Australia: Paying annual leave in advance - an issue that is not leaving us…

It is not uncommon for us here at the Workplace Solutions Group to get enquiries or requests for advice from employers about what they can do about excessive annual leave accumulations, including "cashing out".
The enquiries are usually of these two types:

  1. an employee asks for cash rather than taking leave, due to some pressing financial need; or
  2. the employer realises it has a number of employees with large leave accumulations and wants to know what it can do about it

Until March 2006 it was, generally speaking, impossible to legally cash out annual leave (or long service leave for that matter) except upon termination of the employee's employment. By "legally" what we mean is that if an employer did pay an employee the cash value of some or all of his or her leave entitlement, without the employee actually taking leave and still staying on in employment, the "cash out" was not legally effective to reduce the employee's leave entitlement – ie the entitlement to paid leave remained in existence, whatever the employer and the employee may have agreed.

"Workchoices" makes a breakthrough on "cashing out"

In March 2006, one of the changes to Federal workplace law effected by what is now known as "Workchoices" was to allow for "cashing out" of part of an employee's annual leave accumulation provided it was allowed for in a workplace agreement and there was an individual agreement for each occasion of such "cashing out", and subject to other limitations, in particular retaining a minimum balance (see Section 233 of the Workplace Relations Act 1996 (Cth)). A similar provision existed for cashing out of part of an employee's personal leave accumulation (see Section 245A of that Act) – an initiative partly prompted by the fact that Workchoices provided for the first time a right in employees to unlimited accumulation of personal leave.

Those initiative were controversial at the time, but interestingly, when the Federal Labor Government replaced "WorkChoices" with the Fair Work Act 2009 (Cth) it not only retained these "cashing out" provisions for employees on modern awards and enterprise agreements (see sections 93 and 101 of the latter Act) but extended the right to cash out annual leave to award/agreement free employees (Section 94).

So clearly, legislators have now reached a rough consensus that "cashing out" of annual leave (and personal leave to a lesser extent) in some instances, is not (or at least is not now) anathema to basic industrial standards, provided that some reasonable minimum balances are retained.

And our experience is that indeed sometimes employees themselves want these arrangements – either because they have a pressing financial need or they have so much leave accumulated they will never get an opportunity to take it fully, so seek the cash.

Clearly, these types of arrangements can be good for the employer; firstly, where a valued employee seeks cash instead of leave to meet a pressing situation, the employer is able to assist without leaving itself with an ongoing legal liability dependant on the employee keeping his or her side of the "bargain"; secondly, the employer is able to lawfully reduce its escalating liability (as untaken leave is paid out at the current rate on termination, even if it fell due for taking some years before then).

[Arguably the concept of limited "cashing out" ought be extended to long service leave as well, particularly in modern times, as there are not that many employers and employees who can afford the luxury of an employee taking two months or more of paid leave from the workplace. There are however some different issues in that area, which may be addressed in a subsequent article.]

Paying leave in advance – still a controversial issue

The decision (by majority) of a Full Bench of Fair Work Australia in 2011 in Re Hull Moody-Moody Finishes Pty Limited [2011] FWAFB 6709, that it was permissible for an enterprise agreement to be approved that included a provision whereby payment for an employee's annual leave entitlement could be made in ear marked instalments in advance of the leave being taken (resulting in leave being unpaid when it was actually taken) caused a mild level of consternation amongst industrial relations traditionalists (such as the writer).

The Hull-Moody Finishes decision – the differing approaches

The majority (Vice President Watson and Senior Deputy President Hamberger) adopted what could be described as a "black letter law" or "literal" approach to the relevant sections of the Fair Work Act, ruling that there was nothing in the National Employment Standards or anything else that precluded what was proposed – the employee was not being deprived of the leave, and was being paid for it (albeit not when actually entering on the leave or during the period of leave). The other member of the bench, Commissioner Cambridge, vigorously dissented, arguing both on legal and "industrial" grounds that the approach favoured by the majority took insufficient account of the statutory context and produced a result that undermined the purpose of the benefit.

[One observation that should be made is that in this case there was no party before the Tribunal arguing against the proposed provisions – that is, there was no "contradictor". That does not render the decision invalid of course, or wrong, but it meant that the Tribunal was deprived of the benefit of arguments on both sides of the issue, which is one of the benefits of the "adversarial system".]

