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Cashing out annual leave: Modern Award update

August 22, 2016

cash in hand

If any of your employees are covered by a Modern Award, you should take note of the recent changes announced by the Fair Work Commission. The recent changes apply to certain Modern Awards and the provisions relating to cashing out annual leave, taking annual leave in advance and managing ‘excessive’ annual leave balances.

Cashing out annual leave:

The cashing out annual leave process was previously prohibited by a number of Modern Awards, meaning that employees had to take time off to receive their annual leave entitlements.  However, following the recent decision by the Fair Work Commission, most Modern Awards have been amended to allow employees to ‘cash out’ up to 2 weeks of annual leave in any 12 month period; providing that they have:

  1. signed a written agreement with their employer; and

  2. will have at least 4 weeks of annual leave left after the cash out takes effect.

The agreement to cash out annual leave must specifically state the amount of leave being cashed out, the amount that will be paid to the employee and the date that payment will be made. Most awards now provide a template agreement for employer to use when an employee is cashing out annual leave.

Both you and your employee must sign the agreement (as well as a parent or guardian of the employee if they are 18 years old).  As part of your record keeping obligations, you must keep a copy of the agreement for at least 7 years.

Taking annual leave in advance:

Another change made to most Modern Awards is the provision allowing employees to take a period of annual leave in advance; provided that the employer agrees in writing.

Such agreement must state the amount of leave that will be taken as well as the date the leave commences. The agreement must be signed by both the employer and employee (as well as the employee’s parent or guardian if they are under 18 years old). Similarly to the agreement to cash out annual leave, there is a template agreement in most Modern Awards which must be kept for at least 7 years for record keeping purposes.

If the employee has not accrued an entitlement to the period of annual leave that was taken in advance on termination, the employer may deduct an amount equal to that amount paid to the employee in respect of the period of annual leave that was taken in advance but not accrued on termination.

Managing ‘excessive’ annual leave balances:

An ‘excessive’ annual leave balance is where an employee has accumulated at least 8 weeks of paid annual leave.

If an employee has an excessive annual leave balance, and you are unable to come to an agreement with them on how to reduce the employee’s annual leave balance, an employer may direct an employee to take a period of annual leave.

A direction to take a period of annual leave must be given in writing. The direction cannot be given less than 8 weeks (and not more than 12 months) before the period of annual leave is to commence.  The direction cannot require the employee to take a period of paid annual leave of less than one week and cannot result in the employee being left with less than 6 weeks of accrued paid annual leave.

An employee who has had an excessive annual leave balance for more than 6 months can now give his or her employer written notice that they will be taking a period of annual leave. However, an employee who has been given a written direction by their employer to take a period of paid annual leave cannot make such a request.

When do they come into effect?

Most of the changes concerning paid annual leave are now in effect, having commenced from the first full pay period on or after 29th July 2016.

However, changes allowing those employees who have had an excessive annual leave balance for more than 6 months to advise their employer that they will be taking a period of annual leave will take effect from 29th July 2017.

For more information on the changes to annual leave and what this means for you, clients should contact the HR Assured team. If you’d like more information about the benefits of becoming an HR Assured client contact us today for an informal chat.