Employer update - Understanding annual leave entitlements

What are annual leave entitlements?

Annual leave is one of the oldest entitlements available to employees. Annual leave for employees began in Australia in 1935 with the implementation of 1 week, 4 weeks paid leave began in 1974.

Most countries around the world have labour laws that mandate employers give a certain number of paid time-off days per year to workers. As examples, Canada requires at least two weeks and in the European Union, countries can freely set their minimum, as long as it is no less than 4 working weeks.

Annual leave for all permanent Australian employees is protected in the National Employment Standards (NES), implemented in 2009. However, there remains some variation in annual leave entitlements, depending on the terms of the modern award that applies to a workplace, any enterprise agreement, or even the terms of an individual’s contract of employment.

We look at some of the common questions regarding annual leave entitlements for in the Australian private sector.

What are my annual leave entitlements?

The NES provides that employees, other than casual employees, are entitled to 4 weeks of paid annual leave per year, at the same rate as their contracted ordinary hours. Award covered employees who are classified as ‘shift workers’ under the Fair Work Act 2009 (the Act) are entitled to 5 weeks of paid annual leave per year. An award/agreement free employee qualifies for the shift worker annual leave entitlement if they are:

• employed in an enterprise in which shifts are continuously rostered 24 hours a day for 7 days a week; and
• is regularly rostered to work those shifts; and
• regularly works on Sundays and public holidays; or
• is in a class of employees prescribed by the regulations as shift workers for the purposes of the National Employment Standards.

For employees who are engaged, paid and work as casual employees, there is no entitlement to paid annual leave under the NES.

Annual leave accrues progressively during a year of service according to the employee’s ordinary hours of work and accumulates from year to year. Any accrued but unused annual leave must be paid out when the employment relationship is terminated.

Can I terminate an employee’s employment while they are on annual leave?

Yes, with caution, employees can be dismissed when they are on annual leave as long as the reasons for their dismissal are not related to their taking annual leave.

If their dismissal while on annual leave is nothing more than a coincidence, then the dismissal is not unlawful simply because it occurred while they were on annual leave.

Terminating an employee while they are on annual leave can, however, have a bearing on the notice period you are required to provide. This issue may be raised during an unfair dismissal proceeding if it has a bearing on:

• whether the employee was provided with an opportunity to respond to the reasons for termination;
• the harshness of the termination; or
• whether an extension of time should be granted (if the application was made outside the required timeframe due to the employee’s leave).

Can you force employees to take annual leave?

Generally, annual leave should be taken by agreement and at a time that is mutually convenient to both the employee and the employer.

Under s.88 of the Act, an employer cannot unreasonably refuse an employee's request to take paid annual leave. However, an employer may refuse a leave request if genuine operational requirements underpin their refusal.

Under s.94(5) of the Act, an employer may direct an employee to take a period of annual leave (but only if the direction is lawful and reasonable). A reasonable direction to take annual leave may arise in circumstances where the employee has accrued an excessive amount of annual leave (for example, over 8 weeks of annual leave) or where the employer's business is being shut down for a period (for example, between Christmas and New Year).

Can employees cash out their annual leave?

If employees are not covered by an award or an agreement, they can reach an agreement with their employer to the effect that their annual leave entitlements are paid to them without taking leave (‘cashing out’ annual leave).

However, each agreement to cash out a particular amount of paid annual leave must be a separate agreement, in writing, and the employer and employee must not agree to cash out annual leave if the result would leave the employee with less than four weeks leave accrued.

If a portion of their annual leave is cashed out, the employer must pay them the full amount that would have been payable if they had taken the leave.

If employees are covered by an award or an agreement, there may be clauses in those instruments that set out the steps that need to be followed when cashing out annual leave. Commonly, Awards contain a template ‘cashing out’ agreement that meets the requirements of the Award. If there is no clause in an applicable award or agreement, that permits the cashing out of annual leave, then the employee will not be able to cash out their leave.

Are my employees entitled to leave loading?

There is no entitlement to be paid leave loading (typically an amount of 17.5%) under the Act. An entitlement to leave loading may be found in the applicable award or agreement, or the employee's contract of employment.

To determine if employees are entitled to leave loading, you will need to check the relevant award or enterprise agreement, or their employment contract.

Can employees ‘buy’ additional annual leave?

There is no express right for employees to purchase additional leave if their statutory entitlements have been exhausted. However, some employers are willing to enter into arrangements with their employees where:

• additional leave can be purchased;
• an employee may be permitted to take unpaid leave or leave at half-pay; or
• in certain circumstances, the employee may be permitted to overdraw their leave balance.

Where an employer elects to allow employees to ‘purchase’ additional annual leave, it will commonly be part of their attraction and retention strategy and will be documented in a workplace policy.

What happens to an employee’s accrued annual leave if they are dismissed or resign?

If employees are dismissed or resign, their employer is required to pay them their accrued but untaken annual leave entitlements. These payments should be processed as soon as possible after their employment ends, but no later than one month after the employment ends. If the employment is covered under an award or agreement, there may also be an obligation to pay annual leave loading.

What is the purpose of an annual leave policy?

Policies and procedures are generally an excellent way of providing clarity for you and your employees about how annual leave will be handled and to explain any extra provisions you might allow for.

The Act and awards do not set out notice periods for leave requests, approval priorities, close down periods or operational reasons for applications being denied. These are issues that an employer is at liberty to define. The value of having a policy is so that all employees understand the standards that are acceptable in your business. When you do not have common issues documented, you leave it open for an employee to dispute your decisions, which can lead to disharmony.

If you do put an annual leave policy in place, make sure that you base your requirements on the genuine operational needs of the business, considering issues relating to caring responsibilities, anti-discrimination legislation and the terms of your employment contract.

Need help?

If you are unsure of your obligations relating to annual leave or an employee is disputing a decision you have made, we can assist you. You can reach us at reception@activelaw.com.au or by calling 07 3160 0000.

Disclaimer – Reliance on Content
The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.