An employee has just approached you with a request to ‘cash out’ a portion of their annual leave.  Roger doesn’t want to take the time off – he just wants the cold, hard cash in this instance.  He’s got seven weeks up his sleeve and he’s requested to cash out one week of his accrued annual leave.  

How Cashing Out Annual Leave works

Most Modern Awards and many enterprise agreements allow for cashing out of annual leave but you still need to check the agreements that individual employees are working under.  Award free employees are also able to make a request to cash out leave. No matter which group is asking, there are certain rules by which you must abide:

• The employee must have a minimum of four weeks leave remaining after the cash out. 
  
  
• A written agreement needs to be in place each time they choose to cash out any leave.
  
  
• The payment must be equivalent to the amount the employee would have received had they taken the actual leave.
  
  
• Neither an employer nor employee can be forced or pressured to cash out annual leave. It has to be a mutual agreement, regardless of who initiates the request.

Everything in writing

As above, each separate incident of cashing out annual leave requires its own written agreement between the employer and the employee and must:

• Be signed by both parties (employer and employee). If the employee is under 18, then it must be signed by a parent or legal guardian.
  
  
• State the amount of leave being cashed out
  
  
• State the amount that will be paid for the leave
  
  
• Advise the date the leave will be paid

This agreement must be kept on file by the employer as part of the employee’s record.

Additional points to remember…

There are a number of additional key points to remember around the option to cash out annual leave -

• An employer cannot use undue influence or pressure on an employee to make a cashing out agreement. It doesn’t matter if the employee has accrued a significant amount of leave.  What you can do is consider a direction to take leave (we’ll talk about that next week).
  
  
• You will need to pay tax (PAYG) amounts and superannuation as per normal.
  
  
• You don’t have to agree to an employee’s request to make a cashing out agreement. However, it does help you reduce your financial liability, so it is definitely worth considering.

The Benefit to your Business

There is a reason that annual leave entitlements are captured in the National Employment Standards and that is to ensure everyone has access to time where they can be away from the demands of work enabling physical and mental rest and recuperation.  However they spend it, your employees need a break from work no matter how amazing the conditions, culture and benefits you offer may be. 

If annual leave is so beneficial, why on earth would you agree to cash out? 

There is the employee to consider – they may have a significant amount of leave accrued and they may require a cash injection for whatever reason but don’t need the time off work.  A request from an employee should be respected if it meets all the legal criteria – it’s not necessary for you to know the reason as it may be very personal.  They’ve come to you with a fair request, so give it due consideration when determining whether or not to agree.

Another reason is that it may suit a business need.  Significant annual leave accruals can be a burden to your bottom line.  You are entitled to direct employees to take some leave if they have accrued an excessive amount of leave (over eight weeks) but there are always challenges when you have team members absent.  If an employee wants to cash out some of their annual leave and all the compliance rules are being met, then why not?  You reduce some of the financial burden without the loss of productivity.  As long as both parties are in agreement, it is a win-win.

Back to Roger

You don’t have to agree to Roger’s request, but you can’t direct him to actually take annual leave either as he comes under the eight week threshold of accrued leave being considered ‘excessive, invoking the employers right to make such a direction.  He will have more than 4 weeks balance remaining after cashing out which will also more than cover off the Christmas shutdown period that is looming, and he’s only asking for a week when he could ask for up to two.  

It’s the first time he has made a request to cash in leave so there are no considerations around it being a subsequent request within a twelve month period.    He’s a great employee and losing a week of his annual leave entitlements won’t impact him negatively but the cash injection will allow him to do something special for one of his kids.  There’s nothing to lose here so get that agreement drawn up and arrange the payment!

What about you?

The simple fact may be, that you don’t have the cashflow to be able to agree to Roger’s request. In that case, be honest about the reason for not being able to agree, and see if you can come up with a way to support Roger – for example, you may be able to agree to the request and provide the payment at the end of the month once some of your invoices are paid. Even then, if you can’t, you can’t. Honesty and transparency will ensure you don’t end up with a disengaged employee who had to receive a ‘no’ to a fair request.

Of course, if you aren’t sure about any industrial agreements apply in your business, or how it works for your award free employees, contact the HR Staff n’ Stuff team with your questions.  We are always here to help when you need us!