When an employee calls in sick, the leave they use seems like a small payroll detail. But the choice between paid personal/carer's leave and annual leave carries real compliance weight, and it becomes far more consequential the moment an employee runs out of sick leave, gets ill while on holiday, or resigns with a negative leave balance.
The short answer to the common question is that annual leave can be used for a sickness absence in limited situations, but it is never a lawful default. The two entitlements sit in different parts of the National Employment Standards (NES) in the Fair Work Act 2009 (Cth) (the FW Act), are triggered by different events, and attract different notice, evidence, payment and record-keeping rules. This article walks through how the two entitlements actually interact, the three situations in which annual leave can legitimately appear in a sickness absence, and where employers most often trip up.
The two entitlements and the rule that governs them
Full-time and part-time employees (casual employees are treated differently, below) accrue two separate paid leave entitlements under the NES:
- Paid annual leave: 4 weeks per year of service, or 5 weeks for shiftworkers covered by an award or enterprise agreement that defines them as such. It accrues progressively during the year of service under s 87 of the FW Act.
- Paid personal/carer's leave (sick leave): 10 days per year of service, accruing progressively according to ordinary hours of work and accumulating from year to year under s 96.
The two leaves exist for different purposes. Annual leave is rest and recreation, taken for a period agreed between the employer and employee, and the employer must not unreasonably refuse a request to take it (s 88). Paid personal/carer's leave is a safety net: an employee may take it when they are not fit for work because of a personal illness or injury, or to care for or support an immediate family or household member who is ill, injured or affected by an unexpected emergency (s 97).
Because both entitlements are part of the NES, they are minimum standards that an employment contract, modern award or enterprise agreement cannot exclude or undercut (ss 55 and 56 of the FW Act). An award or agreement can add to them, but it cannot remove them. That matters here because it means an employer cannot contract its way out of the distinction between the two leave types, no matter how the parties describe the arrangement in practice.
Who does what when leave is requested
Three actors carry the rules in practice, and their interests do not always align:
- The employee: decides whether to take leave, must give notice of the leave, and must provide evidence of the reason for it if the employer asks.
- The employer: approves annual leave requests (and must not unreasonably refuse them), can require evidence for personal leave, and must record leave taken and leave balances accurately.
- The award or enterprise agreement: where one applies, it may add specific rules on evidence, cashing out, leave in advance and directions to take annual leave.
The tension is usually between an employee who wants to protect a leave balance and an employer who wants consistent, defensible treatment across the team. Both can be accommodated, but only with a documented process, which is where most of the practical risk sits.
The default when an employee is sick: paid personal leave
When an employee is genuinely unfit for work due to illness or injury and has paid personal/carer's leave available, the usual and safest outcome is to record the absence as personal leave. Two conditions attach to that entitlement, and both come from s 107 of the FW Act:
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Notice: The employee must give notice of the leave as soon as practicable, which may be a time after the leave has started, and must advise the employer of the period, or expected period, of the leave. The Fair Work Ombudsman (FWO) describes this as letting the employer know as soon as possible, including the expected length of the absence.
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Evidence: If the employer requires it, the employee must give evidence that would satisfy a reasonable person that the leave is taken for a reason in s 97. The FWO's guidance on notice and medical certificates confirms that an employer can ask for evidence for as little as one day off work, that medical certificates and statutory declarations are common acceptable forms of evidence, and that an employee who does not provide evidence when asked may not be entitled to be paid for the leave. An award or registered agreement can specify when evidence is required and what type, provided the requirement is reasonable.
This is the frame for everything that follows: if the absence is a genuine illness and the employee meets the notice and evidence requirements, the entitlement is to paid personal leave. Annual leave should not be substituted into that picture unless one of the situations below applies.
The three situations where annual leave can come into the picture
A sick employee who wants to preserve their personal leave
An employee may ask to use annual leave for a sick day even though they still have personal leave available, usually to keep their sick leave balance for future illness or caring responsibilities. The NES does not require an employer to agree to this, and it does not prohibit it either: annual leave is taken for a period agreed between the employer and employee under s 88, so the substitution is possible by agreement.
The discipline required is that the choice must genuinely be the employee's. Directing or pressuring an employee to burn annual leave instead of accessing their paid personal leave entitlement is not something an employer should do. It also carries general protections risk: s 340 of the FW Act makes it unlawful to take adverse action against an employee because they have exercised a workplace right, which includes taking leave. Where the substitution is the employee's request, record the request and your written approval, and note that the notice and evidence requirements for the underlying absence still apply.
One further point worth understanding before agreeing: untaken personal/carer's leave has no payout value. Unlike untaken annual leave, which must be paid out when employment ends under s 90(2) of the FW Act, untaken personal/carer's leave simply lapses under the NES. An employee who saves sick leave "just in case" is not building a termination benefit, which is context worth having when an employee asks to preserve their balance.
An employee who has run out of personal leave
When paid personal leave is exhausted, an employer has a genuine decision to make. The options are:
- Annual leave, if the employee requests it and you approve it: This is an agreement under s 88, and you should check the employee's balance first, including whether any leave is already booked.
