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Managing excessive annual leave balances - What can you do?

Managing excessive annual leave balances - What can you do?

Under the National Employment Standards (NES), an employee (other than a casual employee) will accumulate four weeks of paid annual leave for each year of service. Employees classified as being a ‘shiftworker’ will be entitled to five weeks of paid annual leave per year. 

An employee’s entitlement to annual leave will accumulate continuously based on the number of ordinary hours they work. However some modern awards or registered agreements may provide more generous annual leave entitlements that will apply in addition to the NES provisions.

Although most employees will regularly take periods of accrued annual leave throughout the year, what happens when annual leave is not taken?  

And as annual leave accruals can present a significant liability for employers, what options are available for you as an employer to direct an employee to reduce their accrued leave balance?

Your ability to direct an employee to take a period of accrued annual leave will depend on the provisions contained in the applicable modern award or registered agreement.  The industrial instrument will set out the ‘rules’ about when an employee may be directed to take a period of accrued annual leave, or how alternative arrangements such as cashing out periods of accrued leave may be applied. Where an employee is not covered by an award or agreement, the employee may be directed to take annual leave subject to the provisions of the Fair Work Act 2009.

What is considered to be excessive annual leave?

Most industrial instruments will provide that an employee will be deemed to have an “excessive leave accrual” at such time that they have accrued more than 8 weeks’ paid annual leave. It is however important to ensure that you check the specific provisions of the applicable award to determine whether an alternative provision may apply.

When can an employee be directed to take annual leave?

Most modern awards will contain provisions that will allow an employer to direct an employee to take a period of excessive annual leave. Such a direction can only be given after the employer has tried to genuinely reach agreement with an employee to take a period of leave.

An employee may be directed, in writing, to take one or more periods of paid annual leave, provided that:

  • The employee has an excessive annual leave balance
  • The direction would not result in the employee’s remaining accrued annual leave entitlement being less than 6 weeks when any other paid annual leave arrangements are taken into account;
  • The directed period of leave is not for a period of less than one week;
  • The employee is not required to take a period of paid annual leave beginning less than 8 weeks, or more than 12 months, after the direction is given.

A direction given by the employer requiring the employee to take a period of annual leave must not be inconsistent with any leave arrangements already agreed to between the employer and employee. An employee to whom a direction has been given may also request to take a period of paid annual leave as if the direction had not been given.

An employer may require an award/agreement free employee to take a period of paid annual leave provided that the request is reasonable. A request to take paid annual leave may be reasonable if, for example, an employee has accrued an excessive amount of annual leave or the employer’s enterprise is being shut down for a period, such as Christmas and New Year.

Directions to take leave during close down periods

An employee may be directed to take a period of accrued annual leave during an operational shutdown, for example, where the business temporarily closes during slow periods of the year, such as over Christmas and New Year’s. Such a direction may only be issued if the applicable award or workplace agreement contains provisions allowing for this to occur.

Where such provisions apply, the Award or industrial instrument will set out specific provisions that will apply to such a direction.

Cashing Out of Annual Leave

Nearly all modern awards provide the ability for an employer and an employee to reach agreement in writing to cash out a portion of accrued annual leave. Such an agreement will however be subject to a number of requirements including:

  • The agreement not resulting in the employee’s remaining accrued annual leave entitlement to being less than 4 weeks;
  • A cap on the amount of annual leave that can be cashed out in any 2 month period;
  • That payment is to be made at the rate of pay the employee would have received had the leave been taken

A separate written agreement is required each time a period of annual leave is agreed to be cashed out.

For award-free employees, the Fair Work Act 2009 does allow for an employer to agree in writing with the employee to cash out annual leave. However, unlike award-covered employees, there is no limit to how much annual leave an employee can seek to cash out provided that at an entitlement to at least 4 weeks accrued leave remains.

If you require assistance with managing excessive annual leave, or if you require HR Advice on any matter, please contact the team at HR Advice Online on 1300 720 004.

Information in HR Advice Online guides and blog posts is meant purely for educational discussion of human resources issues. It contains only general information about human resources matters and due to factors such as government legislation changes, may not be up-to-date at the time of reading. It is not legal advice and should not be treated as such.

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