The Hidden Cost of Unused Leave (and How to Budget for It)

The quiet liability sitting on your balance sheet

As the year winds down, most business owners are focused on deadlines, client handovers, and squeezing in those final jobs before the break. But there’s one thing quietly building in the background that many overlook. Unused employee leave.

It might not feel urgent, but those untaken holidays come with a real cost. For a small business with 10 employees, even two weeks of unused annual leave each could mean a $20,000-$30,000 payout waiting to hit your cash flow. And when it does, it usually lands at the worst possible time, right when work slows down or someone resigns.

Why unused leave matters more than you think

While excessive annual leave accrual can be generally considered an HR issue, it’s also a financial one. Every hour of untaken leave is a liability on your balance sheet, and your full time employees are building up four weeks of annual leave each year.

When staff hold onto their leave:

• You’re essentially carrying a debt to your employees.
• The longer it sits, the more expensive it becomes (especially after pay rises).
• It inflates future payroll costs, reduces working capital, and can even distort profitability if not tracked correctly.

If multiple staff take leave or leave the business at once, those accrued entitlements can turn into a significant cash outflow overnight.

Reasons why staff don’t take leave (and what it costs you)

There are good reasons why leave can build up. Staff often want to support their team during busy times, or they’re saving their leave for a well-earned holiday when things quieten down. Sometimes, it’s simply hard to find the right moment to switch off.

But when leave keeps building up, the potential cash flow hit isn't the only thing impacted. Employees saving up their leave can affect productivity, morale, and compliance. Fatigued employees are more likely to burn out, make mistakes, or take unplanned time off down the track.

According to The Conversation, last year, Australians collectively held over 160 million days of accrued annual leave entitlements. For many small businesses, that’s tens of thousands of dollars tied up in future entitlements.

Understanding leave for full-time, part-time and casual employees

Not all staff accrue leave in the same way, and it’s important to understand how each type of employee arrangement affects your leave liability.

Full-time employees

Full-time staff are entitled to four weeks of paid annual leave per year, or five weeks if they’re covered by certain awards (such as shift workers). Leave continues to accrue even when staff are on paid leave, and is calculated based on their ordinary hours of work.

Full-time employees also accrue 10 days of paid personal (sick and carer’s) leave per year, which can be used if they’re unwell or need to care for a family member.

Part-time employees

Part-time staff also accrue annual leave, but it’s calculated on a pro-rata basis according to their regular hours. For example, if a part-time employee works three days per week, they’ll build up three-fifths of the sick leave and annual leave entitlement of a full-time worker.

Casual employees

Casuals don’t accrue paid annual leave because their hourly rate includes a casual loading, typically 25%, to compensate for this. Any holidays taken are usually unpaid. However, casual staff are still entitled to superannuation and must be paid for all hours worked, including public holidays if rostered on.

Public holidays

Permanent employees (full-time and part-time) are generally entitled to paid public holidays, and this does not come out of their annual leave balance. Casuals, on the other hand, are only paid for public holidays if they actually work on the day.

Understanding these differences helps you avoid over- or underestimating your true leave liability. It also ensures your business stays compliant with Fair Work requirements and avoids unexpected payroll corrections later down the track.

Domestic violence leave

All employees are entitled to 10 days of paid family and domestic violence leave each year. This includes full-time, part-time and casual employees.

To be eligible for paid family and domestic violence leave, an employee must be experiencing family or domestic violence.

This entitlement is part of the National Employment Standards (NES) and provides paid time off for employees who need to deal with the impact of family or domestic violence. It’s a minimum leave entitlement under Australian workplace law, just like annual leave or paid personal leave.

Can an employer refuse annual leave?

In most cases, employees can’t be unreasonably refused annual leave, but employers can decline a request if there are genuine business reasons.

Under Fair Work legislation, employees are entitled to take their accrued annual leave, and employers must make sure they have a fair opportunity to use it. However, timing matters. If approving leave would seriously impact business operations, for example, during your busiest trading period or when too many team members are away, you can ask the employee to take their leave at another time.

The key is to handle it fairly and consistently.

• Always give clear, written reasons if leave can’t be approved.
• Offer alternative dates or solutions wherever possible.
• Keep communication open. Planning ahead helps balance both the business’s workload and your team’s wellbeing.

Employers can also direct staff to take annual leave in certain situations, such as during a Christmas shutdown or when someone has accumulated excessive leave. These directions need to be reasonable, in line with award or agreement conditions, and provided with sufficient notice.

Handled well, leave management protects your business cash flow and ensures staff take the time they need to rest and recharge, a win for both sides.

How to calculate your leave liability

Here’s a quick guide to calculate how much annual leave your staff could be entitled to:

1. Multiply each employee’s hourly rate by their total hours of accrued leave.
2. Add on-costs like superannuation (now 12%).
3. The total is your leave liability. This is the amount you’d owe if everyone took their leave tomorrow.

If you’re using Xero Payroll, this number is already being tracked for you. You can view it anytime under Reporting > All reports > Leave Balances to see your business’s total liability at current pay rates.

Things to note:

• Casual employees are generally not entitled to holiday pay, so you can leave them out of the calculations. Any holidays taken are generally unpaid leave.
• Permanent employees are entitled to a paid day off for public holidays. This does not come out of their paid annual leave.

How to manage (and budget for) unused leave

Taking control of leave liability doesn’t have to be complicated, but it does need consistency.

1. Encourage regular time off

Make it part of your culture. Regular breaks keep teams motivated and prevent large accruals. Some businesses even require staff to take at least two consecutive weeks per year.

2. Use downtime to clear leave

The Christmas and January period is the perfect time to reduce balances. Plan early and stagger leave requests if possible so cash flow isn’t hit all at once.

3. Forecast leave entitlements

Include your leave liability in your monthly cash flow forecasts.

4. Automate your tracking

Modern accounting and payroll software (like Xero) can automatically flag excessive leave balances and alert you before they become a problem.

5. Keep an eye on wage increases

It's important to remember that accrued leave must be paid at the employee’s current pay rate, not the rate when it was earned. That means every pay rise increases your liability. This is another reason to encourage regular leave use.

Encouraging leave is good business

Encouraging your team to take time off ensures you're looking after their well-being and also your business' financial well-being. It protects your cash flow, keeps your books accurate, and ensures your staff return rested and ready for the year ahead.

If you’d like help reviewing your current leave liability or building it into your 2026 business budget, our team can help you forecast, plan, and keep your finances in balance all year round.

The accountant’s role: turning leave into insight

At Bonerath & Co, we work with business owners to keep leave liabilities visible and manageable. That means reviewing payroll reports regularly, building leave costs into cash flow forecasts, and setting up payroll systems that stay compliant with Fair Work. We also review provisions throughout the year, so there are no surprises when someone takes time off or moves on. When you treat leave like any other financial commitment, you gain the control and predictability every business needs to stay steady.

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