Long service leave in NSW and what employers must do

If you employ people in New South Wales, long service leave (LSL) is not an optional extra. The Long Service Leave Act 1955 (NSW) (the Act) requires you to track each worker's continuous service, grant paid leave when they reach service milestones, pay it at a rate the Act defines, and pay out accrued leave when employment ends in the circumstances the Act allows. You cannot contract out of any of it, and the obligations apply even if nothing is written down.

LSL sits quietly in the background because the first full entitlement only matures after ten years. But the duties bite much earlier. From the five-year mark, a termination can trigger a cash payout, and from the day of engagement you carry record-keeping obligations and, in some situations, liabilities inherited from a previous owner of the business. This guide sets out who the Act covers, the service and payment rules, what you must do at each milestone, and what happens if you miss a step.

Who the Act covers and the milestones that matter

The Act applies to every employer of a worker. The definition of worker in s 3 is deliberately broad: it covers people employed on salary, wages, piecework or commission, outworkers, and people working under a contract for labour. Under s 4(11)(a), service counts whether the person works on a permanent, casual, part-time or any other basis, and across one or more contracts of employment. Part-timers and casuals accrue LSL in NSW, with the amount scaled to their work patterns.

A small number of workers receive LSL from another source instead of the Act. These include private sector national system employees whose federal award or enterprise agreement has its own LSL provisions, NSW public sector and local government workers covered by their own instruments, and workers in the building and construction, contract cleaning and community services industries, which run portable LSL schemes through the NSW Long Service Corporation. Black coal mining workers accrue under a separate Commonwealth scheme. For most small and medium businesses, the Act is the operative law, so check your award and agreements before assuming otherwise.

The entitlement milestones under s 4(2)(a) are:

• 10 years of continuous service: 2 months of paid leave (8.67 weeks, since the Act counts a month as 4 1/3 weeks)
• Each further 5 years: an additional month, so 15 years means 3 months and 20 years means 4 months
• Between 5 and 10 years: no leave unless employment ends in a qualifying way, in which case a pro rata amount is payable on the basis of 2 months for 10 years of service (one month at the five-year mark)
• From 10 years on: if employment ends for any reason, a pro rata amount is payable on the termination

The five-year mark is where most employers first meet the Act in practice, because that is when a cash liability can crystallise.

Track continuous service, not just calendar time

The core duty is to work out each worker's continuous service correctly. Service means continuous service with the same employer, and continuity is preserved across a range of interruptions. Under s 4(11)(a1), service is treated as continuous despite breaks caused by:

• Absence on account of illness or injury: the break does not break continuity, and the period generally counts towards service.
• Absence under the terms of employment: including paid annual leave
• Leave of absence granted by the employer: for any cause
• Slackness of trade or an industrial dispute: continuity is preserved, but the interruption period does not count.
• An employer-initiated break: followed by re-employment within two months

The distinction that trips employers up is between time that counts towards the entitlement and time that merely does not break it. Paid leave and illness absences generally count as service as well as preserving continuity. Other absences, such as a stand-down for slackness of trade or approved unpaid leave, keep the clock running without adding to it. If a worker is dismissed and not re-employed within two months, continuity is broken and the clock restarts. Keep a written record of every break and the reason for it, because the characterisation decides the entitlement years later.

Pay long service leave at ordinary pay

Leave must be paid at the worker's ordinary pay, which the Act defines in s 3 rather than leaving to your payroll software. The definition depends on how the worker is paid:

• Fixed ordinary time rate: ordinary pay is the greater of the rate on the prescribed date or the average weekly amount earned over the five years ending on that date, excluding amounts for shift work, overtime and other penalty rates.
• Variable pay or hours: for casuals, commission workers and others not paid wholly at a fixed ordinary time rate, ordinary pay is the average weekly wage over the longer of the 12-month or five-year period ending on the prescribed date, again excluding overtime, shift and penalty amounts, plus the average weekly value of any bonuses over the matching period.
• Board and lodging: if you provide board or lodging, the cash value is added.

The prescribed date is the day before the worker enters leave, or the day before termination where leave is paid out. If leave is postponed by agreement, the parties can agree to fix the prescribed date at the date of that agreement, which can be useful when pay has risen over time. For a casual with no fixed weekly hours, normal weekly hours are deemed to be the average worked over the preceding 12 months or five years. Because the reference period drives the number, document which period you used for each payout and keep the working papers.

Give the leave and schedule it

Once entitlement accrues, s 4(3) provides that you give the leave and the worker takes it as soon as is practicable having regard to the needs of your establishment. That makes your operational needs the touchstone for timing, but the Act also gives the worker procedural protection: under s 4(10) you must give at least one month's notice of the proposed start date, unless the worker agrees to a shorter period under s 4(10A).

Leave is taken in one continuous block unless you and the worker agree to split it. The Act caps the number of separate periods by length: a two-month entitlement can be split into up to two periods, larger entitlements into up to four. Under s 4(3AA), you and the worker can instead agree to any number of periods of one day or more, which suits workers who want to stretch leave around busy seasons. Leave in advance is also possible by agreement under s 4(3A), but it must be repaid if employment ends before entitlement accrues.

A few payment and counting rules are easy to overlook:

• Payment timing: s 4(7) lets you pay the full amount when leave starts, pay it as ordinary pay would have fallen due, or use another agreed method.
• Public holidays: under s 4(4A), a NSW public holiday that falls during leave extends the leave by one day if the worker is entitled to be paid for that day.
• Annual holidays: leave under the Act is exclusive of annual holidays that fall during the period.

