Handling annual leave accruals: The Ai Group

Excessive annual leave accruals can be a significant liability for business but can usually be avoided if managed properly. Under the National Employment Standards (NES), an employer can give award/agreement-free employees notice to take excessive accumulated annual leave. Modern awards may also permit an employer to require an employee to take excessive accrued leave.

Ensuring that annual leave is well-managed within an organisation can reduce the liability of high annual leave balances, as well as promote a healthy workplace which can improve productivity and attendance.

The information in this article aims to help employers determine circumstances in which they can issue a direction to an employee onto a period of annual leave, as well as how to respond to requests from an employee to cash out a period of annual leave.

What is an excessive annual leave accrual?

An employee is defined as having an “excessive leave accrual” if the employee has accrued more than 8 weeks’ paid annual leave. Most modern awards now contain provisions that allow an employer to direct an employee to take annual leave. This direction can only be given after the employer has tried to genuinely reach agreement with an employee to take a period of leave.

Excessive leave balances occur for several reasons including:

  • the organisation not encouraging employees to take leave;
  • a belief held by an employee that the workplace cannot operate without them;
  • employees concerned that the employer will look unfavourably upon them if they take leave;
  • wanting to build up a large balance or ‘nest egg’; or
  • the employer is unaware of the balances.

When can an employer direct the employee to take leave?

Under the modern awards which contain the ability to direct an employee to take leave, the employer may direct the employee in writing to take one or more periods of paid annual leave, provided that:

  • a direction by the employer is of no effect if it would result at any time in the employee’s remaining accrued entitlement to paid annual leave being less than 6 weeks when any other paid annual leave arrangements are taken into account;
  • the employer must not require the employee to take any period of paid annual leave of less than one week;
  • the employer must not require the employee to take a period of paid annual leave beginning less than 8 weeks, or more than 12 months, after the direction is given;
  • a direction by the employer must not be inconsistent with any leave arrangement agreed by the employer and employee; and
  • an employee to whom a direction has been given may request to take a period of paid annual leave as if the direction had not been given.

An employer may require an award/agreement free employee to take a period of paid annual leave but only if the requirement is reasonable. A requirement to take paid annual leave may be reasonable if, for example, an employee has accrued an excessive amount of annual leave or the employer’s enterprise is being shut down for a period, such as Christmas and New Year.

How can an employer avoid having excessive annual leave accruals?

Encouraging the regular taking of annual leave is important to managing the financial liability of leave balances, and to ensuring productivity is not affected by over-worked and stressed employees. Employees who “stockpile” their annual leave are not getting the necessary breaks from work to allow them to relax and recharge, and this can contribute to stress at work and greater likelihood of employees becoming ill.

Organisations should encourage a workplace culture where employees feel that they can take regular periods of annual leave, and look at any barriers that may exist to taking leave, such as workload before and after leave, lack of resources to cover leave periods and management support.

Other strategies to assist in the management of excessive leave include:

  • developing a leave roster where employees nominate leave periods in advance;
  • introducing/promoting the cashing out of leave in accordance with the relevant industrial instrument or the NES;
  • allowing access to annual leave in smaller amounts; and
  • clearing accrued leave within specified periods, such as ‘shut downs’.

The above strategies are dependent on the operational requirements of the organisation, as well as the industrial instrument provisions that apply to employees.

How does an employee cash out a period of annual leave?

A clause was inserted into nearly all awards enabling an employer and an employee to agree in writing to the cashing out of a particular amount of annual leave, subject to a number of requirements including:

  • an agreement must not result in the employee’s remaining accrued entitlement to paid annual leave being less than 4 weeks;
  • the maximum amount of accrued paid annual leave that may be cashed out in any period of 12 months is 2 weeks; and
  • each cashing out of an amount of paid annual leave must be the subject of a separate written agreement.
  • For award-free employees, section 94 of the Fair Work Act also allows an employer to agree in writing with the employee to cash out annual leave. Unlike award-covered employees, there is no limit to how much annual leave an employee can seek to cash out, as long as 4 weeks leave entitlement remains in their accruals.