The differing points of view

This decision was and remains controversial. It is certainly contrary to established practices in Australian workplaces over many years and does have the potential to undermine the purpose of leave – ie why would employees bother to take leave if they are faced with a period without pay for it ? And it is too much to expect that employees will squirrel away the advance payments to cover them while they are on leave. It is also an approach that provides a much bigger benefit to the employer than employees – it eradicates the employer's exposure to substantial payments for untaken leave on termination of employees' employment. On the other hand the provisions of the Fair Work Act are not so clear that it can be said that the majority's decision was wrong in law.

It is a decision that is supported by employer groups – and that is understandable. It allows the employer to address the problem, which will be discussed below, of employees accumulating large untaken leave entitlements, thus leaving the employer with a potentially large financial burden, particularly if the employer has to reduce staff numbers at the one time. This is because it has been the law for many years in this area that, no matter when leave was accrued, if it was untaken as at the termination date of employment, the employee has to be paid out at the rate of pay that applies at the termination date, whatever (invariably lower) rate would have applied if the employee has taken the leave when it fell due. And why has that been the law? The reason is simple: to encourage employers to make employees take their leave as the legislators intend they should.

The Fair Work Act Review

In their 2012 Review of the Fair Work Act for the Federal Government ("Towards more productive and equitable workplaces") Professor Ron McCallum, the Honourable Michael Moore and Dr John Edwards commented on this subject as follows (at page 100 of their Report):
"The Panel has considered this issue and is of the view that the arguments on both sides are finely balanced, and as such, does not recommend any change to the provisions at this stage. It is unclear whether the parliament intended for agreements to provide prepayment for leave in this manner; however the Panel would be concerned if agreements became an avenue for the widespread avoidance of payment for annual leave. The Panel therefore recommends that the Government closely monitor developments in this area with a view to possibly amending legislation at a later stage if necessary."
So minds more eminent than the writer's seem to take a similar view to his: namely, that the majority decision is legally arguable, but it could have the effect of undermining the purpose of annual leave.

A contrary view – Commissioner Cribb's decision

In Re BM & KA Group Enterprise Agreement 2013 [2013] FWC 3654 Commissioner Cribb of the Fair Work Commission took the view that the provisions proposed in relation to this enterprise agreement were contrary to the National Employment Standards, even though they were not substantively different to those approved by the majority in the Hull-Moody Finishes case. The Commissioner took the view that she was not obliged to follow that earlier decision because of an intervening decision of (now retired) Justice Peter Gray in the Federal Court in CFMEU v Jeld-Wen Australia Pty Limited [2012] FCA 45 . That decision related not to the Fair Work Act's provisions relating to annual leave but to its provisions relating to personal leave, and was given in the context of a prosecution of an employer over non compliance with those provisions, where the ruling was that the employer was not in breach because it was not proven that the employee had been denied payment for the leave (and had in any event changed its practice after the case was brought). His Honour made no mention of the Hull Moody Finishes case. However his Honour made a ruling that in his view that the Clause 13.5 of the individual agreement in question before him was contrary to Section 100 of the Act because it provided for "cashing out" of paid personal leave. The Commissioner observed that his Honour was clearly treating the expression "paid personal leave" as a composite expression, and that being his approach, that reasoning had the same application to the expression "paid annual leave" in Section 92 (ie paid annual leave cannot be cashed out except as that section provides). The Commissioner then relied on his Honour's decision to justify her not following the majority decision in Hull-Moody Finishes.

The Commissioner's approach to a Full bench decision was novel, but then again, the issue clearly remains very controversial. [And as in the Hull-Moody Finishes case, the Commissioner did not have the benefit of a "contradictor" to the Employer's argument.]

The decision may be taken on appeal, which might be a good thing, as it would allow a revisitation of this issue at the senior level. The writer respectfully suggests that the apparent view of Justice Gray, namely that the expression "paid personal leave" is a composite one, has much to commend it, and would be entirely consistent with industrial relations practices harking back to when annual leave was first introduced in the mid 1940s.

Avoiding disputes by managing employees' leave balances

Returning to where we started, employers report to us problems from time to time with employees wanting to "cash out" some or all of their annual leave entitlements, and what to do with large employee accumulations.

