Cashing out annual leave

​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 in one week of his accrued annual leave.  Do you want to agree to this request and are you obligated to sign off on Roger’s request?

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As an employer, you should be familiar with the National Employment Standards (NES) – ten minimum entitlements for employees in Australia.  As one of the basic standards, you would be aware that your full and part time employees accrue a minimum of four weeks annual leave each year (pro-rata for part timers) and shift workers accrue five weeks.  As a result of decisions by the Fair Work Commission of late, most modern awards now allow employees to cash out annual leave based if it meets a particular criteria. 
Be aware that cashing out annual leave clauses may also be present in an Enterprise Agreement so if your employees work under an EBA, make sure you check the details.  

How Cashing Out Annual Leave works
The conditions under which cashing out annual leave is permitted are as follows:

• Each cash out must be accompanied by a separate written agreement by both the employer and employee.   
• The payment must be equivalent to the amount the employee would have received had they taken the actual leave.
• After cashing out occurs, the employees remaining annual leave balance cannot be less than 4 weeks.
• No more than two weeks every twelve months can be cashed out by an individual employee.

Get it in Writing
As above, each separate incident of cashing out annual leave requires its own written agreement.  This agreement between the employer and the employee must contain certain information to be considered valid:

• The amount of leave to be cashed out and the payment to the employee that it will generate must be stated.
• The date the payment will be made.
• The signatures of the employer and the employee.  In the event the employee making the request is under 18 years of age, their parent or guardian must also witness the agreement.

You may find this Agreement to Cash Out Annual Leave template useful - it's free to download.  Your signed agreement must be kept on file by the employer as an employee 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 can not use undue influence or pressure on an employee to make a cashing out agreement. You cannot direct an employee to accept a cash out, but you may certainly ask the employee, especially where excessive leave has accrued, if they would like to cash out. 
• You will be required to calculate and pay taxation (PAYG) amounts and superannuation as per normal.
• You don’t have to agree to an employee’s request to make a chasing out agreement.

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.  It allows time to be with family and/or friends or time on your own, travelling or staying at home and pottering about.  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?  Firstly, 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.  If you have an open and honest culture established, a request from an employee should be respected if it meets all the legal criteria.  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 but there are always challenges when you have team members absent.  So, if an employee wants to cash in some of their annual leave and you don’t believe it is detrimental to their health and well-being, then why not?  Alternatively, you may find yourself in the position of suggesting the option to the employee. 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.

What happened to Roger?
Back to Roger and his request to cash in one week of his annual leave.  You don’t have to agree to his request, but once he reaches the relevant threshold for excessive annual leave (usually 8 weeks) you can direct him to take a period of leave. He will have more than 4 weeks balance remaining after cashing in 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!

HR Staff n’ Stuff have significant experience in providing HR consulting services and advice pertaining to annual leave.  If you need assistance in establishing policies around leave entitlements, requests to cash out, excessive leave and so on, give us a call – we’re here to help!

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