FWC makes way for cashing out of annual leave in modern awards

 Photography / Craig Sunter

Photography / Craig Sunter

Earlier this month, the Fair Work Commission handed down a decision about the way modern awards deal with excessive accrual of annual leave. There were two main take away points for employers: firstly, employers will be able to direct their employees to take excessive accrued annual leave and secondly, employees will be able to cash out part of their annual leave.

These changes are aimed at bringing the modern awards in line with award-free and agreement-free employers and employees. Under the National Employment Standards, award-free and agreement-free employers have been able to direct employees to take excessive accrued annual leave. Similarly, award-free and agreement-free employees have always had the option to cash out their excessive annual leave. Cashing out is also a regular inclusion in enterprise agreements. To allow the same entitlements to modern award covered employers and employees, the FWC proposes inserting two model clauses into all modern awards.

The new clauses are designed to strike a balance between employer interests and employee safeguards. Submissions from employer groups made the point that excessive annual leave accrual is a problem when it comes to final payments upon employee termination and can really impact the employer’s bottom line when large annual leave payments are due. One way of avoiding these payments is to have the ability to direct employees to take annual leave or for employees to periodically cash out their excessive annual leave.

On the other hand, employee groups argued that employees should have control over when they take leave and should not be directed by their employer in this regard. They also argued that the point of annual leave is for it to be taken for rest and recovery and that cashing out leave undermines the intention of taking annual leave for rest and recreation.

The two model clauses drafted in the FWC decision attempt to balance these concerns with the needs of the modern workplace.

Generally speaking, the clause dealing with directions to take excessive accrued annual leave says that an employer and employee must meet to try and agree about when the employee will take leave. If no agreement can be reached then the employer may give a direction to take leave. That direction must:

  • be in writing;
  • ensure that the employee still has at least six weeks of leave accrued after the directed leave is taken;
  • not be for less than a week;
  • give at least eight weeks notice; and
  • not require an employee to take leave more than 12 months into the future

The model clause also contains provisions for circumstances where an employee wishes to give notice and for dispute resolution.

The model clause about cashing out annual leave says that an employer may agree to cash out an employee’s annual leave where:

  • the employee retains a leave balance of four weeks;
  • the employee does not cash out more than two weeks of annual leave in any 12 month period; and
  •  each time annual leave is cashed out, it is by a separate written agreement

An essential component of this model clause is that any agreement to cash out annual leave must be by agreement between the employer and the employee. Employers can in no way apply any pressure on employees to cash out their annual leave rather than take time off.

Draft versions of the clauses will be posted to the FWC website for comment before the next steps toward implementation are taken. 

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