As the decision in the Hull-Moody Finishes case remains problematical, what other approaches to dealing with these problems are available to employers?

"Cashing out" at an employee's request

With "cashing out" employers now have tools to deal with the problem. For non award employees, a private agreement is permissible as long as it complies with the conditions in Section 94 – most particularly, the agreement must be in writing, must relate to each separate occasion of cashing out, and must leave a minimum balance of leave of 4 weeks. For award/agreement regulated employees, similar provisions may be included in modern awards or (more likely) an enterprise agreement.

Reducing excessive leave balances

But the bigger problem usually is managing large leave balances where the employees concerned do not want to cash out some of it or take leave to reduce the accumulation.

Large annual leave balances are, in our experience, quite common. They occur for any number of reasons, but the main ones are these:

  1. the employer not encouraging employees to take leave;
  2. particular employees feeling that the employer will not look kindly on them taking leave, as the employer will not be able to easily fill their absence;
  3. particularly employees feeling guilt about leaving their fellow workers to cope without him or her;
  4. the employee not being able to arrange leave when it suits his/her partner and/or family members;
  5. an employee wanting to build up a retirement/ termination "nest egg";
  6. the employer simply not giving attention to the question until the auditor notes the looming problem in the end of financial year accounts.

Requiring employees to take annual leave

In relation to employees who are award or agreement free, the legal position is clear. Section 94 (5) of the Fair Work Act provides that "An employer may require an award/agreement free employee to take a period of paid annual leave, but only if the requirement is reasonable." The note to that sub section then cites two possible situations where requiring an employee to take annual leave may be reasonable – ie annual shut down and where "the employee has accrued an excessive amount of paid leave."

With employees who are covered by modern awards or enterprise agreements, the situation is a little more complex. Under section 93 (3) of the Fair Work Act a modern award or enterprise agreement may include terms requiring an employee, or allowing for an employee to be required, to take paid annual leave "in particular circumstances" – "but only if the requirement is reasonable." "Particular circumstances" are not identified or defined.

Modern awards do not tend to have provisions of this type, nor do most enterprise agreements.

In the absence of an award or agreement provision for this type of employee, can the employer require an employee to take part of his or her accumulated leave? Section 88 (1) of the Act provides that paid annual leave "may be taken for a period agreed between an employee and his or her employee." This provision does not, in the writer's view, clearly prescribe that an employee cannot be forced to take leave without his or her consent.

But in any event, whatever might be the strict legal position in terms of requiring any particular employee to take leave, the practical answer is for the employer to have a clear and ambiguous policy about this matter, and to enforce it. Depending on the circumstances of the employer concerned, such a policy could deal with:

  1. how much annual leave is allowed to be accumulated before arrangements have to be made for leave to be taken;
  2. what are the arrangements that will apply to the taking of such leave (ie how much leave has to be taken, by when it must be taken, whether it may be taken in separate portions etc);
  3. what if any exemptions there are from the requirement to take such leave.

Such a policy could and preferably should be included in an enterprise award or in individual contracts.

But equally important in this regard is making sure that the policy is actually implemented – ie enforced in a consistent and (of course) fair fashion. A policy is useless unless the employer uses it and ensures people abide by it. The policy underlying annual leave entitlements are clear – employees should take at least one annual paid break from work, in their interests and that of their employer. Employers have to accept that employee should be taking their leave, and that they should act to prevent a culture developing where employees do not take or avoid taking annual leave, resulting in a long term financial burden for the employer.

A note about long service leave accruals

As mentioned earlier, employers can also be troubled by substantial long service leave accruals amongst its employees. This subject would be deserving of a separate article, but there are some observations that can be usefully made about this subject in this context.

  1. Generally speaking, employers have the legal right to direct an employee to take accumulated long service leave – see for example sub sections 4 (3) and (10) of the Long Service Leave Act 1955 (NSW) and sub sections 66 (2) and (3) of the Long Service Leave Act 1992 (Vic);
  2. Employers and employees can agree to split the amount of leave into a number of portions – see sub section 4 (3) (b) of the NSW Act and subsection 67 (2) of the Victorian Act, so there is clearly flexibility to allow long service leave accumulations to be eradicated or brought down to reasonable proportions;
  3. As with annual leave accumulations, employers need to give attention to managing employees' long service leave accumulations, and in that regard regular monitoring is necessary.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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