For the employer, when an employee accrues excessive leave over years of service, there are two areas of concern.

1. Unused annual leave is recorded as a liability on the balance sheet.

2. If an employee resigns and leaves, their unused annual leave gets paid out in their final pay, and if the employee has a few weeks of unused accrued leave, this may be a large amount of cash, creating a cash flow risk for the employer.

Employees crave work-life balance, and Quiet Quitting and The Great Resignation have highlighted this. Excessive accrued leave balances indicate the employee has yet to take a break from work. Issues like fatigue, burnout, and stress lead to disengagement, which is generally due to a lack of work-life balance.

Not all cases of substantial amounts of accrued leave are an issue. Sometimes, accumulated leave may be for an extended break from work.

Cashing out annual leave may appeal as a quick fix for the employer and employee, but this is a short-term solution with several potential drawbacks.

What is Cashing Out Annual Leave?

All permanent full-time employees in Australia covered by the National Employment Standards (NES) are entitled to four weeks of paid annual leave, or five weeks for shift workers, under federal workplace laws. Employees accrue annual leave based on their ordinary work hours over the year. Permanent part-time employees accrue leave on a pro-rata basis.

In some circumstances, federal workplace laws and most modern awards allow employees to cash out their annual leave. National Employment Standards (NES) outlines employee annual leave entitlements. The NES covers all employees except casual workers.

Cashing out annual leave is when an employee is paid for accrued annual leave instead of taking time off from work. Cashing out annual leave is common when an employee leaves a company; the accrued annual leave they have not used is paid out as part of their final pay. Sometimes, employees may be able to cash out leave whilst they are still employed.

Cashing out annual leave is generally outlined in employment awards and registered agreements for employees in various industries. A list of awards and agreements with cash-out terms is available on the Fair Work Commission website. Today, most modern awards include cashing out annual leave.

The Rules for Cashing Out Annual Leave

When cashing out annual leave, specific rules apply:

1. At least four weeks of annual leave must be remaining for an employee.
2. A written agreement must be in place for each time annual leave is cashed out.
3. An employer cannot force or pressure an employee to cash out annual leave.
4. The payment for cashed-out annual leave has to be the same as what the employee would have been paid if they took the annual leave.

How does Cashing Out Annual Leave work?

Under the Fair Work Act, employees that qualify can cash out their annual leave with their employer's consent.

• For most employees under an award, the following additional terms apply:
• An employee can cash out a maximum of two weeks of annual leave in 12 months.
• A written agreement between the employer and the employee must:
  • Be signed by both the employee and employer.
  • Include the amount of annual leave cashed out and the payment amount.
  • Show the date of payment.
  • Be signed by a parent or guardian for an employee that is under the age of 18.

The employer must maintain a copy of the written agreement as an employee record.

An employee on a common law contract is only subject to the above requirements. Depending on whether an award or registered agreement covers the employee, additional steps may be required.

Calculating Annual Leave Payments

There are many calculators available to determine how much annual leave and annual leave loading an employee has accrued at a point in time. Most modern payroll solutions automate the process for both the employee and the employer. 

Full-time employees are entitled to 152 hours of annual leave per year, equal to four weeks, paid at their base salary.

1. Employees accrue annual leave based on their ordinary working hours. Employees start accruing annual leave when they begin working for the company, even if they are on probation.
2. Each year, annual leave accumulates gradually throughout the year and accumulates over time. To avoid excessive annual leave accruals, the employer needs to monitor, manage, and report on annual leave accruals.
3. Annual leave continues to accrue if any form of paid leave is taken by an employee, including annual leave, personal leave, community service leave, and long service leave. However, annual leave will not accumulate when an employee is on unpaid annual leave, parental leave, and unpaid sick/carer's leave.

Cashing Out Annual Leave and Superannuation

In 2009 the Australian Taxation Office ruled that lump sum payments of unused leave, other than termination payments, are taxable income. However, unused leave paid out on termination of employment is not included in an employee's OTE for superannuation guarantee purposes. Employers must comply with an award or agreement that provides more beneficial superannuation entitlements.

The super rate increased to 10% on 1 July 2021 and will continue to increase in small increments to 12% in 2025.

To determine how much super you need to pay and what constitutes ordinary time earnings (OTE), visit the ATO website.

Managing excessive Accrued Annual Leave balances

It may be more convenient for employees to cash out their annual leave than to take time off. While cashing out annual leave is one solution for excessive leave balances, it has many drawbacks that should be considered. Averting or resolving the problem can also be achieved by:

• Emphasise the importance of work-life balance. Create awareness sessions on stress management, healthy living, and work-life balance to encourage employees to take leave and have breaks from work.
• Communicating leave balances to managers and emphasizing the benefits and need of reducing employees' (and their own) leave accruals.
• Regularly checking in with employees/team and covering leave plans ensures the business has enough cover and encourages peer discussion about leave.
• Offer incentives to employees for reducing and maintaining low leave balances. An example, Employees who use all their annual leave allowance by a specific date get an extra day/week of annual leave to use by the end of the year.

Some costs may be associated with initiatives to drive employees to take leave and not let it accrue, but the costs offset the liabilities in the long run.

Every business needs to ensure they have enough staff to accommodate the workload. Comprehensive workforce reporting helps businesses manage staffing levels, employee fatigue, costs, and leave management.

Most companies need help to visualise the workforce data as the data comes from different systems and in various formats.

A workforce management solution allows companies to have a single data source from onboarding and time and attendance to leave management. When all the data is integrated and available from a single source, it is much easier to strategically manage leave balances and the workforce.

How does a workforce management solution help manage leave balances?

Workforce management software is a powerful solution for managing employee data. A workforce management solution provides a single source of truth on many levels, including payroll processing, leave balances, time and attendance recording, rostering and work schedules, reporting and much more.

A streamlined workforce management solution provides comprehensive reporting on leave balances, accrual rates, and long-service leave to ensure you know the numbers before it becomes an uncontrollable liability for your business.

Here are 4 key benefits of leave management with a workforce management solution.

1. Reliable Data

Managing your employees' data through workforce management software provides a single source of truth. Leave taken, leave requests and leave accrual reporting are available from a single data source. As a business, this data helps you and your managers to review and manage leave liabilities with comprehensive reporting. 

2. Employee Experience 

With an in-app employee experience, workforce management solutions make it easier for employees to update their details, view their leave balances, and request leave.

3. Employee Communication

In-app communication is a powerful tool to help manage leave balances.

For example, if an employee has not taken leave for 3 or 6 months, a manager can message them to ask if they have planned a holiday or offer an incentive if they take leave before the end of the year.

4. Reports and Insights

Workforce management reports help businesses review productivity, make strategic decisions and analyse leave patterns. Comprehensive reporting and insights are vital for growth, productivity, and employee well-being.

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Learn how The Access Group can help your business streamline its workforce processes.

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In our eBook, ‘A guide to workforce management for your business’, we share the importance of a unified workforce management solution for our digital world and the requirement for enhanced employee experience. The new normal is a digital Workforce Management Solution for data-driven employee engagement and business growth.