Australia: Leading firm urges greater awareness of significant changes to annual leave provisions now in force

Last Updated: 17 October 2016
Article by Peter Doughman

"Important changes to annual leave rules for Award covered employees recently made by the Fair Work Commission will have significant impacts on employers with most of these new rules already in effect, however a leading firm believes many may not yet be aware of the changes.

"The changes introduced by the Fair Work Commission (FWC) include new arrangements for requesting and taking annual leave, for cashing out annual leave, and for reducing excessive leave accruals. In some cases the changes affect as many as 112 out of a total of 122 modern awards.

"Employment lawyers should ensure their employer clients are aware of these important changes, particularly as most of the changes started on 29 July 2016.

The problem of accumulating annual leave balances

"Four weeks annual leave has been enshrined in Australian employment law for many years, as is the right to be paid upon termination of employment the monetary value of all untaken leave at the rate of pay when the employment ends.

"We all recognise that annual leave exists for employees to have time out from work, at least yearly, and that is clearly in the interests of both employees and employers. But there are some collateral problems, particularly for employers, if such leave is not taken regularly."

"Large accumulations of annual leave by employees can create substantial financial liabilities for employers when employment ends, and employers are likely to pay out a lot more than if the employee had taken leave as and when it fell due. Leave accumulates for a range of reasons – sometimes employees only want to take leave at the same time as their partner; others are approaching retirement and want to build up a nest egg; some are "work junkies"; and sometimes the employer does not have the staff cover to release employees on leave.

"The new changes to most Modern Awards will assist employers to deal with this problem, if they are prepared to take up the opportunity. It will also allow award regulated employees to cash out part of their annual leave accumulation (a benefit only previously available to award free employees and those employees covered by an enterprise agreement with cashing out provisions).

"The key initiatives that Employers and their advisors need to be aware of in relation to the new award measures that address problem of accumulating annual leave balances are these.

Cashing out annual leave

"FWC has varied 112 of the 122 modern awards to permit and regulate the cashing out of accrued and untaken paid annual leave by agreement of employer and employee. Any agreement to cash out annual leave must:

  • be for each individual occasion of cashing out
  • be in writing signed by the employer and employee
  • state the amount of leave to be cashed out and the payment to be made to the employee
  • state the date when the payment is to be made to the employee
  • be no more than the cash equivalent of two weeks' annual leave in any twelve month period; and
  • not result in an employee's accrued annual leave entitlement falling below four weeks.
  • "The employer must keep a copy of each such agreement as part of its employment records.

Excessive leave accruals and directions or notice to take leave

"The FWC has varied 80 of the 122 modern awards in order to insert the "excessive annual leave" model term that defines an excessive leave accrual as being in excess of eight weeks (or ten weeks for a shift worker). The model term provides that where an employer and employee cannot agree on how to reduce or eliminate an excessive annual leave accrual, either the employer may direct the employee to take, or the employee may give a notice requesting to take, one or more periods of paid annual leave.

"In either case, the direction given by the employer or the notice given by the employee:

  • must not result in the remaining annual leave being less than six weeks when any other leave arrangements are taken into account; and
  • must not involve the use of annual leave for a period shorter than one week.

"Further, the period of annual leave must not commence less than 8 weeks or more than 12 months after the direction by the employer or notice by the employee is given.

"In the case of an employee's notice to take paid annual leave, the notice can only be given if the employee has had an excessive leave annual accrual for more than six months, and has not been subject to a prior direction by the employer to reduce the excessive annual leave accrual. The model term provides that where an employee issues a notice to an employee consistent with its provisions, the employer must grant the employee's request for paid annual leave.

"Unlike the other variations to the modern awards, the model term permitting an employee to give notice to an employer to take paid annual leave will not take effect in any of the many affected awards until 29 July 2017.

"These national level award changes are potentially very significant in that they apply to the overwhelming bulk of award regulated employees and provide the means whereby the problem of excessive annual leave balances can be addressed, particularly by employers, over time", said Mr Doughman.

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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