It has been become increasingly common for employers to offer employees the option to cash out annual leave. However, since the commencement of the National Employment Standards in January 2010, new rules apply to the cashing out of annual leave.
A significant change is the ability for award and agreement-free employees to cash out annual leave by mutual agreement. Under previous laws, the cashing out of annual leave could only be offered if the workplace was covered by an enterprise agreement providing for cashing out annual leave.
This means that from 1 January 2010, employees who are not covered by an award and agreement are entitled to cash out their annual leave if they wish. However, it is important that the coverage of Modern Awards have been properly assessed to determine whether the employee is genuinely award-free.
To determine whether an employee is award-covered or award-free, businesses need to assess the coverage of their award and the classification structure which outlines an employee’s duties, responsibilities and qualification. It is important to note that an employee’s rate of pay or title does not determine whether the employee is award-covered or award-free.
Employees paid well in excess of award wages may still be award-covered if their industry or occupation is covered and they fit one of the classifications in the classification structure of their award.
For employees who are covered by a Modern Award, enterprise agreement or Division 2B State Instrument, the ability to cash out annual leave is more restrictive. Award and agreement-covered employees can only cash out annual leave if their award or agreement allows for cashing out.
As it is uncommon for awards to provide for the cashing out of annual leave, an enterprise agreement with cashing out provisions would in most cases be required to be negotiated to allow an award-covered employee to cash out his or her annual leave.
The amount of annual leave allowable to be cashed out is limited to any annual leave in excess of four (4) weeks. This means that, for example, an employee with six (6) weeks accrued annual leave would be entitled to cash out two (2) weeks.
Should an employee wish to cash out their annual leave entitlement they need to reach an agreement in writing with the employer on each occasion.
In addition, under the record-keeping requirements of the Fair Work Regulations 2009, a copy of the cashing out agreement and specific information on the payment for the leave cashed out and the date of cashing out, must be kept as an employment record.
Whenever reaching an agreement with an individual employee, including cashing out of annual leave, the employer must ensure that the employee does not feel coerced or pressured into accepting an agreement.
Therefore, if offering the option to cash out, the employer should make it clear that the employee has option of refusing to cash out leave. Further, an employer is entitled to refuse a request by an employee to cash out annual leave.
When cashing out annual leave, the following factors need to be considered
- The employee, after cashing out part of their entitlement, must still have four (4) weeks paid annual leave retained; and
- The employee must be paid at least the full amount they would have received had they taken annual leave.
To assist businesses in correctly applying and managing the cashing out of annual leave, Business SA’s Fair Work Booklet provides valuable information. Employers should also review their policies on cashing out of annual leave. Business SA’s HR Policy Package contains updated policies including on the cashing out of annual leave.
Should you require more information on cashing-out of annual leave, call our Business Advisory Centre on 8300 0101.
