Including annual leave loading in a base or “all‑inclusive” rate has become more legally delicate in light of the Woolworths supermarkets decision on pay periods and set‑off. That ruling reinforces that award entitlements must be satisfied in each pay period in which they fall due, not averaged or pooled across time. This has real implications when an employee on a loaded rate takes annual leave: if the amount actually paid for those leave weeks does not meet the award‑mandated leave plus loading outcome for that specific period, there will be an underpayment for those weeks.

The Woolworths principle: pay‑period by pay‑period

The key message from the supermarkets litigation is that monetary entitlements under modern awards and the NES accrue and become payable in the pay period in which the relevant work (or leave) occurs. Employers cannot treat overpayments in one period as a “buffer” that can be drawn down to offset underpayments in other periods. In practical terms:

• Each pay period must stand on its own; the employee must receive at least their full award entitlements for that cycle.
• Set‑off or “all‑inclusive” salary arrangements only work to the extent that, in that particular pay period, the amount paid is sufficient to discharge all award entitlements falling due in that period.
• Any shortfall in a given pay cycle is an underpayment, regardless of whether the employee’s total annual earnings are comfortably above award.

Annual leave and leave loading fit squarely within this framework. When an employee takes paid annual leave, the award‑defined entitlement to paid leave (including any loading or “higher of” comparison) falls due in the pay period in which the leave is taken. If the payment in that pay period is insufficient, the employer cannot rescue the situation by pointing to generous payments at other times of the year.

How annual leave loading normally works

Most modern awards that provide annual leave loading require that, when an employee takes annual leave:

• they are paid their base rate of pay for the ordinary hours they would have worked during the leave period; and
• they receive an additional percentage (commonly 17.5%), or, in some awards, the higher of 17.5% or the penalties that would have applied had they worked, across the whole leave period.

Two important features follow:

• The comparison for “higher of 17.5% or penalties” is made over the actual period of leave, not on a notional or averaged basis across the year.
• The obligation crystallises in the pay period when the leave is taken; that is when the full leave‑plus‑loading amount must be paid.

This structure sits awkwardly with any arrangement that simply assumes leave loading has been “built into” a higher hourly or salary rate, without verifying whether the amount actually paid for the leave period matches the award outcome.

When a loaded base rate causes underpayment

Employers commonly pay above‑award “loaded” rates that are said to compensate for a bundle of entitlements such as penalties, overtime and leave loading. After Woolworths, that approach is still possible, but it cannot operate on a “trust us, it’s all in there overall” basis. The test is what is actually paid in the period when the entitlement falls due.

Consider a typical scenario:

• The award minimum is $30 per hour.
• The employer pays an “all‑inclusive” $35 per hour, said to include penalties and 17.5% leave loading.
• When the employee takes two weeks’ annual leave, the employer continues to pay $35 per hour for their ordinary hours during those weeks.

On its face, $35 per hour exceeds the award base rate of $30 per hour. However, the award requires $30 per hour plus 17.5% loading (that is, $35.25 per hour) for the leave period, or potentially a higher figure if “higher of 17.5% or penalties” applies by reference to the employee’s usual working pattern over those two weeks. If the employee receives only $35 per hour, they are being paid less than the award‑mandated leave plus loading amount for that pay period. That gap is an underpayment for those two weeks.

Crucially:

• You cannot argue that the employee is still “better off overall” on an annual view because the $35 rate is generous in non‑leave weeks.
• You cannot net off higher earnings in busy penalty‑heavy periods against the shortfall during the leave period.
• The underpayment arises in the pay period covering the leave and must be identified and rectified in that period.

The same logic applies where an employee’s usual roster in the leave period would have attracted high penalties. If, under the award, the employee should receive the higher of 17.5% leave loading or those penalties, the employer must ensure that the amount actually paid for the leave weeks at least matches that “higher of” outcome. A flat loaded rate that might be adequate for “typical” weeks can easily fall short in weeks where the hypothetical penalty earnings would have been higher.

Structuring loaded rates safely after Woolworths

The supermarkets decision does not prohibit loaded rates or annualised remuneration models. It does, however, raise the compliance bar in three practical ways when it comes to annual leave and loading:

1. Model the award outcome for leave periods:
   Employers should model what an employee would be entitled to under the award for common leave scenarios—two weeks of leave on their usual roster pattern, extended leave over peak penalty periods, and so on. That model should calculate the award base pay plus the applicable leave loading or “higher of” figure over the entire leave period.
2. Test the loaded rate per pay period:
   The proposed loaded hourly rate or salary must then be tested against those scenarios on a pay‑period basis. For any period in which leave is taken, the amount actually paid for that period (not averaged across the year) must equal or exceed the award‑calculated leave plus loading.
3. Top‑ups where needed:
   If the modelling shows that the loaded rate is likely to fall short in particular situations—for example, when an employee with a heavily penalty‑loaded roster takes annual leave—the employer should either:
   • increase the underlying rate so that no shortfall arises in any pay period; or
   • pay a separate leave‑loading or penalty “top‑up” when leave is taken, to ensure the total for that pay period reaches the award outcome.

Payroll systems and processes become critical here. They must be capable of:

• identifying when annual leave is taken;
• calculating the award‑equivalent entitlement (base plus loading, and any “higher of” comparison) for that specific leave period based on the employee’s usual pattern; and
• flagging and automatically applying any necessary top‑up where the loaded rate does not get there on its own.

Key takeaway for employers

For employers who have historically treated annual leave loading as simply “included” in an above‑award base rate, the Woolworths decision serves as a warning. The law focuses on what the employee actually receives in the pay period when the leave is taken, not on the label attached to the rate or how the numbers wash out across the year. If, during a two‑week holiday, the employee’s payslip shows less than the award‑required leave plus loading for that period, there is an underpayment for those weeks—even if the employee’s annual earnings remain well above award.

In other words, “we’ve included the loading into the base rate” is no longer a safe answer on its own. Employers must be able to demonstrate, pay‑period by pay‑period, that annual leave and leave loading entitlements have been fully met whenever leave is taken, or face exposure to underpayment claims grounded in the reasoning of the Woolworths supermarkets ruling.