An employee asks if they can cash out some of their accrued annual leave instead of taking time off. The answer depends entirely on whether their Modern Award or enterprise agreement allows it — because the National Employment Standards do not provide a standalone right to cash out leave. Getting this wrong means either granting an illegal arrangement or breaching the employee’s statutory rights.

This guide covers exactly when cashing out is permitted, the mandatory conditions that apply to every transaction, how to calculate the payment (including leave loading), and the mistakes that trigger Fair Work complaints.

When Cashing Out Is Allowed

Cashing out annual leave is only permitted if one of the following applies:

The employee’s Modern Award contains a cashing-out provision
The employee’s enterprise agreement contains a cashing-out provision
The employee is award-free and enters into a cashing-out agreement that meets the requirements of the Fair Work Regulations 2009

If none of these conditions apply, you cannot allow cashing out — even if both you and the employee want to do it. The NES alone does not give employers or employees the right to convert annual leave into a cash payment during employment.

Checking Your Award

Most Modern Awards that cover office-based and professional employees include a cashing-out clause. For example, the Clerks — Private Sector Award 2020 permits cashing out. But not all awards do — some industry-specific awards are silent on the matter, which means cashing out is not available to employees covered by those awards.

The first step is always to identify the correct Modern Award for the employee and check whether it includes a cashing-out term. Use the Fair Work Ombudsman’s Pay and Conditions Tool (PACT) at fairwork.gov.au to confirm.

The Four Mandatory Conditions

Every cashing-out arrangement must satisfy all four of these requirements under section 94 of the Fair Work Act. There are no exceptions.

1. Written Agreement for Each Cash-Out

You need a separate written agreement for each instance of cashing out. A standing or blanket agreement that covers multiple cash-outs is not sufficient.

The agreement must be signed by both the employer and the employee. It must specify:

The amount of annual leave being cashed out (in hours or weeks)
The payment amount
The date of payment

Verbal agreements are not valid. An email exchange is not sufficient unless it constitutes a clear written agreement signed by both parties.

2. Minimum 4-Week Balance Retained

After cashing out, the employee must retain a balance of at least 4 weeks of accrued annual leave. This means:

The employee can only cash out leave if their current balance exceeds 4 weeks
The cash-out amount is limited to the surplus above 4 weeks
For a shift worker entitled to 5 weeks per year, the minimum retained balance is still 4 weeks under most awards (check the specific award — some set a higher threshold)

Example: an employee has 7 weeks of accrued annual leave. They can cash out a maximum of 3 weeks, leaving 4 weeks in their balance.

3. Payment at Full Rate Including Leave Loading

The employee must be paid at least the full amount they would have received if they had taken the leave. This includes:

Base rate of pay for the hours being cashed out
Leave loading (17.5%) if the applicable award or agreement requires it

Do not pay the cash-out at a discount. Do not exclude leave loading if the award requires it. Paying less than the full rate constitutes underpayment.

4. Genuinely Voluntary

The cash-out must be a genuine, voluntary decision by the employee. You cannot:

Make cashing out a condition of employment
Pressure an employee into cashing out
Offer cashing out as the only option when the employee has requested to take leave
Include cashing out as a term in a new employment contract that the employee must accept

If the employee requests to take leave and you refuse but offer cashing out instead, that is likely to be considered coercive and may breach the Fair Work Act.

Frequency Limits

Most Modern Awards specify that an employee can cash out a maximum of 2 weeks of annual leave in any 12-month period. This limit applies regardless of how much leave the employee has accrued above the 4-week minimum.

For award-free employees, there is no specific frequency limit in the Fair Work Regulations, but the 4-week minimum balance rule still applies.

Check the specific award — the limit may be expressed differently. Some awards say “fortnightly” (2 weeks), some say “no more than the employee accrues in a 12-month period” (which is 4 weeks, but the 4-week minimum balance means only the surplus is accessible).

