- The payroll question hiding inside every leave balance
- Who runs the accrual system
- The NES baseline: what accrues, and at what rate
- The master switch: what counts as "service"
- Paid leave: the accrual clock keeps running
- Unpaid leave: when the clock pauses, and the one exception
- Parental leave: where two systems meet
- Public holidays that fall inside leave
- Long service leave and workers compensation: the state-based tail
- Where a lawyer earns their fee
- The excluded-period list is the whole game
The payroll question hiding inside every leave balance
Every payroll system quietly answers a question most employers never consciously ask: does an employee's leave balance keep growing while they are away from work? Most systems are set to accrue leave automatically, week by week, so whatever you have configured runs in the background until a long absence, a resignation, or a Fair Work Ombudsman inquiry forces the issue.
The short version of the answer is that it depends on the type of absence, and specifically on whether the time away counts as "service" under the Fair Work Act 2009 (Cth). Paid leave generally counts as service, so balances keep accruing. Most unpaid leave does not count, so accrual pauses. And there are two exceptions that catch employers out: unpaid community service leave still counts as service, and government parental leave payments do not turn unpaid parental leave into paid leave from your side of the ledger.
This article walks through how the accrual system actually operates: the baseline entitlements, the definition of service that controls everything, how each leave type behaves, and the edge cases where payroll settings quietly drift out of line with the law.
Who runs the accrual system
Three parties and two sets of rules keep the system moving:
- The employer and the payroll system: you carry the obligation to pay the right entitlements, and your payroll configuration decides in practice whether accrual runs or pauses during an absence.
- The employee: full-time and part-time employees build up leave through service. Casual employees sit outside the main accrual rules and receive a casual loading instead.
- The Fair Work Ombudsman (FWO): the regulator that investigates underpayment claims and can enforce the National Employment Standards (NES), which sit in Part 2-2 of the Fair Work Act 2009 (Cth).
- Awards, enterprise agreements and contracts: these can give employees more than the NES, never less, and often add accrual or payment rules of their own. State and territory legislation separately governs long service leave and workers compensation.
The NES baseline: what accrues, and at what rate
Under s 87 of the Fair Work Act 2009 (Cth), a full-time or part-time employee who is not a casual is entitled to 4 weeks of paid annual leave for each year of service, or 5 weeks if a modern award or enterprise agreement defines them as a shiftworker for NES purposes. The leave accrues progressively during the year of service, according to the employee's ordinary hours of work.
Paid personal/carer's leave works the same way. Under s 96, the same employees get 10 days of paid personal/carer's leave per year of service, accruing progressively according to ordinary hours and carrying over from year to year.
The FWO's annual leave guide gives a useful worked example: a part-time employee on 20 hours a week accumulates 80 hours of annual leave over a year, the equivalent of 4 weeks of their ordinary work. That example matters for payroll because the accrual rate for part-timers is proportional, not a flat four-week block.
Casual employees are excluded from both entitlements by the wording of ss 87 and 96. They do not accrue paid annual leave or paid personal/carer's leave; instead they are compensated through the casual loading on their hourly rate. They do get access to some unpaid leave types, which we come to below.
The master switch: what counts as "service"
The accrual provisions all run off "a year of service", so everything turns on the definition of service in s 22 of the Act. Service is, broadly, the period the employee is employed, minus a list of excluded periods that do not count.
The excluded periods are set out in s 22(2):
- any period of unauthorised absence;
- any period of unpaid leave or unpaid authorised absence, with three carve-outs: community service leave under Division 8 of Part 2-2, a period of stand down under Part 3-5 or an enterprise agreement or contract, and any leave or absence prescribed by regulation;
- any other period prescribed by regulation.
Read that list closely and the whole system follows from it. Paid leave never appears as an excluded period, so paid absences count as service and accrual continues. Unpaid leave is excluded unless it falls within a carve-out, so unpaid absences generally pause accrual. Community service leave is the notable carve-out: it counts as service even though it is usually unpaid.
There is a second, related concept worth knowing. Under s 22(3), an excluded period does not break an employee's continuous service, but it does not count towards its length either. That matters beyond leave balances, because thresholds like the 12 months of continuous service required before unpaid parental leave under s 67, and the length-of-service tests in some state long service leave laws, are calculated on this basis.
Paid leave: the accrual clock keeps running
Because paid leave counts as service, the annual leave and personal/carer's leave balances keep growing during every kind of paid absence:
- paid annual leave itself;
- paid personal/carer's leave, confirmed by the FWO's annual leave guide, which states that annual leave accumulates during paid sick and carer's leave;
- paid compassionate leave;
- paid family and domestic violence leave.
Compassionate leave under s 104 is 2 days for each occasion where an immediate family or household member has a life-threatening illness or injury, dies, or where a child is stillborn or a miscarriage occurs. Under s 106 it is paid at base rate for non-casual employees and unpaid for casuals. Either way, the paid version counts as service, so other balances keep accruing.
Family and domestic violence leave has its own quirks. Under s 106A, employees get 10 days of paid family and domestic violence leave in each 12-month period, available in full at the start of the period for full-time, part-time and casual employees alike. Unlike annual leave it does not build up progressively and does not accumulate from year to year; it resets each period. But because it is paid, it counts as service, so annual leave and personal/carer's leave keep accruing while an employee is on it.
Unpaid leave: when the clock pauses, and the one exception
The general rule is that unpaid leave does not count as service, so no annual leave or personal/carer's leave accrues during it. That covers unpaid personal/carer's leave, unpaid annual leave agreed between the parties, and unpaid authorised absences generally.
