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3 Essential rules you should know before paying out Annual Leave

Can annual leave be paid out?

This is a question we’re often asked, and until recently, we said “no” because it wasn’t allowed in Australian Legislation….

But something magic occurred on the 29th July 2016.

Fair Work Commission passed down a decision to allow annual leave to be paid out from the first pay period after the 29th July 2016.

But before you start paying out annual leave, there’s three essential rules you should understand:

  • Maximum of 2 weeks paid out per financial year
  • Employees keep 4 weeks minimum after payout
  • Signed, written agreement each time cashed out

Although this is an exciting opportunity for your employees, as an employer, you can get into some hot water if you don’t follow these rules.

Maximum of 2 weeks paid out per financial year…

If you have an employee who requests their annual leave to be paid out instead of taking it, you can only agree to “cash out” a maximum of 2 weeks per financial year of annual leave to each individual employee who makes the request.

The payment is subject to Superannuation, and where applicable, leave loading and tax the payment at marginal tax rates.

Basically, you should pay the annual leave in the same way as if the employee took the annual leave.

Employees must keep 4 weeks minimum after payout…

You cannot agree to pay out annual leave if, after cashing it out, the employee won’t have a minimum of 4 weeks accrued.

This provision is really there to allow employees with excessive leave the option to “cash out” their balance and also, protect employees with low annual leave balances.

In practice, this will be a benefit for  long term employees, and those who tend not to take their full 4 weeks per year as leave.

Signed, Written agreement

You must also give your employees a signed agreement saying that you agree to “cash out” their leave.

In practice, this could be a signed letter on your letterhead. By default, emails therefore aren’t acceptible (unless you attach the signed letter).

Remember also, that you cannot force your employees or lead them to believe they’re being forced to take the cash out option (eg a blanket ‘newletter’ email telling staff to take up the option).

Remember the rules 

This new provision provides a valuable opportunity for your staff, and is available in most Awards and is effective from the first period after 29th July 2016.

In the immediate term, it is only applicable to employees with more than 4 weeks annual leave at the time of thier request, and is something to look out for coming into the Christmas period as more requests will inevitably begin to occur!

2 thoughts on “3 Essential rules you should know before paying out Annual Leave

  1. Hi, does this apply to salary earners not just those on the award?

    My employer rejected my application on those grounds. They have paid them under both the award and to salary earners in the past. Is there a link you could direct me to to confirm that this is the case?


    1. Hi Rod,

      This is a really great question – thank you for asking it.

      The new legislation was passed by the Commonwealth Government in March 2017 to cover all employees. Whether or not they are on a Salary or an Award. You will also need to know if you are covered by a Registered Agreement (sometimes also known as an “Enterprise Agreement”)- as we understand that some have not yet been amended to cater for this legislation. If such an agreement exists, and hasn’t been updated for this legislation, the agreement will override this legislation in the mean time.

      There may be a few reasons why your employer hasn’t agreed to cash out your leave. In particular, if after cashing out part of your leave, you don’t have 4 weeks annual leave left they aren’t legally allowed to comply with your request.

      Fair Work Australia have a really great, easy to understand guide here here.

      To find out if your award / industry is covered, there’s a list of awards included from the Commissioner here

      I really hope this was of help for you!

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