- Unpaid leave: The NES does not create a general right to unpaid sick leave for an employee's own illness; unpaid time off in that situation is a matter of agreement or an award or enterprise agreement term. Note that unpaid carer's leave of 2 days per occasion is a separate NES entitlement, but it exists only for caring for a family or household member, not for the employee's own illness (s 102).
- Long service leave: in some circumstances, where the employee has accrued the entitlement under the relevant state or territory legislation.
- Award or enterprise agreement provisions: which may deal with what happens when personal leave runs out.
The operational risk in this scenario is inconsistency. Approving annual leave for one employee's exhausted-balance illness while refusing another without a documented reason invites complaints and, at the extreme, allegations of unfair treatment linked to illness. Decide the general position, write it down, and apply it across the business.
An employee who gets sick while on annual leave
This is the situation with the clearest statutory footing, and it commonly surfaces around Christmas shutdowns and peak leave periods. The FWO's guidance is that an employee who is sick or injured while on annual leave can use their paid sick leave instead of their annual leave: the days are deducted from the personal/carer's leave balance and the annual leave is re-credited.
The mechanism still runs through the notice and evidence requirements in s 107. The employee needs to let you know as soon as practicable and provide evidence that would satisfy a reasonable person they were unfit during the relevant period, if you ask for it. Because the re-crediting depends on the illness being genuine and documented, this is exactly the situation where a clear evidence requirement, applied consistently, prevents later dispute.
Where the traps sit
Most compliance problems in this area come from habits, not intent. These are the patterns that cost employers:
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Treating annual leave as the default sick leave: If sick days are routinely recorded as annual leave without a genuine employee request, the employee's annual leave balance erodes for no agreed reason, payslips and balances become wrong, and the NES minimum entitlement to paid personal leave is quietly bypassed. Record the genuine request, or record it as personal leave.
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Inconsistent approvals: Verbal approvals through Slack or email, handled differently by different managers, create precedents the business did not intend. When the same situation produces different outcomes, complaints and cultural friction follow, and an adverse action or discrimination allegation becomes easier to run.
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Disputed evidence and re-crediting: Where annual leave has been converted to personal leave because of illness during leave, the dispute is usually about whether the illness was real and whether evidence was required. Get the evidence at the time, in writing, and apply the same standard to everyone.
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Annual leave in advance and final-pay deductions: Some awards and registered agreements allow annual leave in advance under a written agreement signed by both parties, with a parent or guardian's signature required for employees under 18. If the employee resigns before accruing the leave back, the employer can only deduct the negative balance from final pay in the limited ways permitted by s 324 of the FW Act: a deduction authorised in writing by the employee that is principally for their benefit, or one authorised by an enterprise agreement, a modern award, an FWC order or a law. This is a sensitive area, and a blanket policy on deducting negative balances should be checked before it is implemented.
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Cashing out and directions to take annual leave: Annual leave can only be cashed out where an award or enterprise agreement permits it, or, for award and agreement-free employees, by a separate written agreement for each cashing out, and in all cases at least 4 weeks of accrued leave must be retained (ss 93 and 94). Similarly, an employer can only direct an employee to take annual leave where the award or agreement allows it and the direction is reasonable, or, for award and agreement-free employees, where the requirement is reasonable, for example an excessive leave balance or a temporary business shutdown.
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Record-keeping: Under reg 3.36 of the Fair Work Regulations 2009 (Cth), an employer must make and keep a record of any leave the employee takes and the balance of the entitlement from time to time, and these records must be kept for 7 years. Getting the leave category wrong in payroll produces wrong balances, wrong payslips and an inaccurate final-pay calculation, which is where underpayment claims tend to start.
When to bring in a lawyer
The points in this article cover the NES baseline, but awards and enterprise agreements routinely add layers on top of it, and the facts of each workplace differ. Professional help is usually worth it at four points:
- Drafting a leave policy: so the request process, evidence requirements and sick-during-leave rules are written down and match how the business actually operates.
- Checking award or agreement interaction: before treating leave as one-size-fits-all across different roles or states.
- Designing a final-pay and negative-balance approach: before implementing any deduction from final pay.
- Responding to a dispute: including a Fair Work claim, an adverse action allegation, or an underpayment audit, where the records you kept become the evidence.
A lawyer's practical role is to turn the NES rules and the applicable award terms into a process that produces consistent, documented outcomes, and to check the specific decisions that carry financial risk, such as deductions from final pay or directions to take leave.
The re-crediting call when an employee is sick
If there is one decision that concentrates the risk in this area, it is the re-crediting call: when an employee is sick during annual leave, whether you accept the illness and re-credit the days, and what evidence you required before doing so. Get that call right, with a written evidence requirement applied consistently, and the annual leave balance, the personal leave balance and the final-pay calculation all follow correctly. Get it wrong, and you face a dispute over balances that reaches back through months of records.
The same discipline protects the other situations: a genuine, documented employee request before annual leave is used for sickness, and a consistent written position when personal leave is exhausted. None of this requires elaborate forms or expensive systems. It requires a short written policy, an evidence standard you apply to everyone, and payroll records that match the agreement. For the decisions that carry money risk, particularly negative balances and final-pay deductions, a quick check with an employment lawyer before you implement the policy is far cheaper than unpicking it after a claim.