The exception that trips employers up is community service leave. Under s 108, an employee is entitled to be absent for an eligible community service activity, which covers jury service and voluntary emergency management activities such as working with the State Emergency Service or a fire-fighting body during a natural disaster. The FWO's community service leave guide confirms that, with the exception of jury duty, the leave is unpaid, and there is no limit on how much an employee can take.
Yet s 22(2)(b)(i) explicitly carves community service leave out of the excluded-period list. The result: annual leave and personal/carer's leave keep accruing during the absence even though you are not paying the employee for it. The unpaid status of the absence does not matter, and an employee who has been away on jury service for two weeks comes back with an untouched annual leave balance that has grown in the background.
Two related carve-outs are worth knowing even if they arise less often. A period of stand down under Part 3-5 of the Act, an enterprise agreement or a contract also counts as service under s 22(2)(b)(ii), so accrual continues during a stand down. And community service leave carries notice and evidence obligations: the employee must tell you about the absence as soon as possible and give you the expected period, and you can ask for evidence that they are entitled to the leave.
Parental leave: where two systems meet
Parental leave is where accrual questions get most confused, because two separate systems run at the same time.
The NES gives an eligible employee up to 12 months of unpaid parental leave under s 70, with the right to request an extension of up to another 12 months under s 76. The employee must have completed at least 12 months of continuous service under s 67. Unpaid parental leave is unpaid authorised absence, so it falls into the s 22(2)(b) excluded periods. Annual leave and personal/carer's leave do not accrue while the employee is on it, and this stays true no matter how long the leave runs.
The Australian Government's Paid Parental Leave Scheme, administered by Services Australia, pays the employee directly. The FWO's annual leave guide is explicit that the scheme is not considered paid leave: an employee does not accumulate annual leave while being paid by the scheme if they are taking unpaid leave from their employer at the same time. From your perspective the employee is on unpaid parental leave, so accrual stays paused.
Employer "top-ups" are where the trap sits. Simply topping up an employee's income while they are on unpaid parental leave does not change the NES treatment, because the leave itself remains unpaid leave under the Act. By contrast, if your contract or policy provides a distinct period of employer-paid parental leave, that paid period counts as service and accruals run for its duration. The distinction turns on the structure of what you have promised, not on the fact that money changed hands, which is why the drafting of the parental leave clause matters. If you want a period to accrue entitlements, it needs to be framed as employer-paid leave in the contract or policy, not as extra money during unpaid leave.
Public holidays that fall inside leave
A public holiday landing inside a period of paid leave is a frequent payroll error. The FWO's guidance on public holidays is clear: if a public holiday falls during paid annual leave or paid sick leave, the employee must be paid for the public holiday, and the day is not counted as annual leave or sick leave under the NES. In other words, the public holiday hours are not deducted from the employee's built-up balance. The FWO notes this may not apply where the leave was granted in excess of the NES minimums, and an award or agreement can set its own rules.
The FWO also flags the practical consequence for you: payroll systems often need a manual adjustment so annual leave is not wrongly deducted for the public holiday. This is a classic example of a correct rule and an incorrect system setting producing an underpayment.
Long service leave and workers compensation: the state-based tail
Long service leave sits outside the NES entirely, in state and territory legislation, and the accrual rules differ by jurisdiction. What you can rely on federally is that the FWO's annual leave guide confirms annual leave keeps accumulating while an employee is on long service leave. What you cannot assume is the reverse: how long service leave itself accrues during unpaid absences, including unpaid parental leave, is set by the relevant state or territory Act and varies. The continuous service concept in s 22(3) also interacts with the length-of-service thresholds some of those Acts use, so the interaction is worth checking against the Act that applies to the employee's work location.
Workers compensation absences are similarly state and territory based. Whether time away on workers compensation counts as service for leave accrual purposes depends on the relevant scheme and how the absence is classified, and some states treat it differently from others. Where an award or agreement applies, its terms also matter. Because the treatment genuinely varies by location and circumstances, this is an area where a general answer is not safe, and tailored advice is the practical option before you finalise payroll settings for a longer absence.
Where a lawyer earns their fee
The accrual system is simple in outline and fiddly in application, and the fiddly parts are exactly where a lawyer adds value. A practitioner can map each leave type in your payroll against the service rules and the instruments that apply to your workforce, checking whether community service leave is set to accrue, whether unpaid parental leave is set to pause, and whether any award or agreement varies the default position. They can also draft the contract and policy language that determines how paid parental leave and other absences are treated, which is what actually decides whether a "top-up" arrangement counts as service.
Legal help is most worthwhile before a long absence starts, when there is time to fix settings and confirm the position in writing, and in any dispute about balances at termination, where an underpaid leave entitlement on final pay becomes an FWO complaint and a back-payment liability. If the FWO is already investigating, advice on responding to the inquiry and correcting the underpayment is the urgent version of the same conversation.
The excluded-period list is the whole game
Strip the system back and one list decides every balance: the excluded periods in s 22(2) of the Fair Work Act 2009 (Cth). Paid leave is never on it, so accrual runs. Unpaid leave is on it, so accrual pauses, with the two carve-outs for community service leave and stand down. The misstep that costs employers most is treating "paid or unpaid" as a reliable proxy for "counts as service", because community service leave inverts the assumption, and because a parental leave top-up looks like paid time to everyone except the Act. Before the next long absence starts, pull out your payroll mappings and your parental leave clause and check them against that list. Getting it wrong produces quiet underpayments that surface at the worst moment; getting it right means the system runs itself.