Changes to Annual Leave

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On 29 July 2016, the Fair Work Commission (‘FWC’) made changes to the Awards in relation to annual leave as part of the four yearly award review process. 

These changes include:

  • Cashing out annual leave
  • Managing excessive annual leave balances
  • Taking annual leave in advance
  • Payment for annual leave

These changes are significant and will impact on how annual leave is managed at the workplace.

The following information relates to the changes that have been made to most Awards.  There are some Awards that have been varied in different ways or that have not had some of the variations outlined below included in them.  Businesses need to check the Awards that cover their operations to ensure they understand how the changes will impact them.

Cashing Out Annual Leave

Requests by employees to cash out accrued annual leave rather than taking the leave is very common. Prior to this decision, in many cases, it was unlawful for an employer to agree to such a request even if it suited the interests of both the employer and the employee.

The Decision means that a model clause will be inserted into most Awards allowing for cashing out to occur in certain circumstances.

The position prior to this change was that cashing out could only occur if the following conditions were present.

  1. The industrial instrument that covers the employee (eg- the Award, enterprise agreement or National Employment Standards) must permit the cashing out of annual leave. Most Awards and many enterprise agreements do not permit cashing out of annual leave and so it was often not possible to lawfully cash out annual leave.
  2. An employee can only cash out the amount of leave that they have in excess of 4 weeks. i.e. If an employee has 5 weeks annual leave to their credit, they can only cash out 1 week.
  3. There had to be an agreement in writing between the employer and employee on each occasion about the cashing out of annual leave.
  4. The employee had to be paid an amount of money equivalent to the amount they would have received had they taken the annual leave.

Under the new rules, most Award covered employees can cash out annual leave if the above provisions exist and the additional protections below are also met.

  1. a maximum of two weeks’ paid annual leave can be cashed out in any 12 month period (in the case of part-time employees, this is based on the employee’s weekly ordinary hours);
  2. specific requirements relating to record keeping and the content of any agreement relating to cashing out accrued annual leave. i.e. the amount to be cashed out must be in writing, the date payment is to be made must be stated and the written agreement must be kept as an employee record.
  3. if the employee is under 18 years of age the agreement to cash out a particular amount of accrued paid annual leave must be signed by the employee’s parent or guardian; and
  4. notes are inserted at the end of the model term drawing attention to the general protections in Part 3-1 of the Act against undue employer influence and misrepresentation in relation to rights under the clause. i.e. an employer must not exert undue pressure or make any false or misleading representations in relation to the cashing out of annual leave.

You should be aware that whilst the model clause as outlined above will be inserted into most Awards, some Awards have a variation on the above general position so it is advisable that you check the Award of Awards that covers your business to ensure that you are complying with your obligations.

This decision is a sensible and overdue outcome given that it is usually employees that want to access this entitlement and until now employers have been unable to lawfully agree to such arrangements.  It also provides a benefit to employers to assist them in dealing with employees that have accrued excessive amounts of annual leave. Whilst the cashing out process does require agreement between the parties and this will not always be possible, it does open an avenue that previously did not exist to dealing with what can be a difficult issue from time to time.

Employers covered by enterprise agreements will still have to comply with the terms of their Agreement. If the Agreement does not allow for cashing out then it cannot occur.  The requirements of (i) to (iv) above must also be met as they form part of the National Employment Standards and as such will override the provisions in an enterprise agreement if those provisions are lesser than the requirements under the NES.

Excessive Leave

Employers are often faced with the situation of an employee that has accrued significant amounts of annual leave which they refuse to take.

The Decision will be incorporated into most Awards that do not deal with excessive leave currently and will allow an employer to direct an employee to take annual leave if they have accrued an excessive amount. 

An employee will be considered to have excessive annual leave if;

  1. the employee is not a shiftworker and has accrued more than eight weeks paid annual leave, or
  2. the employee is a shiftworker and has accrued more than ten weeks paid annual leave.

Prior to directing an employee to take annual leave, the employer and the employee must meet to discuss the issue and genuinely try to reach agreement on steps to reduce the annual leave balance.  If no acceptable arrangement can be agreed then the employer can direct the employee to take annual leave subject to the following provisions;

  1. The employer must give the direction in writing to take a period or period of annual leave and the direction must state that it is made under sub-clause 1.2(b) of the Award.
  2. The employer can only direct the employee to take the amount of annual leave accrued to the employee that is in excess of six weeks. i.e.- if the employee has eight weeks annual leave, they can only be directed to take 2 weeks of that period because a six week minimum period must remain after the taking of the leave.
  3. The period of leave directed to be taken must not be less than on week.
  4. The employee must be provided with at least eight weeks’ notice of the date that the leave must be taken.
  5. The direction cannot require an employee to take a period of leave more than 12 months after the direction is given.
  6. The direction cannot be inconsistent with any leave arrangement agreed between the employee and the employer.

This decision provides certainty and consistency in relation to an issue that frequently is a problem for employers who don’t want to carry too much annual leave on their books.  It also serves as a push factor in getting employees to be sensible about how they take their annual leave so as to avoid being forced to take annual leave at a time not suited to them.

Taking Annual Leave in Advance

On occasion, employees seek to be paid annual leave in advance of the entitlement accruing.  Under the former provisions, if the employee was granted annual leave in advance but subsequently left their employment prior to them accruing sufficient annual leave to offset the advance payment, there was no capacity for the employer to withhold the balance from the employee’s final entitlements.  This created a risk for employers in granting annual leave in advance.

As a result of the Decision, employers that grant annual leave in advance of the entitlement accruing will now be able to recover the outstanding balance of leave owed to the employer from the employees final entitlements.  This provision might be useful in several circumstances, but particularly for businesses that observe an annual closedown and some staff do not have sufficient leave to cover the closedown period.

To make such an agreement the employer and the employee must ensure that the agreement;

  1. is in writing and signed by the employee and employer.
  2. states the amount of leave to be taken in advance and the date on which the leave is to commence;
  3. is retained as an employee record.

When Payment for Annual Leave Should be Made

Currently, 51 Award require annual leave to be paid in advance when an employee takes annual leave.

The FWC have varied those Awards to allow annual leave to be paid in the ordinary course of the pay cycle for employees who are paid by electronic funds transfer (EFT).  This brings all Awards in to line with normal payment arrangements.

Conclusion

The proposed changes are generally positive for employers and legalize many commonly occurring practices that occur.  Employers should check the Awards that cover their staff to ensure they understand their rights and obligations. If you require any assistance in understanding the new rules, please contact our office to discuss.