Pay and Conditions

I Want a Holiday, or Maybe I’ll Just Take the Money Instead


It is not uncommon that we receive a query as to whether employers can direct employees to take annual leave. This often arises when the business shuts down usually over the Christmas and New Year season. Conversely, it is not uncommon that we receive a query as to whether, and in what circumstances, employees are able to trade in a portion of their annual leave entitlement for cash.

The answer to both questions is far from straightforward. The industrial relations landscape in Australia does permit employers to direct employees to take leave under certain specified conditions. In addition, some employees may be entitled to “cash out” their leave, subject to specific requirements which apply under legislation and various industrial instruments.

Fair Work Act

The Fair Work Act 2009 (Cth) (“FW Act”) sets out the basic entitlement of employees to paid annual leave. This entitlement is one of the ten safety net entitlements under the National Safety Net (“NES”) contained in the FW Act. Most employees are entitled to 4 weeks paid leave each year which accrues progressively during the year of service, depending on the employee’s ordinary hours of work. Annual leave accumulates from year to year and cannot be lost or extinguished other than by cashing out in accordance with the provisions of the FW Act.

Some employees may be entitled to an additional weeks’ annual leave each year, if they are a shift worker who works in a business that has continuously rostered shifts 24 hours a day, 7 days a week and the employee regularly works those shifts and works on Sundays and public holidays. Employees covered by a Moderns Award or Enterprise Agreement who are classified as shift workers for the purposes of the NES will also be entitled to 5 weeks’ annual leave each year.

Unfortunately, the rules regarding the taking and cashing-out of annual leave are not uniform and differ depending on whether the employee is covered by a Modern Award or Enterprise Agreement, or not. This makes the issue for employers especially difficult as there may be different rules applicable to different classes of employee within the business. Employers will need to be very careful not to apply a one rule fits all approach to this issue.

Section 94 of the FW Act provides that an employer and award/enterprise agreement-free employees may agree to cash out some of the employee’s accrued annual leave entitlement’ provided such agreement would not result in the employee’s remaining entitlement being less than 4 weeks. The FW Act requires the parties to evidence such agreement in writing on each separate occasion that annual leave is cashed out.

In the same vein, the FW Act allows employers to direct award/enterprise-free employees to take a period of paid annual leave, but only if the requirement to do so is reasonable, for example, if the business is shutting down for a period for example, between Christmas and New Year or the employee has accrued an excessive amount of paid leave. The list of what is “reasonable” is not closed and will depend on the circumstances. In addition, the employer and an employee can agree on when and how paid leave may be taken by the employee. This allows the employer and employee to agree for instance on the ability of the employee to take paid leave in advance of accrual; that the paid leave must be taken within a fixed period of time from date of accrual and how much notice of the intention to take leave is required.

Modern Awards

In the case of an award-covered employee, cashing out of annual leave is only permissible where the applicable modern award contains a term permitting cashing out of annual leave to occur. Until a recent decision by the Full Bench of the Fair Work Commission which implemented changes affecting 122 modern awards from 29 July 2016, the legal position was that cashing out of annual leave for award-covered employees was rare. The newly implemented changes mean that employees covered by a Modern Award that contains a cashing-out clause, can now cash out up to 2 weeks’ annual leave in any 12 month period, as long as they have not less than four weeks’ accrued annual leave remaining, and the agreement is formalised in writing between the employee and employer. The changes are expected to affect as many as 2 million employees across various sectors of Australian business and industry.

Under the new regime, employees can now also direct employees who have excessive annual leave, to take one or more weeks paid annual leave on the basis that the remaining annual leave entitlement is not less than six weeks. Before issuing the direction, an employer must first meet with the employee to try and agree on a plan to reduce the excessive leave accrual.

In addition, the new regime also allows an employer and employee to agree to paid leave in advance of the employee actually having accrued the entitlement to take the leave. Such agreement must be recorded in writing. In circumstances where this does occur, should the employee’s employment end before the employee has sufficiently accrued the leave taken in advance, the employer may deduct the balance owing from any monies due to the employee on termination.

If, however, the applicable Modern Award is silent on this issue, the employee will not be entitled to cash-out their accrued leave and any agreement to do so will be a breach of the FW Act and the Modern Award. In addition, if the Moderns Award does not allow an employer to direct an employee to take leave or deal with the leave as set out above, the employer will not be entitled to do so.

Enterprise Agreements

Section 93 of the FW Act allows an enterprise agreement to include terms that relate to cashing out of annual leave. The relevant test as to whether the terms of a cashing out clause meet the legislative requirements is measured against the requirements of section 94 of the FW Act. If the test has been satisfied and the enterprise agreement is better off on an overall basis for employees, the Fair Work Commission will approve the enterprise agreement.

Although the procedural requirements for cashing out of annual leave are prescriptive and not overly controversial, employers who breach the requirements or who otherwise take some form of detrimental action (including by coercing an employee to cash out annual leave) may be at risk of contravening the general protections under the FW Act. In such circumstances, an employer could be ordered to pay an employee compensation in respect of the breach and may be potentially liable to significant civil penalties for failing to comply with the terms of a modern award or enterprise agreement.

It is not uncommon for us to be asked whether an employer can refuse an employee’s request to take annual leave. Given that the NES provides all employees with an entitlement to take annual leave, this is an extremely pertinent question. Annual leave can create practical management difficulties for employers, and employers may have a real concern that if an employee takes annual leave at a certain time, it will be disruptive and prejudicial to the business. So can the employer refuse the request in these circumstances? The NES provides that paid annual leave may be taken for a period agreed between the employer and employee and that the employer must not “unreasonably” refuse to agree to a request by an employee to take annual leave. However, given that the annual leave period must be agreed and the fact that the act specifically states that the employer cannot “unreasonably” refuse a request, means the employer is able to refuse a request for annual leave if such refusal is reasonable. Whether the refusal will be reasonable will depend on the circumstances of each case. Care should be exercised in making a decision to refuse a request for annual leave, and it is advisable that evidence of the reasons be maintained and properly communicated to the employee. The inappropriate refusal of annual leave may result in a claim by the employee of the general protection provisions and would also constitute a breach of the FW Act.

A practical method of dealing with annual leave processes, and the ability to cash out annual leave, is to implement an appropriately worded workplace policy which can be tailored to meet the needs of the business. In addition, each employee’s contract of employment can contain the agreements regarding the taking of annual leave, notice requirements and the necessity to take leave over a shut-down period. We often assist employers to create workplace policies, including concerning the taking of leave, amongst other issues, and have worked closely with organisations to achieve harmonious outcomes for staffing issues with the least amount of disruption to the organisation.

If you wish to discuss any aspect of this article or require specialist advice or assistance in relation to an employment law issue, please do not hesitate to contact us.

This alert is not intended to constitute, and should not be treated as, legal advice.

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