In a decision that received relatively little media attention recently, the Fair Work Commission (“FWC”) has made a significant ruling that will affect annual leave entitlements and how excessive annual leave accruals may be dealt with, for employees covered by Modern Awards.
Two model clauses have been determined by the Full Bench of the FWC, which will ultimately be inserted into all modern awards and will enable:
- employers to direct award covered employees to take excessive annual leave; and
- employees covered by modern awards to cash out annual leave, by agreement with their employer.
How will these new clauses work?
Direction to take annual leave
A direction to take annual leave will only be permitted where an employee has accrued eight weeks annual leave (or 10 weeks if the employee is a shift worker with a five-week per year entitlement).
The model clause requires that, before making a direction, an employer must first meet with an employee to genuinely attempt to agree on ways to reduce the amount of untaken accrued leave.
If agreement cannot be reached, an employer can then give a written direction to an employee to take a period (or periods) of annual leave, subject to the following requirements:
- The direction must be in writing and must not result in the employee retaining less than six weeks of paid annual leave after the directed annual leave is taken;
- The employee cannot be directed to take any period of leave of less than one week
- The leave cannot commence less than eight weeks or more than 12 months after the date of the direction and
- The direction cannot otherwise be inconsistent with any leave arrangements already in place, such as leave already agreed to, or policy or contractual provisions that govern the taking of annual leave in the workplace (if one is in place).
After a direction is given, the employee can still request a period of annual leave as if the direction had not been made. If this happens, the employer cannot unreasonably refuse this request.
The direction will be automatically deemed withdrawn where a separate period of annual leave is agreed after a direction is made if the direction would then result in the employee’s remaining annual leave entitlement falling below the six-week threshold.
Cashing out annual leave
A further model clause will be inserted into modern awards permitting an employer and an employee to agree to the employee cashing out an amount of accrued annual leave, subject to the following conditions:
- The agreement must be in writing, signed by both the employer and the employee (or the employee’s parent/guardian if aged under 18 years) and the employer must retain the agreement as an employee record
- The written agreement must specify the amount of leave to be cashed out, the payment to be made to the employee, and the date upon which the payment will be made
- Annual leave cannot be cashed out if it would result in the employee’s remaining entitlement being less than four weeks and
- Employees are not permitted to cash out more than two weeks accrued annual leave in any 12 month period.
The Full Bench considered these arrangements were fair noting the mutual benefits that flow from an employee being able to elect to receive cash rather than take leave (subject to the safeguards), with the employer at the same time being able to reduce its annual leave liability.
When will these changes commence?
Regarding excessive annual leave, the FWC will allow interested parties to make further submissions on both the model clause and the decision to insert it into all modern awards. The FWC will reach a final view only after considering further submissions.
In relation to the cashing out of annual leave, the model clause will be inserted into all modern awards shortly. The Full Bench will issue determinations which will be prepared and published on the FWC website for comment.
We will provide a further update when these changes are in place.
Other aspects of annual leave considered by the FWC
- Where employees are paid by electronic funds transfer, the requirement to pay employees annual leave upfront will be removed and paid in the usual pay cycle while the employee is taking annual leave.
- Employers will now be able to allow employees to take annual leave in advance of having an accrual and then deduct any annual leave shortfall from termination payments, where this has been agreed to in advance by the employer and employee.
- The FWC will soon release a discussion paper concerning employees “purchasing leave” which the Full Bench agreed “is worthy of consideration“.
- The Full Bench reiterated that an employer’s ability to schedule an annual shutdown requiring employees to take annual leave is something that will be approached on an award-by-award basis depending on the industry concerned.