Historically, animal welfare has been defined by the absence of negative states such as disease, hunger and thirst. However, a shift in animal welfare science has led to the understanding that good animal welfare cannot be achieved without the experience of positive states. Unequivocally, the housing environment has significant impacts on animal welfare. This review summarises how cage and cage-free housing systems impact some of the key welfare issues for layer hens: musculoskeletal health, disease, severe feather pecking, and behavioural expression. Welfare in cage-free systems is currently highly variable, and needs to be addressed by management practices, genetic selection, further research, and appropriate design and maintenance of the housing environment. Conventional cages lack adequate space for movement, and do not include features to allow behavioural expression. Hens therefore experience extreme behavioural restriction, musculoskeletal weakness and an inability to experience positive affective states. Furnished cages retain the benefits of conventional cages in terms of production efficiency and hygiene, and offer some benefits of cage-free systems in terms of an increased behavioural repertoire, but do not allow full behavioural expression. In Australia, while the retail market share of free-range eggs has been increasing in recent years, the majority of hens (approximately 70%) remain housed in conventional cages, and furnished cages are not in use. Unlike many other countries including New Zealand, Canada, and all those within the European Union (where a legislated phase-out commenced in 1999 and was completed in 2012) a legislative phase-out of conventional cages has not been announced in Australia. This review came about in light of the current development of the Australian Animal Welfare Standards and Guidelines for Poultry in Australia. These standards are intended to provide nationally consistent legislation for the welfare of all poultry species in all Australian states and territories. While it is purported that the standards will reflect contemporary scientific knowledge, there is no scientific review, nor scientific committee to inform the development of these standards, and conventional cages are permitted in the standards with no phase-out proposed.