in the calculation base.
- Awards differ on what “base rate” means — some tie loading to the award minimum rate, others to your actual (possibly above-award) base rate. Read the clause.
- Most awards require it to be paid out on termination along with your unused annual leave. Some don’t, and a few only require it where the employer ended the employment.
Our annual leave loading calculation guide walks through the payout mechanics in more detail.
Worked Example: Same Overtime, Three Different Answers
Dani is a full-time maintenance technician. Ordinary hours 38 a week, base rate $36.00/hour. Over a 12-month period she works 190 hours of overtime, some of it Sunday shifts attracting penalty rates. She then takes one week of annual leave.
A — Accrual. She accrues on 38 ordinary hours a week, not on the 190 overtime hours.
- 38 × 4 weeks = 152 hours of annual leave for the year. The overtime adds zero hours.
P — Payment. One week of leave = 38 hours at her base rate.
- 38 × $36.00 = $1,368.00. Her Sunday penalties don’t travel with her onto leave under the NES floor.
L — Loading. Her award pays the greater of 17.5% loading or the shift penalties she’d have earned that week.
- 17.5% option: $1,368.00 × 0.175 = $239.40, giving $1,607.40.
- Penalties option: had she worked, that week’s rostered penalties would have added $205.00, giving $1,573.00.
- The greater-of clause pays her the loading: $1,607.40.
Change one fact — make her rostered week a heavy weekend block worth $310 in penalties — and the same clause pays $1,678.00 instead. The overtime she worked across the year never enters any of the three calculations.
Frequently Asked Questions
Do I accrue annual leave on time off in lieu?
TOIL is time you take instead of being paid overtime. The underlying hours are still overtime hours, so they don’t accrue annual leave. When you actually take the TOIL, check your award — some treat it as paid time that continues normal accrual, others don’t.
Does annual leave accrue while I’m on annual leave?
Yes. Annual leave accrues during paid leave, including while you’re taking annual leave itself and during paid personal/carer’s leave. It does not accrue during unpaid leave or unpaid parental leave.
Do shift workers accrue leave differently?
The accrual base is the same — ordinary hours — but eligible shiftworkers get five weeks instead of four under the NES. Our guide to shift worker leave entitlements in Australia covers who qualifies.
Does overtime count toward my leave payout on termination?
No. Your payout is your unused accrued hours at your base rate, plus loading if your award requires it. Overtime earnings across your employment don’t change either figure. See leave payout on termination in Australia for the full calculation.
What This Means for You
Audit one thing this week: how your payroll or leave system defines ordinary hours. If it’s hard-coded to 38 and your award averages hours across a roster cycle, you are almost certainly under-accruing leave for your shift staff — and under Australia’s wage theft provisions, sustained under-accrual is not a rounding error.
Leave Balance accrues annual leave against each employee’s configured ordinary hours rather than a fixed weekly default, so overtime stays out of the balance and averaged rosters stay in it.
This article is general information, not legal advice. Check the modern award or enterprise agreement that applies to your workplace, or get advice from an employment lawyer.
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