To Use Your Long Service Leave Or To Be Paid Out?

Many employees reach the point where they must decide: take your long service leave (i.e., take the time off) or accept a payout of your accrued long service leave when employment ends. The decision isn’t just about time off versus cash — it also affects accrual of benefits (including superannuation), continuity of service, and how the law treats you. This article breaks down key considerations, especially how leave and super accrue (or don’t) in each scenario, and how the rules under federal/state law apply.

What is long service leave and how is it treated under the law

Entitlement

Under the Fair Work Ombudsman’s guidance, most employees’ entitlement to long service leave (LSL) comes from state or territory laws, rather than solely federal law, though the federal laws (such as the Fair Work Act 2009) still apply in providing minimum standards.  

For example:

• In NSW the Long Service Leave Act 1955 (NSW) gives full-time, part-time and casual workers 2 months (≈ 8.67 weeks) of paid LSL after 10 years continuous service, and 1 month for each additional 5 years.  

• In Victoria the Long Service Leave Act 2018 (Vic) applies: most workers are entitled to LSL after at least 7 years with the same employer; accrual is roughly one week for each 60 weeks (≈ 0.866 weeks per year) of continuous service.  

Taking vs Payment

• If you take your LSL (while still employed), you utilise the time off and you receive payment for that leave at your ordinary rate.  

• If you end your employment and you have unused accrued LSL, you are usually entitled to a payment for the unused accrued leave. For example, in Victoria the law says when employment ends and you have at least 7 years continuous service you are entitled to payment for the full amount of accrued but unused LSL.  

Federal Law Overlay

Under the Fair Work Act 2009 (Cth), section 113 recognises an employee is entitled to long service leave in accordance with applicable laws (state/territory or federal award/enterprise agreement) and the Act does not exclude state/territory laws.  

Thus, while federal law doesn’t set a national uniform LSL regime, it ensures that LSL entitlements are recognised in “the national system” and cannot be overridden by less favourable conditions.  

Why “using” LSL vs “payout” matters and how accrual of leave and super changes

Accrual and taking leave

When you take your long service leave, you remain employed by your employer during the leave period. This has two important benefits:

1. Leave continues to accrue: Because you are still in employment, your period of service continues to count. While you’re on paid leave, your continuity of service is maintained, and you may continue to accrue further leave entitlements (depending on your state/territory rules).

2. Superannuation / employer contributions continue: Since you are still considered ‘in employment’ and paid for the leave, your employer is generally required to make super guarantee (SG) contributions on your “ordinary time earnings” (OTE), including while on paid leave such as LSL. For instance:

• According to super funds’ guidance, if you take your LSL while still employed, SG contributions generally apply because the leave payment counts as OTE.  

• If you receive a payout after employment ends (for unused LSL), you generally are not eligible for SG contributions on that payout because you are no longer in employment and the payment is a termination-payment rather than OTE.  

Payout of unused LSL (upon termination)

If you end employment and instead of taking the leave you are paid out for unused accrued LSL:

• Your service ends (with that employer) so you are no longer accruing service time (so no new accruals).

• The payout is treated as a termination entitlement payment rather than ordinary time earnings, so super guarantee contributions by your employer on that amount generally do not apply.  

• The “time off” benefit of the leave is converted into cash rather than you receiving the leave break. That removes the opportunity to take the extended break and also to accrue further leave while you are still employed.

• Because you no longer remain employed, some benefits of being in employment (e.g., continuity for super, possibly eligibility for certain accruals) may cease.

Scenario Service still employed? Leave accrual continues? Super contributions continue? Time-off benefit

Take LSL while still employed Yes Yes Yes (on the paid leave) Yes – you get the break

Accept payout when employment ends No (job ends) No new accruals after termination Generally No (on the payout) Time-off benefit replaced by cash

Practical considerations & what to think about

1. Calculate the value of “time off” vs cash

If you take your leave, you get the rest/holiday benefit and still accrue service/super. If you take the payout, you get cash now—but potentially miss out on further accruals and super contributions. Think: Am I more likely to benefit from the break and ongoing employment, or do I want the cash now?

2. Superannuation implications

Because super contributions work on ordinary time earnings, and payouts on termination for unused LSL are generally not treated as OTE, by accepting a payout you effectively lose future SG contributions on that amount. Some of the super-industry commentary flags this as a significant “lost opportunity” for retirement savings.  

3. Continuity of service

By remaining employed (taking your leave) you maintain the ‘continuous service’ with your employer, which can matter for further accruals of LSL in jurisdictions where additional leave accrues after the first entitlement (for example, after 10 years, etc). Or for eligibility for other employment benefits.

4. Tax and end-employment payments

Payouts may attract different tax treatment compared to salary or leave payments while employed. Also, any termination of employment may trigger other entitlements (redundancy, notice, etc). Always good to check your personal tax and employment situation.

5. State/territory legislation differences

Remember: LSL rules vary between states/territories (qualifying years, amounts, pro-rata on termination, etc). For example: in Victoria the minimum service is 7 years.  

You’ll need to check your relevant jurisdiction or any applicable enterprise agreement/award.

6. Employer agreement and policy

Some workplaces may allow or encourage cashing out of LSL under certain conditions (especially at end of employment). Others may require the leave to be taken. Check your employment contract, award or enterprise agreement and employer policy. Also check that any “cashing out” is lawful under your state/territory legislation.

“Use it or lose it”?

In short: if you use your LSL now while still employed, you benefit from the time off, your service continues, and you continue to accrue benefits (including super contributions) on that leave. If you instead take a payout at termination, you get the cash but you lose the ongoing accrual and likely lose super contributions on that payout.

If you value the break and future accruals (especially if you plan to stay longer), then taking the leave may make more sense. If you need the cash now, or are ending employment anyway, a payout may suit—but you should factor in the “hidden cost” (lost super, lost accrual).

Before you make your decision, consider seeking personalised advice (from a tax advisor, super fund or employment law professional) because your individual situation (tax, retirement savings, employment contract, jurisdiction) matters.