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Key Changes to Annual Leave Entitlements You Need to Know

A number of very important changes have recently been made by the Fair Work Commission to annual leave entitlements for employees contained in the Fair Work Act 2009.

It is now critical for you to familiarise yourself with these changes because:

  • The changes are now officially authorised for implementation.
  • Prosecution and penalties apply to those who will not comply.
  • Employers must now update their existing annual leave policies and procedures.

Below is the detailed explanation for each important change:

New Cash out Policies

For the first time, all employees covered by the Modern Award are now entitled to cash-out a part of their accrued annual leave. However, there are four very strict rules to follow in order to cash out:

  1. Employees can only cash out a maximum of two weeks’ annual leave every 12 months.
  2. An employee must always have a remaining balance of at least 4 weeks after the cashing out has been processed.
  3. Each agreement to cash-out annual leave must be recorded in writing, and
  4. The amount paid to the employee must be no less than the amount they would have received had the leave been taken.

The following must also be noted by all employers:

  • Employees under 18 years of age will also need their parent / guardian to sign the cashing-out agreement, and
  • Employers remain strictly prohibited from coercing or misleading employees into cashing-out their accrued annual leave.
  • A small number of Modern Awards are still subject to variation to permit cashing-out of annual leave. Always check the applicable Award carefully.

The cash-out leave policy is still in effect for employees who are not covered by either a Modern Award or an Enterprise Agreement. However, it is subject to the separate rules contained in section 94 of the Fair Work Act 2009. These rules are similar as those listed above, however there is no limit on how much annual leave can be cashed-out in each 12 month period.

Excessive Annual Leave

The issue of unwieldy leave balances is common in many businesses. With the latest changes, employers will now find it easier to guide employees to take annual leave and thus minimise, or do away, with excessive leave balances.

What is ‘excessive leave’?

  • If the employee is not a Shiftworker: 8 weeks’ annual leave
  • If the employee is a Shiftworker: 10 weeks’ annual leave

Most, but not all, Modern Awards now have a ‘model directed leave term’. This new provision will permit employers to direct an employee to take annual leave. As is the case with cashing-out of annual leave, very strict rules apply:

  1. The employee and employer must firstly meet with one another and discuss ways of reducing the excessive leave balance. If they’re unable to reach agreement on when or how annual leave should be taken, your business can then direct the employee to take some of their annual leave. This is referred to as ‘directed annual leave’.
  2. The directed annual leave period must begin:
    • no earlier than 8 weeks, and
    • no later than 1 year from the date the annual leave direction is issued by your client
  3. The directed annual leave period must be at least one week long, and
  4. The employee must have at least six weeks of annual leave left after the directed leave period has been completed.
  5. The Employer’s direction must not be inconsistent with any leave arrangements already in place. This includes any annual leave policies or procedures which apply in their workplace.
  6. An employee may subsequently request annual leave despite the employer’s prior direction for it to be taken. If this happens, the employer must disregard their previous direction when considering the employee’s new annual leave request, and in the case where an employee has had an excessive leave balance for over 6 months and the employer has failed to issue a way for the leave to be taken, the employee is allowed to unilaterally take some of their leave. In this case the same rules as mentioned above for employer-directed leave will also apply.

Leave in Advance

Under most Modern Awards, employers are now allowed to grant their employees with annual leave prior to that leave having been accumulated by the employee.

Notably, the new ‘model clause’ also specifically permits employers to deduct any subsequent ‘annual leave debt’ from the employee’s last pay if their employment terminates prior to their accrued annual leave having been restored to a positive balance.

The following rules apply to annual leave provided in advance of accrual:

  1. The mutual agreement must be recorded in writing.
  2. The agreement must confirm the amount of leave in advance being provided, the date when that period of leave will commence.
  3. The agreement must be signed by both the employer and the employee, as well as the employee’s parent or guardian if they’re under 18 years of age, and
  4. A copy of the agreement must be kept in the employee’s records.

Payment of Annual Leave

Several Modern Awards have historically required employees to be paid their full wage or salary in-full and upfront when they begin a period of annual leave.

Most Modern Awards applying this rule have now been changed to permit employees who are paid via EFT to continue getting their wage or salary payments ‘as usual’ during their period of annual leave.

Any advice stated above is of a general nature only. For guidance on your individual business situation, consult with your human resources department or accountant.

PJS Accountants offer accounting and other bookkeeping services to individuals and companies, big and small. Allow our team to evaluate your business and advise you on how to create an effective strategy for employee annual leave management. For enquiries, contact PJS Accountants.