Cashing out sick leave in Australia, what employers can and can't do

An employee with a healthy sick leave balance asks whether they can be paid it out instead of taking time off. It is a common request, and for most Australian employers the answer remains no. But the simple line that still appears in many online guides, that cashing out sick leave is always prohibited, is no longer the whole story. The National Employment Standards (NES) in the Fair Work Act 2009 (Cth) now contain a narrow and conditional mechanism under which paid personal/carer's leave can be cashed out, but only where a modern award or enterprise agreement includes the right cashing-out terms.

The distinction matters to an SME. Pay out sick leave without a lawful basis and you expose the business to underpayment claims, Fair Work Ombudsman (FWO) attention and court-ordered penalties. Refuse a cash-out that your award or agreement actually permits, and you may be denying an entitlement you have agreed to provide. This guide sets out who the rules apply to, the six duties they impose on employers, what happens if you breach them, and a compliance checklist you can put to use immediately.

Who these obligations apply to

The duties come from the NES in Part 2-2 of the Fair Work Act, which binds national system employers. In practice that means virtually every private-sector business in Australia that employs staff, with limited state-system exceptions, principally unincorporated businesses in Western Australia. Even where a modern award, enterprise agreement or contract covers your employees, the NES remains the floor that nothing can go below.

Within that framework, paid personal/carer's leave operates differently across employment types:

• Full-time employees: accrue 10 days of paid personal/carer's leave for each year of service.
• Part-time employees: accrue the entitlement on a pro rata basis, calculated by reference to their ordinary hours of work.
• Casual employees: do not accrue paid personal/carer's leave under the NES, but can take unpaid carer's leave in some circumstances, covered below.

The obligations tend to bite at predictable moments: when an employee asks to cash out leave, when you are tempted to clear large year-end balances, when someone resigns with a substantial accrued balance, and whenever your payroll system touches leave entitlements.

Duty 1: Accrue and pay personal/carer's leave correctly

The starting duty is to get the accrual itself right. Under s 96 of the Fair Work Act, full-time employees accrue 10 days of paid personal/carer's leave for each year of service, part-time employees accrue on a pro rata basis, and the entitlement accrues progressively according to ordinary hours of work and accumulates from year to year. There is no "use it or lose it" rule: balances carry over, which is why long-serving staff can accumulate substantial amounts.

When an employee does take paid personal/carer's leave, s 99 requires payment at the employee's base rate of pay for their ordinary hours of work in the period. That is also the rate against which any lawful cash-out must be measured, because the cashing-out rules require the employee to be paid at least the full amount they would have received had they taken the leave.

Two payroll mistakes commonly follow. The first is calculating leave at the wrong rate, such as a loaded or averaged rate when the base rate applies. The second is getting accrual timing wrong, whether by pausing accrual that should continue or continuing to accrue during long unpaid leave. Because accrual is tied to ordinary hours of work, extended periods where no ordinary hours are worked generally do not add to the balance. If that matters for your workforce, confirm the position in the applicable award or agreement and keep payroll consistent with it.

Duty 2: Don't cash out leave unless your award or agreement allows it

This is the core duty, and the one where the law has moved. Section 100 of the Fair Work Act provides that paid personal/carer's leave must not be cashed out except in accordance with permitted cashing-out terms. Section 101 then sets out what those terms look like: a modern award or an enterprise agreement may include terms providing for the cashing out of paid personal/carer's leave, and any such terms must require three things:

• the employee's remaining accrued personal/carer's leave must not fall below 15 days as a result of the cash-out;
• each cash-out of a particular amount must be by a separate agreement in writing between employer and employee; and
• the employee must be paid at least the full amount that would have been payable had they taken the leave.

In practice, the Fair Work Ombudsman reports that most modern awards do not allow sick and carer's leave to be cashed out, and that only two modern awards currently do. Employees covered by a registered enterprise agreement can cash out sick leave only if their agreement includes a cashing-out term. For award or agreement free employees there is no mechanism at all: unlike annual leave, which has its own cash-out framework, no standalone route exists for personal/carer's leave.

Three consequences follow. First, mutual agreement between you and an employee is not enough on its own. Second, a contract clause cannot create the right, because the NES are minimum standards that cannot be contracted out of. Third, the annual leave rules are a different regime: cashing out annual leave under ss 93 and 94 has its own conditions, including a four-week remaining balance floor, and the two sets of rules should never be conflated in your policies or payroll.

Duty 3: Don't pay out unused personal/carer's leave on termination

Employees frequently assume that accrued sick leave is paid out when they resign or are dismissed, the same way annual leave is. It is not. The NES requires payment for untaken annual leave when employment ends under s 90(2), but there is no equivalent provision for personal/carer's leave. Unused sick leave does not have to be paid out, and in most cases it is not.

The risk usually sits in the final pay calculation. Payroll systems and template letters sometimes add a sick leave component to termination pay by default, or a business agrees to "look after" a departing employee by paying the balance. Both approaches can produce an unauthorised payment that is hard to recover, and the second is effectively an unlawful cash-out dressed up as a gesture. Before finalising any termination payment, confirm what your award or agreement actually requires, and treat annual leave and personal/carer's leave as entirely separate line items.

