Legal

5 ways for businesses to keep leave balances down

Accruing annual leave and not taking holidays isn’t just bad for an employee’s wellbeing, it’s a headache for employers, too. So what can you do to keep leave balances down?

By Elizabeth Ticehurst

Australia is kind to its employees when it comes to paid holidays. While we may envy the
five-week vacations enjoyed by workers in France, some countries (such as the US) don’t require paid leave to be given at all, and in many others the statutory minimum is a measly five to 10 days per annum. 

The average leave balance for Australian workers is 18 days, with 28 per cent of workers having more than five weeks’ leave accrued. The average leave balance for Australian workers is 18 days, with 28 per cent of workers having more than five weeks’ leave accrued.

In Australia, annual leave accrues and must eventually be paid out if not used, but in many countries the “use it or lose it” rule applies. Maybe this is why Australians tend to hoard their leave. Research carried out by Roy Morgan in 2014-15 shows that the average leave balance for Australian workers is 18 days, with 28 per cent of workers having more than five weeks’ leave accrued.

Not having holidays can impact badly on people’s health and wellbeing, but high leave balances are also a problem for employers as they represent a liability that increases with each pay rise. The accrued days must be paid out at an employee’s base rate of pay at the time of termination, which could be significantly higher than his or her base rate of pay at the time the days were accrued. So how can employers reduce this liability? There are several options.

1. Shutdown

Many businesses shut down for an extended period over Christmas/New Year and make their staff take annual leave over the shutdown. Is this requirement legal? The Fair Work Act 2009 (Commonwealth) says that if a requirement is “reasonable” you can insist employees who are not covered by an award or agreement take a period of annual leave. Enforcing staff to take leave over a shutdown period is even given as an example of a “reasonable” condition. But if employees are covered by an award or an agreement, it depends on the provisions in that specific agreement. 

 

2. Direction to take leave

If an employee has accrued an excessive amount of leave, it is also considered “reasonable” to direct them to take time off. While the Fair Work Act doesn’t define how much leave is “excessive”, eight weeks is used as a general guide (this is a period used in many agreements). But for employees covered by an award or agreement, you will have to check the agreed provisions. 

 

3. Cashing out leave

Employers can also cash out some of an employee’s leave balance, but only if the worker agrees to it. The agreement has to be in writing and the person can’t be left with a leave balance of less than four weeks. Staff employed under a registered award or agreement can only cash out a maximum two weeks’ leave every 12 months. 

 

4. Requiring employees to use leave within a certain period

Some employers try to encourage a “use it or lose it” attitude to holidays by asking staff to take leave in the same year they accrue it. If a worker builds up a certain amount of leave, they must talk with their supervisor about a mutually convenient time to take it. Such policies may “encourage” staff to take holidays, but they can’t be legally enforced unless the requirement is deemed “reasonable”. Accrued leave can’t be extinguished just because an employee hasn’t used it within the stipulated time. A worker who doesn’t comply with the policy is still entitled to accrue leave and have it paid out on termination.

 

5. Offering incentives for employees to use leave

Some employers manage to keep leave balances down by offering staff an additional benefit (such as an extra one or two days’ “bonus” leave) if they use all their annual leave within the year it accrues. These kinds of policies are enforceable, as they are not altering an employee’s fundamental right to the minimum period of annual leave.

Elizabeth Ticehurst as Special Counsel – Employment at KPMG.

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