Managing people

Excessive annual leave: how much is too much?

Over time, an employee can accrue large amounts of annual leave. But how much is too much?

12 January 2023

Excessive amounts of accrued leave can become an issue for businesses. An employer may be concerned about paying out an excessive annual leave balance, may want to direct an employee to take leave, or simply find ways to reduce leave balances.

Keep reading to learn about your options when it comes to excessive annual leave balances.

What is an ‘excessive amount of annual leave accrual’?

In the case of award/agreement-free employees, the meaning of an ‘excessive amount of annual leave accrual’ is not defined by the Fair Work Act.

In the case of modern awards, a Fair Work Commission full bench has varied the terms of most awards in relation to taking annual leave, including a directive from employers for employees to take annual leave when they have excessive leave accrual.

The same decision also inserted terms into modern awards permitting the cashing out of annual leave. Cashing out annual leave may also be an option for an employer and employee in dealing with excessive amounts of annual leave accrual.

Employees covered by an award

It is best for employers to refer to the relevant award for specific guidance.

For example, the annual leave clause in the Clerks – Private Sector Award 2020 offers guidance for excessive amounts of annual leave and other annual leave-related matters, including when an employer directs that leave should be taken, and employee requests for leave. 

Award/agreement-free employees

The National Employment Standards (s88) provide that annual leave may be taken for a period agreed to between an employee and their employer. However, under the Fair Work Act (s94(5)), an employer may require an award/agreement-free employee to take a period of annual leave but only if the request is reasonable.

A legislative note provides that a reasonable request would include a circumstance where an employee has accrued an excessive amount of annual leave, although the note does not provide a definition of the meaning of ‘excessive amount of annual leave’. The Explanatory Memorandum to the Fair Work Bill 2008 is also silent on the issue of excessive annual leave.

It should be noted the Fair Work Act (s88(2)) provides that an employer must not unreasonably refuse to agree to a request by an employee to take paid annual leave. 

Cashing out annual leave

Another option to decrease a company’s overall annual leave balance is cashing out annual leave.

The conditions which permit cashing out of annual leave for award/agreement-free employees are determined by the Fair Work Act, the terms of the enterprise agreement where applicable, or the terms of the applicable modern award.

Award/agreement-free employees

When it comes to excessive annual leave and the Fair Work Act (s94), an employer and an award/agreement-free employee may agree to an employee cashing out a particular amount of the employee’s accrued annual leave. The employee must be left with an annual leave balance of at least four weeks after cashing out has occurred.

Each agreement to cash out an amount of annual leave must be a separate agreement in writing. The amount is equal to the employee’s base rate of pay payable had the employee taken the annual leave.                           

The bottom line: While the Fair Work Act does not specifically define the meaning of what constitutes an ‘excessive amount of annual leave’, most modern awards provide for a minimum balance of eight weeks’ leave. This may give an indication to an employer in determining a ‘reasonable’ minimum annual leave balance for award/agreement-free employees in this circumstance.

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