Are you compliant with annual leave rules?

SME owners are being urged to keep up to date with annual leave rules for employees, amid changing rules for dealing with excessive leave accumulation.

We all recognise that annual leave exists for employees to have time out from work, at least yearly, and that this is clearly in the interests of both employees and employers. But there are some collateral problems.

Annual leave changes occur regularly, so it is important to stay on top of them as they happen.

The entitlement to take four weeks' annual leave per year has been enshrined in Australian employment law for many years, but that benefit includes the right to be paid on termination of employment the monetary value of all untaken leave at the rate of pay when the employment ends.

Large accumulations of annual leave by employees have presented significant problems for employers for many years; if employees do not regularly take their annual leave, then over time the employer builds up substantial financial liability, as when each such employee leaves, the employer pays out a lot more than if the employee had taken leave as and when it felt due, or at least regularly.Man struggling to carry a heavy box

This happens for various reasons – sometimes employees do not want to take their leave because their partner will not be available for leave too; or they are approaching retirement and want to build up a nest egg; or they are just 'work junkies'; or sometimes the employer does not have the staff cover to release employees on leave.

Recent changes to most modern awards will help employers deal with this problem, if they are prepared to take up the opportunity.

These changes will also allow award-regulated employees to cash out part of their accumulated annual leave (a benefit only previously available to award-free employees and those covered by an enterprise agreement with cashing out provisions).

Following its four-year review of annual leave provisions in modern awards, the Fair Work Commission (FWC) has decided to make a number of significant changes on this subject in most modern awards.

In terms of the problem area of excessive annual leave accumulations, the FWC’s critical initiatives were the following:

Cashing out annual leave

The FWC has varied 112 of the 122 modern awards to incorporate a model term permitting and regulating the cashing out of accrued and untaken paid annual leave.

This model term provides that any agreement to cash out annual leave must be in writing, signed by the employer and employee, must state the amount of leave to be cashed out and the payment to be made to the employee, and state the date when the payment is to be made to the employee.

The model term also provides that no more than two weeks’ annual leave may be cashed out in any 12-month period, and that a cashing out agreement must not result in an employee’s remaining annual leave entitlements falling below four weeks.

Excessive leave accruals and directions to take leave

The FWC has varied 80 of the 122 modern awards to insert the 'excessive annual leave' model term.

The model term defines an excessive leave accrual as an accrual of annual leave in excess of eight weeks (or 10 weeks for a shift worker) and provides that where an employer and employee cannot agree on how to reduce or eliminate an excessive annual leave accrual, either the employer may direct the employee to take, or the employee may give a notice requesting to take, one or more periods of paid annual leave.

In either case, the direction given by the employer or the notice given by the employee must not result in the remaining annual leave being less than six weeks when any other leave arrangements are taken into account, and must not involve the use of annual leave for a period shorter than one week.

Furthermore, the period of annual leave must not commence less than eight weeks or more than 12 months after the direction is given.

In the case of an employee’s notice to take paid annual leave, the notice can only be given if the employee has had an excessive annual leave accrual for more than six months, and has not been subject to a prior direction by the employer to reduce the excessive annual leave accrual.

The model term provides that where an employee issues a notice to an employer consistent with its provisions, the employer must grant the employee’s request for paid annual leave.

Employers must be aware of these variations

These award variations took effect from the first pay period after 29 July, meaning that millions of national system employees now have the benefit of these new award provisions.

The variations apply to some, but not all, of the 122 modern awards currently in operation, and most modern awards will feature some, but not all, of the variations determined by the FWC.

Employers should check as soon as possible whether and to what extent these important changes to modern award terms apply to their operations.

Peter Doughman is a solicitor at Carroll & O’Dea Lawyers.

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