The rule that generates the most compliance problems is the cash-out ban in s 4(8). Payment in lieu of LSL is prohibited while employment continues, by both employer and worker, and the only exception is the payout on termination under s 4(5). An informal arrangement to "buy out" accrued leave is void and can expose you to a penalty.

Pay out correctly when employment ends

When employment ends, s 4(5) deems the worker to have entered the leave on the date of termination and requires you to pay the full amount of ordinary pay forthwith, less anything already paid. If the worker has died, payment is made to the personal representative on request under s 4(5)(b).

Whether a pro rata amount is payable depends on the length of service and, critically, on why employment ended:

• 5 to 10 years of service: pro rata is payable only if the employer terminates for any reason other than the worker's serious and wilful misconduct, the worker resigns on account of illness, incapacity, domestic necessity or other pressing necessity, or the worker dies.
• 10 to 15 years: pro rata is payable if employment ends for any reason, calculated on the basis of 3 months for 15 years of service.
• Over 15 years: pro rata is payable for the period since the last entitlement, on the basis of 2 months for 10 years.

The practical trap sits in the 5-to-10 year band. A worker who simply resigns, including to retire, is not entitled to a payout unless the resignation was genuinely caused by a qualifying reason. NSW Industrial Relations guidance is that the worker must prove the qualifying reason on the balance of probabilities and that it must be the genuine motivating reason for resigning, not merely a preference. Conversely, if you terminate for serious and wilful misconduct, the burden is on you to prove the misconduct was both serious and wilful, which is a higher standard than poor performance. Redundancy, ill health and death are the straightforward cases; everything else deserves a careful look before payroll runs.

Tax treatment also differs from ordinary wages. The ATO treats lump sum payments for unused long service leave on termination as subject to PAYG withholding and reported separately from eligible termination payments, so check current ATO guidance before processing, and confirm with your adviser whether superannuation guarantee applies to the payment.

Keep records and carry service across changes

Section 8 of the Act requires you to keep a long service leave record for each worker, in the way prescribed by the regulations, for at least six years after the worker ceases employment. The record should capture start and end dates, breaks in service and their reasons, leave taken or paid out, and the calculations used. Making a false or misleading statement in a long service leave record is itself an offence under s 10(2)(a). Remember that the Fair Work Act 2009 (Cth) separately requires time and wages records to be kept for seven years, so keep the LSL record inside a broader record-keeping system that satisfies both.

Service continuity also follows the business, not just the person. Under s 4(11)(c), when a business is transmitted from one employer to another, continuity is deemed not to be broken and the worker's service with the previous owner counts as service with you. The same applies to transfers between related corporations under s 4(13). If you are buying a business, the seller's LSL liabilities come with it, so due diligence should quantify accrued entitlements, verify service records and check the Act's record transfer rules under s 8(4) before settlement.

What happens if you get it wrong

The Act is enforced through several routes, and the consequences go beyond paying what is owed:

• Penalties: under s 10, contravening the Act, making false records, obstructing an inspector or doing anything to avoid or evade an LSL obligation each carries a maximum penalty of 20 penalty units. The current dollar value of a NSW penalty unit is prescribed under the Crimes (Sentencing Procedure) Act 1999 (NSW).
• Director liability: under s 10A, offences under ss 4 and 8 are executive liability offences, so a director or manager in a position to influence the conduct of the company can be personally liable if they knew or ought to have known of the contravention and failed to take reasonable steps to prevent it.
• Recovery orders: under s 12, a worker can apply to the Local Court or the Industrial Relations Commission in Court Session for an order that you pay amounts due under the Act, including amounts that became due up to six years before the application, with costs.
• Void arrangements: under s 7, the Act operates despite any stipulation to the contrary, and no contract or agreement can annul, vary or exclude its provisions. A pay rate, contract term or cash-out deal that undercuts the Act is unenforceable to that extent.

A compliance checklist for NSW employers

Work through these items periodically, not just when a milestone looms:

• Run a service audit now: list every worker's start date, breaks and any prior service recognised on a business purchase, and flag anyone approaching the five or ten-year marks.
• Document the pay method: record the ordinary pay approach for each worker, including the reference period used and the exclusion of overtime, shift and penalty amounts.
• Diarise notice periods: allow the one-month notice requirement before any scheduled leave starts, and record any agreement to a shorter period or to split leave in writing.
• Never cash out informally: the only payout route for accrued leave is termination under s 4(5).
• Build the termination reason into final pay: confirm service length, then check the pro rata categories before paying or withholding.
• Keep records for six years: retain LSL records after each worker leaves, inside a system that also satisfies the Fair Work seven-year record rule.
• Check transfers: on any acquisition or restructure, quantify inherited LSL liabilities and confirm how service records will transfer.

When to bring in a lawyer

Most LSL administration is routine once the rules are set up. Advice is worth getting where the facts are borderline: a resignation between five and ten years where the worker claims a pressing necessity, a termination where misconduct is alleged, variable-pay averaging for casuals or commission earners, an acquisition or group restructure with long-tenured staff, or a dispute or recovery claim already on foot. A lawyer can also review your records, contracts and termination processes before an error compounds across a whole team.

Start at the five-year mark

If you take one thing from this guide, make it this: in NSW, the five-year anniversary is when long service leave stops being a theoretical entitlement and becomes a cash liability, and from that moment the reason employment ends decides everything. Between five and ten years a plain resignation generally pays nothing, while a redundancy, illness-driven resignation or death pays a pro rata amount, and at ten years any end of employment triggers a payout. The cheapest compliance step available to you this week is a service audit of everyone past their fourth year, so that when the milestone arrives you already know what you owe, how you calculated it, and what records prove it.