Cashing out annual leave means an employee is paid for some of their accrued annual leave instead of taking the time off. It's allowed in Australia when the employee's award or enterprise agreement permits it, or when an award and agreement-free employee agrees in writing, but the rules are strict: the employee must keep at least 4 weeks of annual leave afterwards, and there must be a separate signed agreement every time leave is cashed out.
Fair Work publishes a free template for that agreement. This guide covers when cashing out is allowed, what the agreement must say, how to pay and report it, and the mistakes that catch employers out. It's written for owners, managers and payroll officers.
This is general information, not legal or tax advice. Facts are as at November 2026. Check your award or agreement, and the Fair Work Ombudsman's page on cashing out annual leave, before you rely on them.
When can annual leave be cashed out?
Under the Fair Work Act, annual leave can only be cashed out in one of three ways. Which one applies depends on how the employee is covered.
| Employee is covered by | Can they cash out leave? | Extra limits |
|---|---|---|
| A modern award | Only if the award has a cashing out clause (most do) | Usually no more than 2 weeks in any 12 months |
| An enterprise agreement | Only if the agreement allows it | Whatever the agreement says, on top of the minimum rules |
| No award or agreement | Yes, by written agreement with the employer | The minimum rules below |
Not every award allows cashing out, so check the award first. If it's silent, the answer is no.
The rules that always apply
Whichever group the employee is in, Fair Work says:
- At least 4 weeks must be left. The employee's remaining annual leave balance can't drop below 4 weeks after the cash out.
- The agreement must be in writing. A conversation in the office isn't enough.
- Pay must match taking the leave. The payment must be at least what the employee would have been paid if they'd taken the leave, including annual leave loading where it applies.
- No pressure. An employer can't force or pressure an employee to cash out leave.
Extra rules under most awards
The model clause that the Fair Work Commission put into most modern awards in 2016 adds more:
- One agreement per cash out. Each cash out of a particular amount of leave needs its own agreement.
- What it must say. The agreement states the amount of leave being cashed out, the payment, and the date the payment will be made.
- Who signs. The employer and the employee sign it. If the employee is under 18, a parent or guardian signs too.
- A cap. No more than 2 weeks of annual leave can be cashed out in any 12 months.
- Keep a copy. The employer keeps the signed agreement with the employee's records.
Why a contract clause isn't enough
It's tempting to add a "set and forget" clause to employment contracts or a leave policy saying employees can cash out leave whenever they like. It doesn't work. The Act only allows cashing out under an award, an enterprise agreement or, for award and agreement-free employees, an agreement about a particular amount of leave. Under most awards, every cash out needs its own signed agreement with the amount, payment and payment date filled in.
So if an employee cashes out a week in March and another week in September, that's two agreements, each signed by both of you.
What's in the Fair Work template
The Fair Work Ombudsman's Agreement to cash out annual leave template follows the award model clause. It's one page with:
- The employee's name and the employer's name.
- A statement that you both agree to cash out a particular amount of accrued annual leave.
- The amount of leave, in hours or days.
- The payment amount, marked as before or after income tax.
- The payment date.
- The employee's signature and date.
- The employer representative's name, signature and date.
- A parent or guardian section, only if the employee is under 18.
You don't have to use the template, but it covers everything the award clause asks for. Check your award or agreement for any extra rules first.
How to pay and report cashed out leave
Work out the amount. Pay at least what the employee would have earned for the same leave, at their current rate. If they'd normally get annual leave loading (often 17.5% under awards), include it.
Withhold tax correctly. The ATO says that when a continuing employee is paid for unused leave, with or without leave loading, you work out the withholding using the tax table for back payments, commissions, bonuses and similar payments (Schedule 5), not the normal weekly or fortnightly table. Most payroll software has a "cash out annual leave" pay item that does this.
Report it through STP. In Single Touch Payroll Phase 2, cashed out annual leave and leave loading are reported as cash out of leave in service (paid leave type C).
Pay super on it. The ATO lists cashed out annual leave and leave loading paid during employment as ordinary time earnings, so super guarantee applies. Under payday super, it's paid with that pay run.
Update the balance. Deduct the hours from the employee's annual leave balance in payroll, and keep the signed agreement with their records. Employee records must be kept for 7 years.
Common mistakes
- No signed agreement. The employee asks, payroll processes it, and nobody signs anything.
- One agreement for many cash outs. A single form or contract clause covering future cash outs.
- Dropping below 4 weeks. Nobody checks the balance before agreeing.
- Going over the award cap. Two cash outs of 2 weeks each in the same 12 months.
- Leaving out leave loading. Paying base rate only when the award gives loading on leave.
- Taxing it like normal pay. Adding it to the regular pay instead of using Schedule 5.
- Pressure from the business. Suggesting cash outs to clear leave liabilities. If you need to reduce large leave balances, look at your award's excessive leave rules instead.
Cashing out vs leave in advance vs leave on termination
These three get mixed up:
| Cashing out | Leave in advance | Paid out on termination | |
|---|---|---|---|
| What happens | Paid for leave instead of taking it | Takes leave before it's accrued | Unused leave paid when they leave |
| Written agreement | Yes, every time | Yes, under most awards | No |
| Minimum balance | 4 weeks must remain | Not applicable | Not applicable |
| Super | Yes | Yes | No |
For more on leave requests, see our guides to annual leave in advance and the Fair Work leave application form.
How Canyou handles this
Canyou is employee onboarding software for Australian businesses, and the same workflows work for requests like this one. You set up a "Cash out annual leave" workflow once and employees start it themselves whenever they want to cash out leave:
- The employee says how many hours they'd like to cash out, and confirms it's their own choice.
- Payroll or an admin checks the balance, fills in the hours, payment and payment date on your agreement, and signs.
- The employee checks the figures and signs with Canyou's built-in e-sign.
Every request creates a new agreement, so you get one signed agreement per cash out automatically. The signed PDF is saved against the employee, can be emailed to both of you, and completion notifications let payroll know straight away.
Our help centre has the full setup: how to set up annual leave cash out agreements in Canyou.
Try for free (no credit card required), or Book a demo.
Sources (checked 3 November 2026): Fair Work Ombudsman, Cashing out annual leave and Agreement to cash out annual leave template; Fair Work Commission, cashing out of annual leave model term; ATO, Withholding from leave payments for continuing employees, STP Phase 2 reporting guidelines and What payments are qualifying earnings.
