Changes to Annual Leave in Modern Awards

The Fair Work Commission (‘FWC’) has handed down an important decision in relation to annual leave entitlements for employees covered by Awards. The Decision is part of the FWC’s four yearly Award review process.

The decision covers several areas.

Whilst employees that are covered by enterprise agreements have been able to cash out annual leave if the Agreement allowed for this to occur, and employees that are not covered by an Award have been able to do the same, employees covered by Awards have generally not been able to do this. 

Requests by employees to cash out, rather than take, accrued leave are very common. Prior to this decision it was unlawful for an employer whose employees are covered by an Award to agree to such a request even if it suited the interests of both the employer and the employee.

The Decision means that a model clause will be inserted in all Awards allowing for cashing out to occur in certain circumstances.

Currently, if cashing out of annual leave is permissible, the following protections exist;

       i.          an employee can only cash out the amount of leave that they have in excess of 4 weeks.  i.e. If an employee has 5 weeks annual leave to their credit, they can only cash out 1 week.

      ii.         there must be an agreement in writing between the employer and employee on each occasion about the cashing out of annual leave.

     iii.            the employee must be paid an amount of money equivalent to the amount they would have received had they taken the annual leave.

In addition to these protections, Award covered employees that wish to cash out annual leave will have the following extra protections and restrictions;

       i.          a maximum of two weeks’ annual leave can be cashed out in any 12 month period (in the case of part-time employees, this is based on the employee’s weekly ordinary hours);

      ii.          the will be specific requirements relating to record keeping and the content of any agreement relating to cashing out accrued annual leave. i.e. the amount to be cashed out must be in writing, the date payment is to be made must be stated and the written agreement must be kept as an employee record.

     iii.          if the employee is under 18 years of age the agreement to cash out a particular amount of accrued paid annual leave must be signed by the employee’s parent or guardian; and

     iv.          notes are inserted at the end of the model term drawing attention to the general protections in Part 3-1 of the Fair Work Act 2009 against undue employer influence and misrepresentation in relation to rights under the clause. i.e. an employer must not exert undue pressure or make any false or misleading representations in relation to the cashing out of annual leave

This decision is a sensible and overdue outcome given that it is usually employees that want to access this entitlement and until now employers have been unable to lawfully agree to such arrangements for businesses that have their employment arrangements regulated by Awards.  It also provides a benefit to employers to assist them in dealing with employees that have accrued excessive amounts of annual leave. Whilst the cashing out process does require agreement between the parties and this will not always be possible, it does open an avenue that previously did not exist to deal with what can be a difficult issue from time to time.

Employers are often faced with the situation of an employee that has accrued significant amounts of annual leave and which they refuse to take.

Whilst employees that are not covered by an Award can be directed to take excessive annual leave (subject to certain conditions being satisfied) and employees covered by enterprise agreements can be directed to take annual leave if their Agreement provides for this, some but not all Awards are silent on the issue.  If the Award does not allow for a direction to take leave to be given by an employer, it has not been possible to compel an employee to take excessive annual leave.

The Decision, which will be incorporated into the 70 Awards that do not deal with excessive leave currently, means that a model clause will be inserted into those Awards allowing an employer to direct an employee to take annual leave if they have accrued an excessive amount.  

An employee will be considered to have excessive annual leave if;

       i.          the employee is not a shiftworker and has accrued more than eight weeks paid annual leave, or

      ii.          the employee is a shiftworker and has accrued more than ten weeks paid annual leave.

Prior to directing an employee to take annual leave, the employer and the employee must meet to discuss the issue and genuinely try to reach agreement on steps to reduce the annual leave balance.  If no acceptable arrangement can be agreed then the employer can direct the employee to take annual leave subject to the following provisions;

       i.          the employer must give the direction in writing to take a period or period of annual leave and the direction must state that it is made under sub-clause 1.2(b) of the Award.

      ii.          the employer can only direct the employee to take the amount of annual leave accrued to the employee that is in excess of six weeks. i.e. if the employee has eight weeks annual leave, they can only be directed to take 2 weeks of that period because a six week minimum period must remain after the taking of the leave.

     iii.          the period of leave directed to be taken must not be less than one week.

     iv.          the employee must be provided with at least eight weeks’ notice of the date that the leave must be taken.

      v.          the direction cannot require an employee to take a period of leave more than 12 months after the direction is given.

     vi.      the direction cannot be inconsistent with any leave arrangement agreed between the employee and the employer.

This decision provides certainty and consistency in relation to an issue that frequently is a problem for employers who don’t want to carry too much annual leave on their books.  It also serves as a push factor in getting employees to be sensible about how they take their annual leave so as to avoid being forced to take annual leave at a time not suited to them.

A provision will be incorporated into 48 Awards that will allow employers to grant annual leave in advance of the entitlement accruing, but employers will be able to recover the balance of any amount advanced to the employee from the employees final wages if the employee subsequently leaves the employment before they have accrued sufficient annual leave to cover the amount that was advanced to them.  This provision might be useful in several circumstances, but particularly for businesses that observe an annual closedown and some staff do not have sufficient leave to cover the closedown period.

To make such an agreement the employer and the employee must ensure that the agreement;

       i.          is in writing and signed by the employee and employer.

      ii.          states the amount of leave to be taken in advance and the date on which the leave is to commence;

     iii.          is retained as an employee record.

Currently, 51 Awards require annual leave to be paid in advance when an employee takes annual leave.

The FWC intends to vary these Awards to allow annual leave to be paid in the ordinary course of the pay cycle.  This brings all Awards in to line with normal payment arrangements.

The changes are mostly positive for employers but have not yet been incorporated into Awards.  The FWC is still going through some consulting processes and is currently seeking feedback on the proposed changes.

We will advise further when the changes have occurred but it appears likely that the changes will progress as indicated in due course