Employers and employees may occasionally find it mutually convenient to “cash out” a portion of an employee’s paid leave entitlements. While this can serve as a useful tool for managing an employer’s leave liabilities, the cashing out of leave entitlements is subject to strict rules, which can vary considerably depending on the type of leave involved and the source of these rules. In this article, we examine the most common rules relating to the cashing out of annual leave, personal/carer’s leave and long service leave, and the opportunities they may present to employers.
Cashing out of annual leave is governed by the National Employment Standards (“NES”) in the Fair Work Act 2009 (Cth). The NES provides different rules depending on whether or not the employee is covered by an industrial instrument (a Modern Award or Enterprise Agreement).
Employees covered by a Modern Award
The NES provides that, where an employee is covered by a Modern Award, the employer and employee may only agree to cash out annual leave if this is expressly permitted by the terms of the relevant Award.1
During the Four Yearly Review of Modern Awards, the Fair Work Commission developed a new “model” annual leave award clause, which has since been inserted into most but not all Modern Awards.2 This means that an employer will need to check the applicable Award to determine whether cashing out is permitted and, if so, the conditions that will apply.
The model clause provides that an employer and employee may agree to cash out up to two weeks of annual leave in any 12-month period, provided that the employee will have at least four weeks of annual leave remaining after the cashing out takes effect.
Among other things, the model clause also provides that:
- each occasion of “cashing out” must be subject to a separate written agreement between the employee and employer;
- the agreement must include details of
the amount of leave being cashed out, the amount of money being paid to the employee and the date on which payment will be made;
- the agreement must be signed by the employer and employee and, if the employee is under 18 years of age, by the employee’s parent or guardian; and
- the employer must keep a copy of the agreement as an employee record.
Employees covered by an Enterprise Agreement
The NES provides that, where an employee is covered by an Enterprise Agreement, the employer and employee may only agree to cash out annual leave if this is expressly permitted by the terms of the Agreement.3 Unlike Modern Awards, there is no standard annual leave clause for Enterprise Agreements. This means that an employer will need to check the applicable Enterprise Agreement to determine whether cashing out is permitted and, if so, the conditions that will apply.
For example, the Inghams Enterprises (Lisarow) Enterprise Agreement 2014 includes a provision for cashing out annual leave. It provides that
“An employee may request in writing to forgo one week of annual leave and to receive payment of that amount (including the leave loading) in lieu of taking the leave. Payment is conditional on the Company agreeing to the request. The employee must have at least four weeks of accrued leave remaining after the pay-out and can only request payment twice per year. Where an employee elects to receive a payment in lieu of taking annual leave, their annual leave entitlement shall be reduced by the quantum of the annual leave payment”.
Employees who are not covered by a Modern Award or Enterprise Agreement
The NES provides that, where an employee is not covered by a Modern Award or an Enterprise Agreement, the employee and employer may agree to cash out annual leave, provided that the employee will have at least four weeks of annual leave remaining after the cashing out takes effect.4
The NES also provides that:
- each agreement to cash out must be a separate agreement in writing; and
- the employer must pay the employee at least the full amount that would have been payable to the employee had the employee taken
We note that cashing out of annual leave is prohibited for employees whose employment is governed by the Annual Holidays Act 1944 (NSW) (this will usually be public sector employees).
The NES provides that, where an employee is not covered by a Modern Award or an Enterprise Agreement, he or she is not permitted to cash out personal/carer’s leave.
Employees who are covered by a Modern Award or Enterprise Agreement may cash out personal/ carer’s leave if this is expressly permitted by the relevant Award or Agreement.5 However, given that the NES does not require personal/carer’s leave to be paid out on termination, it is very rare for Awards or Agreements to permit cashing out of this entitlement, and perhaps even rarer for an employer to be willing to do so.
Long service leave
Cashing out of long service leave is governed by the rules of the relevant State or Territory long service leave scheme.
Cashing out of long service leave is permitted in South Australia, Western Australia and Tasmania.6 In these jurisdictions, an employee and employer may agree to cash out an entitlement to long service leave after the entitlement has been accrued. The agreement to cash out must be in writing (and, in South Australia, signed by the employer and employee).
In Queensland, an employee may only cash out long service leave with the permission of the Queensland Industrial Relations Commission (“QIRC”).7 The QIRC may grant a request to cash out long service leave only if it is satisfied that the payment should be made on compassionate grounds or on the ground of financial hardship.
Cashing out of long service leave is unlawful in New South Wales, Victoria, the Northern Territory and the Australian Capital Territory.
- Cashing out annual leave can be an effective way of managing excessive leave liability.
- Employers should consider engaging in discussions to cash out annual leave for employees who:
- have at least six weeks of annual leave accrued; and
- are not covered by an Award or Agreement, or are covered by an Award or Agreement that expressly permits cashing out of annual leave.
- Employers with an Enterprise Agreement are subject to the cashing out provisions contained in the Enterprise Agreement. If the Agreement does not expressly permit cashing out of annual leave, given the changes that have been made to Modern Awards, consideration should be given to inserting such a clause when the Enterprise Agreement is re-negotiated.
- There is limited capacity for the cashing out of personal/carer’s leave and long service leave.
- Given the penalties that can be enforced for breaches of the cashing out provisions, we recommend that employers take a cautious approach to employee requests to cash out leave entitlements. If necessary, an employer should seek specific legal advice on whether it can lawfully enter into a cashing out agreement with a particular employee, and if so, what conditions will apply.
This article initially appeared on the People + Culture Strategies website and has been reproduced with permission.
- Fair Work Act 2009 (Cth), s 92.
- For example, see clause 29.9 of the Clerks – Private Sector Award 2010.
- Fair Work Act 2009 (Cth), s 92.
- Fair Work Act 2009 (Cth), s 94.
- Fair Work Act 2009 (Cth), s 100.
- Long Service Leave Act 1987 (SA), s 5(1a); Long Service Leave Act 1958 (WA), s 5; Long Service Leave Act 1976 (Tas), s10.
- Industrial Relations Act 1999 (Qld), s 53.