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How to Calculate the Payment

The payment calculation must include leave loading where applicable.

Step-by-Step Calculation

Determine the hours to be cashed out
Calculate the base rate: hours x hourly base rate of pay
Calculate leave loading: base rate amount x 17.5% (if award requires it)
Total payment: base rate amount + leave loading

Worked Example

Employee details:

Hourly base rate: $40/hour
Annual leave balance before cash-out: 6 weeks (228 hours)
Amount to cash out: 2 weeks (76 hours)
Leave loading applies: 17.5%

Calculation:

Base payment: 76 hours x $40 = $3,040
Leave loading: $3,040 x 17.5% = $532
Total cash-out payment: $3,572
Remaining balance: 4 weeks (152 hours)

Process Checklist for Each Cash-Out

Confirm the award or agreement allows cashing out
Verify the employee’s current annual leave balance
Confirm the balance exceeds 4 weeks after the proposed cash-out
Confirm the amount does not exceed 2 weeks (or the award-specific limit) in the current 12-month period
Draft a written agreement specifying the hours and payment amount
Both employer and employee sign the agreement
Calculate payment including leave loading
Process payment via payroll
Update the employee’s leave balance
File the written agreement with employee records (retain for 7 years)

Common Mistakes

1. Cashing Out Without Checking the Award

Not every award permits cashing out. Assuming it does because a colleague’s award allows it is not sufficient — each employee’s entitlement depends on their specific award classification.

2. Using a Blanket Agreement

A single agreement that covers multiple future cash-outs does not meet the statutory requirement. Each cash-out needs its own separate, signed, written agreement.

3. Letting the Balance Drop Below 4 Weeks

This is a clear breach of the Fair Work Act. If an employee has 5 weeks and you cash out 2 weeks, their balance drops to 3 weeks — which is below the 4-week minimum. In this case, you can only cash out 1 week.

4. Forgetting Leave Loading

If the applicable award or agreement requires leave loading on annual leave, it must also be paid on cashed-out leave. This is one of the most commonly missed items and it constitutes underpayment.

5. Cashing Out Instead of Directing Leave

Some employers prefer to cash out excessive annual leave rather than directing the employee to take it. These are different mechanisms. Cashing out requires the employee’s voluntary agreement and is subject to frequency limits. Direction to take leave is an employer-initiated process with its own rules. Use the correct mechanism for the situation.

6. Not Retaining the Written Agreement

Written agreements must be kept as part of the employee’s records for at least 7 years under the Fair Work Act. If a Fair Work inspector requests evidence and you cannot produce it, the reverse onus applies — you may be required to prove the cash-out was lawful.

Cashing Out vs Termination Payout

These are different processes with different rules:

Feature	Cashing Out (During Employment)	Termination Payout
Requirement	Must be permitted by award/agreement	Mandatory for all employees
Minimum balance	4 weeks must remain	No minimum — entire balance paid out
Written agreement	Required for each instance	Not required
Employee consent	Must be voluntary	Not required — automatic on termination
Frequency limit	Typically 2 weeks per 12 months	No limit — one-time payout
Leave loading	Included if award requires	Included if award requires

When employment ends, the separate cashing-out rules no longer apply. The termination payout rules under section 90 of the Fair Work Act take over, and the entire accrued balance must be paid out.

For detailed guidance on termination payouts, see our guide to leave payout on termination in Australia.

Leave Balance Helps

Leave Balance tracks annual leave balances in real time, so you always know whether an employee has enough accrued leave to cash out while retaining the 4-week minimum. The system enforces the rules — preventing cash-outs that would drop the balance below the threshold — and calculates payments including leave loading at AUD $29/month flat for unlimited employees.

Requests and approvals happen in Slack or Microsoft Teams. Records are retained digitally, meeting the Fair Work Act’s 7-year requirement. For more on annual leave rules, see our complete guide to annual leave entitlements and our guide to leave loading calculations.