Tuesday, 13 September 2016

New changes to annual leave for award covered employees

On 29 July 2016, the Fair Work Commission finalised its decision varying modern awards to insert annual leave provisions about:

  • Cashing out annual leave;
  • Directing an employee to use excessive annual leave;
  • Taking annual leave in advance

Most of these changes came into operation in the awards on 29 July 2016.

Cashing out annual leave

Under the new cashing out of annual leave provisions, an employer may agree with an employee to cash out a particular amount of accrued paid annual leave provided that the employee’s remaining accrued entitlement is no less than 4 weeks after the cashing out and that no more than 2 weeks is cashed out in any 12 month period.

Each cashing out of annual leave must be the subject of a separate agreement in writing signed by the employer and employee. The agreement must state the amount of leave to be cashed out and the day on which the payment is made. The employer must keep a copy of the written agreement as an employee record.

It is important to note that award free employees also have the right to cash out annual leave under the Fair Work Act. However, award free employees are not subject to any cap on the amount of leave which can be cashed out.

Employees may also have the right to cash out long service leave if permitted under the relevant long service leave legislation in the State or Territory where the employee is based.

Directing employees to take excessive leave

Employers are now able to direct employees who have accrued excessive amounts of annual leave to take a portion of that leave. “Excessive” annual leave means more than eight weeks’ accrued annual leave (or ten weeks’ annual leave in the case of a “shiftworker”).

Before directing an employee to take leave, an employer must first attempt to reach agreement with the employee on how to reduce or eliminate the excessive leave. If agreement cannot be reached, the employer may direct an employee to take annual leave, provided that the employee’s remaining accrued entitlement is not less than six weeks and that the employee takes a period of annual leave of at least one week. The employee must be given at least eight weeks’ notice of the commencement of the directed leave.

Employees will also have the ability to demand to take a period of their excessive annual leave if agreement cannot be reached with the employer on when it should be taken and provided that the employee has had an excessive annual leave accrual for at least six months.

Directing employees to take annual leave has the benefit of reducing this liability on the employer’s balance sheet, which continues to increase in value as employees salary levels increase. Also ensuring employees take adequate periods of leave can have benefits in reducing the risk of workplace injuries, both physical and psychological.

Under long service leave legislation in most States and Territories, employers also have the right to direct employees to take long service leave by providing the appropriate notice.

Annual leave in advance

Under the new provisions, an employer may agree for an employee to take annual leave in advance if the employee has not yet accrued sufficient paid annual leave. There is no automatic right to leave in advance of its accrual – the advance leave must be by agreement.

While there is no restriction on amount of annual leave an employee may take in advance, the employer has the right to make a deduction from the employee’s termination pay if the employee’s employment ceases before they accrue the annual leave taken.

Actions for Employers

From 29 July 2016, employers must comply with the new minimum obligations regarding annual leave for all award covered employees. Employers should now carefully review and update their leave policies and procedures to reflect the changes in any applicable modern awards.

If you would like to understand the impact of these changes on your business or if you require assistance with drafting or updating leave policies, please contact us.


This article was produced by HR Legal. It is intended to provide general information only in summary format on legal issues. It does not constitute legal advice, and should not be relied on as such.

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