On 29 July 2016, important changes made by the Fair Work Commission (FWC) to most modern awards came into effect.  The variation of clauses governing excessive annual leave accrual, cashing out annual leave, taking annual leave in advance and payment of annual leave is expected to provide greater flexibility for employers.

Managing “Excessive” Annual Leave

The FWC has determined that employees under most modern awards have an “excessive leave accrual” if they have accrued more than 8 weeks’ paid annual leave, or 10 weeks for shiftworkers.

The first step for an employer where an excessive leave accrual exists is to attempt to confer with the employee and genuinely ‘’try” to come to an agreement on how to reduce the balance.

If no agreement can be reached (including because the employee won’t negotiate), an employer can direct their employee to take annual leave, provided certain conditions are met.

Any direction made by an employer regarding reducing excessive leave accruals must:

  • Leave the employee with at least 6 weeks’ leave ‘in the bank’ after the forced leave is taken;
  • Give the employee between 8 weeks’ and 12 months’ written notice (Notice Period);
  • Not require the employee to take leave for less than one week; and
  • Be consistent with any other leave arrangement already agreed with the employee.

 
Interestingly the FWC has decided that such a direction is no bar to the employee subsequently making a request for annual leave.  Employers in this situation are reminded that section 88(2) of the Fair Work Act (FWA), provides that an employer cannot unreasonably refuse a request for leave.  Theoretically, such a request could be made within the Notice Period and result in the employee being under the threshold for “excessive” leave accrual – making the employer’s pre-existing direction invalid. The overall result would be a decrease in the annual leave balance of the employee which is what the employee intended to achieve by issuing the direction.

Cashing Out Annual Leave

Most modern awards now allow employees to take a cash out in lieu of annual leave.  Each cash out must be contained in a separate written agreement signed by both employer and employee. There are a number of other preconditions to a cash out agreement:

  • Payment can’t be less than would be received by taking the leave;
  • Employees can’t be left with less than 4 weeks annual leave;
  • Employees can only cash out 2 weeks’ worth of leave every 12 months; and
  • Employers must keep a copy of each agreement as an employee record.

 
Employers should note that under section 344 of the FWA, they are prohibited from exerting any undue influence or pressure on an employee to sign a cash out agreement or accept its terms.

Annual Leave in Advance

Most modern awards will now allow employees to take annual leave before a right to such leave has accrued; provided an agreement with their employer is signed that:

  • states how much leave is being taken and the starting date; and
  • is retained by the employer as an employee record.

 
If an employee does not accrue an entitlement to the leave taken in advance by the date of their termination, their employer may deduct a corresponding amount from any monies owed to the employee at termination.

Payment of Annual Leave

A number of modern awards previously required annual leave to be paid in advance of the period of their annual leave.  These awards have been amended so that if an employee is normally paid by electronic funds transfer, they can continue to be paid as normal during the period of their annual leave.

Future Changes

Some awards have inserted a new clause, effective from 29 July 2017, allowing employees with excessive annual leave balances to direct their employer that they are taking leave.  This clause, when effective, will be dependent on the employee having had an excessive leave accrual for over 6 months and genuine steps having been taken to reduce the leave balance.

Commercial Impact

Employers generally prefer to keep annual leave accruals at workable levels.  The welcome changes to most modern awards will allow for greater flexibility for employers trying to manage employees annual leave balances.

Please contact Michael Bishop, Amelita Hensman or Ben Drysdale with any queries in relation to annual leave or employment law more generally.

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