Duty 4: Don't use deductions or payroll workarounds

A related temptation is to treat a cash-out as a deduction, an offset or a reallocation in payroll so the ledger balances. The Fair Work Act regulates deductions tightly. Under s 324, an employer may deduct from an amount payable to an employee only where the deduction is authorised in writing by the employee and is principally for the employee's benefit, or is authorised under an enterprise agreement, a modern award, an FWC order or a law. A deduction designed to simulate a sick leave cash-out fits none of those categories, and the underlying payment obligation remains in full.

The safer approach is to configure payroll so that a cash-out can only ever be processed where your award or agreement contains a cashing-out term, and only with the required written agreement on file. If a payroll issue surfaces, resolve it before paying rather than reverse-engineering a workaround afterwards.

Duty 5: Apply notice and evidence requirements consistently

Personal/carer's leave is not an honour system, and the NES gives you tools to keep it honest, provided you apply them consistently. Section 107 requires the employee to give notice of the leave as soon as practicable, which may be after the leave has started, and to give evidence that would satisfy a reasonable person that the leave is taken for a permitted reason, such as being unfit for work or caring for an ill family member. A medical certificate is the obvious example, but the test is reasonableness, not a fixed document list.

Consistency is where employers most often stumble. Asking one team for a certificate for every absence while never asking another invites disputes and discrimination complaints. Set the evidence expectation in your leave policy, apply it across the business, and record what you asked for and received. The same logic applies to cash-outs: if your award or agreement allows them, apply the written agreement and balance-checking requirements to every request without exception.

Duty 6: Give casuals their unpaid carer's leave

Casual employees do not accrue paid personal/carer's leave under the NES, so cash-out questions should not arise for them at all. But casuals do have a separate entitlement that is often overlooked: unpaid carer's leave. Under ss 102 and 103, any employee, including a casual, can take up to two days of unpaid carer's leave for each permissible occasion, meaning each time a member of their immediate family or household needs care or support because of illness, injury or an unexpected emergency. The leave can be taken as a single continuous period of up to two days, or in separate periods if you agree. A casual cannot take unpaid carer's leave during a period when they could instead take paid personal/carer's leave, which simply reflects that no paid balance exists for them.

Consequences of getting it wrong

The Fair Work Ombudsman enforces the NES, and cashing out sick leave without a lawful basis is the kind of issue that surfaces in audits and employee complaints. The FWO can investigate, issue compliance notices, accept enforceable undertakings and commence proceedings in court seeking civil penalties and orders for back-pay. Civil penalties for NES contraventions are set at levels intended to deter, and deliberate or repeated conduct attracts the highest exposure. Employees can also recover unpaid amounts themselves, including through the small claims procedure in the Federal Circuit and Family Court of Australia, which is designed to be quick and inexpensive for the employee.

The reputational cost can outrun the legal one. An underpayment finding or a regulator-issued notice is public, and it is increasingly scrutinised by current and prospective employees. For a small business, a single complaint about a sick leave cash-out can trigger a broader payroll review that uncovers other issues.

Compliance checklist

Work through these items before processing any cash-out, final pay or payroll change:

• Check your award or agreement: search it for a cashing-out term before agreeing to any request; most awards do not contain one.
• Never rely on mutual agreement alone: a cash-out is lawful only where the award or agreement provides for it and every condition is met.
• Keep the 15-day floor: no cash-out may leave the employee with less than 15 days of accrued personal/carer's leave.
• Use a separate written agreement each time: keep signed copies on file for every cash-out.
• Pay the full amount: at least what the employee would have received had they taken the leave, at the base rate for ordinary hours.
• Don't pay out on termination: keep annual leave and personal/carer's leave separate in every final pay.
• Configure payroll: prevent cash-out processing unless an award or agreement term exists and the paperwork is complete.
• Apply notice and evidence rules consistently: document your policy and your requests.
• Keep records: accruals, approvals, evidence, cash-out agreements and communications, for the periods the Fair Work Regulations require.

Where a lawyer can help

The questions this area raises are usually short and specific: does my award contain a cashing-out term, and if not, can my enterprise agreement be varied to add one? Is this termination payout compliant? Did that payroll adjustment breach the deductions rules? An employment lawyer can review your award and agreement coverage, draft a cashing-out clause for a future agreement or the written agreement template each cash-out requires, audit a payroll or final-pay calculation, and respond if the FWO comes knocking. The cost of a quick review is modest next to the penalty and back-pay exposure of getting a cash-out wrong, particularly where the error is only discovered years later.

The misunderstanding that costs employers most

The belief that a signed agreement with the employee makes a sick leave cash-out lawful is the misunderstanding that costs employers most in this area. It does not. The written agreement is only one of three conditions, and the entire mechanism has to come from the award or agreement in the first place. A business that pays out sick leave on the strength of a handshake, an email or a contract clause has made an unlawful payment, whatever the employee signed.

The first action to take this week is to pull up the award or agreement that covers your workforce and search it for a personal/carer's leave cashing-out clause. If it is not there, tell payroll that no sick leave cash-out is ever to be processed, and treat any request as a conversation about alternatives: unpaid personal leave once the paid balance is exhausted, annual leave where appropriate, or flexible arrangements. If the clause is there, make sure the separate written agreement, the 15-day floor and the full payment are all in place before a cent moves. That check takes ten minutes, and it is the difference between a lawful request and an underpayment.