First published on Thursday, July 25, 2024
Last updated on Friday, August 16, 2024
Many employees choose to cash out their annual leave. This allows them to exchange any accrued holiday days for their monetary value in dollars. In return, they work the cashed-out hours they are paid for.
Alternatively, your employee may be leaving your employment and be owed a payout that has built up over the course of their employment.
Of course, cashing out annual leave can seem confusing for SMEs that haven’t received this request before. And there are strict rules and obligations governing the cashing out of leave that you must follow.
That’s why, we’re here to advise you. Exploring the world of annual leave cash out, we’ll cover your legal requirements, considerations, and procedures when cashing out annual leave, and the tools you can use to simplify the process.
What exactly is an annual leave cash out?
In Australia, full-time employees have a legal annual leave entitlement of four weeks for every 12 months they’ve worked.
For part-time employees, this number is calculated on a pro-rata basis. This will often be claimed for holidays and personal reasons like significant life events.
Some employees, however, may want to exchange their accrued leave for financial reward. Opting to work these days instead of taking the time off.
The Fair Work Act 2009 governs the employee-employer relationship in this area. There are three ways that employees can cash out their annual leave:
A modern award
A written agreement between employer and employee
The Fair Work Act 2009 section 94(1) covers employees without these agreements
If an employee wants to cash out, they must have accrued more than four weeks’ worth of leave. This applies to all three of the routes listed above. Importantly, employees can convert only certain types of paid leave into payment.
These are:
Annual leave
Rostered days off
Long service leave
Time off in lieu
Sick and carer’s leave (under set criteria)
You shouldn’t force your employees to take or not take a payout of annual leave. Requiring a tactful approach, section 344 of the Fair Work Act 2009 bans employers from exerting undue pressure on employees.
There are also further regulations that you and your HR team need to follow, including new amendments.
Rules and regulations for cashing out annual leave
It can be daunting to understand the industry-specific and legal regulations surrounding cashing out annual leave. So, here are details about each of the three pathways.
Cashing out annual leave under an award
An employee may request payment for their annual leave days if they fall under the jurisdiction of a modern award.
A modern award dictates the conditions of an employee’s work. More than 120 industry awards apply across the entire country and they’re not dependent on an individual state or territory’s interpretation of the law. Crucially, most awards cap cashing out of annual leave to 2 weeks within any 12 months.
You can find the specific terms and conditions surrounding cashing out annual leave through the Fair Work Ombudsman’s award-checking tool. Your employees can only cash out their annual leave as the relevant award allows.
Cashing out annual leave via a registered agreement
On the other hand, you and a minimum of two employees may have negotiated an enterprise agreement. Assessed by the Fair Work Commission, your business would have formed a set of conditions that apply to your unique business.
What you originally agreed on will determine when cashing out is possible. However, specific rules must still be followed to comply with the law. Your employees must have a minimum of four weeks of annual leave owed to them.
They must be compensated the same financial amount (as a minimum) that they would have received if they took their leave.
Similarly, you cannot compel your employees to cash out their annual leave payout. And the cashing out payment must be made in writing on each occasion where annual leave is exchanged for money.
Cashing out annual leave where no agreement exists
It’s worth noting that cashing out annual leave is still possible for employees with no award or agreement in place. Just be sure that this new arrangement is recorded in writing.
Your employee is entitled to at least the equivalent financial amount that they would have received as wages whilst on leave. All employees seeking to cash out annual leave need to have more than four weeks left following this transaction.
How have payouts of annual leave changed over the years?
While the Fair Work Act 2009 and its new awards were introduced in principle in 2010, an issue arose. Barely any of these awards featured conditions where employers and employees could organise a worker’s annual leave allowance. In fact, only those employed within the Seafood Processing Award (2010) could ask for their annual leave to be cashed out. Something had to change.
Things continued this way until 29th July 2016 when the Fair Work Commission’s (FWC’s) model clause amendments came into effect. This granted millions of employees (with a modern award) new cashing out rights.
More recent changes have been gradually introduced to the regulations that cover cashing out annual leave. The Closing Loopholes Act introduces amendments where “all modern awards and any newly made enterprise agreements will include a new standard clause.” This will give these employees the right to be represented by workplace site union delegates.
How should you obtain written consent from your employees?
Before putting anything in writing, you should always check if any clauses exist within the relevant modern award or enterprise agreement. This helps you understand your legal obligations and negotiate.
A best practice is to obtain–and keep–written consent from any employee who wishes to cash out annual leave. This ensures you’re following the law, maintains your record-keeping obligations, and confirms specific information.
On this written agreement, you and your employee must confirm:
How much leave will be cashed out
What this equates to in financial terms
On what date the payment will happen
This needs to have both your and your employee’s signature. Any agreement with an employee aged 17 or younger will require an additional signature from a parent or guardian. It’s worth noting that any future cashing out by the same employee will require a new written agreement.
Our HR document library, BrightBase has a specific template letter for this purpose. And we’re always here to support you and your HR team 24/7 via our employment relations advice line BrightAdvice.
Implications and considerations when employees cash out annual leave
The fundamental entitlement annual leave fulfils, is the ability for employees to take a break, relax, and unplug from their workplace responsibilities. When employees don’t use this entitlement, it increases the risk of burnout as well as poor mental and physical health.
This is why, separate from annual leave cash out regulations, there may be rules for accruing excessive annual leave. Under these rules, certain employers may be able to direct employees to take annual leave once they’ve accrued a certain amount.
Another thing to factor in is the potential implications for you as an employer regarding annual leave payouts. If you’re making key decisions in this area, you’ll need to make sure your employee has four weeks of annual leave remaining after cashing out annual leave.
We’d advise you to factor this payment into payroll–along with their wage for the hours they’ll work. You should also understand the impact of taxation on your cash flow. A payout of annual leave is taxed using Methods A or B within the Schedule 5 tax table. It can also affect your long-term workforce management strategies.
Outgoing employees who cash out will create a considerable wage bill at a time when you may need to focus on recruitment.
Developing effective workplace policies and procedures for managing your employees’ leave requests can alleviate these impacts by helping you plan ahead. This will also help you sustain cash out annual leave requests while complying with the law.
Best practices and how to minimise risks in an annual leave cash out
As with all aspects of business, being fair and transparent while maintaining clear communication is vital. Promoting the culture of taking rest in your workforce avoids the pitfalls of cashing out. This can be as simple as asking your employees why they haven’t used their annual leave entitlement during their performance review.
Firstly, your business reaps the rewards of well-rested employees after a break
Secondly, when you payout your employee’s accrued annual leave, you will be paying them at their current salary and not the one that they held throughout the last 12 months
Thirdly, working too long without leave limits employee productivity, creativity, and overall job satisfaction
Get round-the-clock help from BrightHR
We help Australian businesses navigate the choppy waters of annual leave cashing out.
This includes supporting your business with up-to-the-minute advice and document templates to ensure you comply with cashing out legislation, both new and established.
Discover BrightHR and see how we can help you avoid the risks of cashing out annual leave. Talk to a friendly advisor today!
