Take it or leave it

The rules for cashing out annual leave or taking excessive leave changed this year. Are your policies up to date?

From 29 July 2016 numerous modern awards have been varied to include provisions which allow modern award-covered employees to cash out annual leave and give employers and employees new rights and obligations regarding excessive leave accruals.

The new provisions (which affect the majority of modern awards) have been introduced by the Fair Work Commission as part of its four yearly review of modern awards.

The changes include the introduction of new modern award provisions which:

  • allow award-covered employees to cash out up to 2 weeks of annual leave per year;
  • alter when and how employers can direct employees to take excessive annual leave accruals; and
  • give employees new powers to make enforceable requests to take part of their excessive leave.

Note: specific changes vary from award to award and it is important to check the particular modern award which applies to your organisation.

Cashing out annual leave

Under the changes, the majority of modern awards have been varied to include new provisions which enable an employer and modern award-covered employee to agree to the cashing out of annual leave.

These changes are significant as previously modern award-covered employees largely could not cash out annual leave.

To be valid, the cashing out agreement must meet certain requirements, including:

  • it must be in writing, signed by both the employer and employee;
  • the maximum amount of accrued annual leave that can be cashed out is 2 weeks in any 12 month period;
  • the agreement must not result in the employee having less than 4 weeks' accrued annual leave left after the cashing out;
  • the employee must be paid no less than they would have received if they had actually taken the leave (including annual leave loading); and
  • each cashing out must be the subject of a new, separate written agreement.

Taking excessive annual leave

The majority of modern awards have also been varied to include new provisions in relation to how employers and employees can deal with "excessive leave accruals", defined as being where an employee has more than 8 weeks' accrued annual leave.

Direction by employer to take leave

Under the new provisions, where the employer and employee cannot reach agreement about the taking of excessive annual leave, the employer can direct the employee to take leave.

While employers previously had the power to direct employees to take annual leave, the new provisions change when and how such a direction can be issued and how much notice the employer must give.

In order for the direction to be enforceable, it must meet certain requirements, including:

  • it must be in writing;
  • it must not result in the employee having less than 6 weeks' accrued annual leave, taking into account other paid leave arrangements (e.g. if the employee has already been approved to take annual leave);
  • the employee must not be required to take less than 1 week of annual leave; and
  • the employee must be given at least 8 weeks' (and no more than 12 weeks') notice of the requirement to take leave.

Enforceable request by employee to take annual leave

Under the new modern award provisions, where an employer and employee cannot reach agreement, the employee can now issue a notice requesting to take some of their excessive annual leave which, if validly made, must be granted.

This is an important change, as it provides modern award-covered employees, for the first time with the ability to dictate when they will take annual leave, if agreement cannot be reached.

In order to be valid, the request must meet certain requirements, including:

  • it must be in writing;
  • the employee must have more than 6 weeks' accrued annual leave;
  • the request must not result in the employee having less than 6 weeks' accrued leave;
  • the request must not be required to take less than 1 weeks of leave;
  • the employee must give at least 8 weeks' (but not more than 12 weeks') notice of the request to take leave; and
  • the employee cannot issue a request to take more than 4 weeks' leave in a 12 month period.

Commencement of variations

In the majority of cases, the new provisions regarding cashing out leave and employer directions to take excessive leave commenced on 29 July 2016. However, the provisions regarding employee requests to take leave do not commence until next year, on 29 July 2017.

What this means for employers

The changes will no doubt be welcomed by many employers as they have the potential to provide greater flexibility to manage annual leave in a way which suits the organisation's individual circumstances. However, the changes are significant for employers as they alter when and how employers can deal with their modern award-covered employees' annual leave.

It is important that employers familiarise themselves with the new modern award provisions (and amend their annual leave policies and procedures appropriately) to ensure they are compliant and also that they are utilising the new provisions to their advantage.

This article was written by Rania Jones, Associate, HWL Ebsworth Sydney.

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The articles represent the views of the authors and not necessarily that of the Bank. You should seek independent professional advice before acting on any matters set out in the articles.

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