Too much annual leave accrued: what can employers do?

Author: Harrison HR | Blog

A common business problem for employers occurs when employees accrue excessive amounts of annual leave. This scenario is detrimental to both the employees and the organisation, but both sides being ‘at fault’ may be the cause.

WHAT CAUSES THE PROBLEM?

One potential cause is organisation downsizing; and, thereby, requiring ‘more from less’ from the remaining employees, has resulted in pressure against taking accrued leave. The business does not maintain sufficient staff to cope with employees being absent for their four weeks a year of annual leave. Managers may overtly or covertly place pressure on employees not to take leave because ‘we will not be able to cope at that time’. Employees then fear that no-one is likely to do their work while they are on leave and that they will return to a huge backlog and have to work long hours to catch up.

On the other hand, many employees choose to hoard their leave entitlements. Some may be saving it for a lengthy holiday (eg around Australia or overseas), others may save it as a possible contingency (eg if they become seriously ill and are off work for longer than their sick leave entitlements). Some others may fear for their job security, and try to accrue a large untaken leave balance that will be paid out if they are retrenched or dismissed.

Problems for both parties

There are, however, problems for both parties if leave accruals become excessive.

  • For employers: When leave is taken or paid out, the rate of pay is the current one at the time the leave is taken or paid, not the time at which it was accrued. This becomes an extra up-front cost for the employer that will reduce any of the potential cost savings (eg from not using casual employees as relief staff). Untaken annual leave is also recorded as a liability on balance sheets.
  • For employees: Not taking a break from work for a lengthy period and, possibly, feeling pressured not to take leave may have adverse effects on their well being and, consequently, their productivity. In serious cases, a potential claim for stress could follow later on.

Additional reasons for not taking leave

The following additional reasons are why employees may resist taking their annual leave:

  • They have ‘skeletons in their closet’ and fear that if they take any more than a brief period of leave, a co-worker will relieve their position and either show up their poor job performance or discover some ‘time bombs’ that the employee has been trying to conceal.
  • They try to make themselves indispensable (and therefore protected against redundancy or dismissal) by not taking leave so that no-one else is trained to do their job or able to relieve in it.

Both the above scenarios can create significant risks for the organisation.
For the general community, it could be argued that employees not taking their full annual leave entitlements has a detrimental effect on the economy (eg by reducing activity in the tourism and hospitality industries). Similarly, cashing in annual leave instead of taking it may result in a lesser economic benefit, depending on how the cash is used.

Need to know why leave is not taken

All the above reasons have the potential to cause both short- and long-term problems and, therefore, should not be ignored. Before taking action, it is essential to identify the real reason(s) why employees are letting annual leave accrue excessively.

Cashing out leave

Cashing out annual leave, where it is permitted, may appeal as a quick fix, and there are some employees who will prefer to have the cash than to take annual leave. However, it is not a long-term solution and has a number of potential drawbacks.

  • Important to know:  It is not a legal option for every employee.
  • Where cashing out is allowed, there is usually a provision that the employee must not be subjected to any pressure or duress to ‘agree’ to such an arrangement (i.e. there must be genuine consent).
  • Employees who prefer to cash out their leave will simply let it continue to accrue again, and avoid taking leave as much as possible.
  • As noted above, not taking regular breaks from work may have detrimental effects on employee well being and work–life balance.
  • The ‘skeletons in the closet’ mentioned above will remain concealed and unresolved.

Legal avenue to counter excessive leave accruals

The Fair Work legislation allows employers to require employees to take annual leave if certain conditions are met.
Arrangements relating to the taking of annual leave are regulated by the National Employment Standards (NES) under the Fair Work Act 2009 and, where applicable, the relevant modern award or enterprise agreement.
Under the Fair Work Act (s88), annual leave may be taken for a period agreed to between an employee and his or her employer.

This section of the Fair Work Act does not bestow a unilateral right for an employer to send an employee on annual leave. The employer, however, can direct an award/agreement-free employee to take annual leave, but only if the request is reasonable (s94(5)). A requirement to take paid annual leave may be reasonable if, for example:

  • the employee has accrued an excessive amount of annual leave; or
  • the employer’s enterprise is being shut down for a period (eg between Christmas and New Year).

Some positive steps to take

Other positive suggestions for organisations to avert or deal with the problem:

  • Emphasise the importance of ‘no leave, no life’. Conduct awareness sessions on how to manage stress and live a healthy and balanced lifestyle.
  • Point out to managers the economic and wellbeing benefits of reducing employees’ (and their own) leave accruals.
  • Offer discounts on travel and accommodation to employees, using the organisation’s commercial relationships with suppliers.
  • Offer small interest-free loans to employees to pay for booked holidays.
  • Run a one-year campaign for employees to reduce their leave accruals to a predetermined amount, then award one week’s extra annual leave the following year to employees who achieved the target.

While some of those initiatives will incur fairly nominal upfront costs, it is argued that those costs will more than offset the extra costs incurred by taking no action and letting accruals continue to climb.
Another approach is to make management of employees’ annual leave balance one of the criteria for managers’ performance reviews. The advantage of this approach is that it focuses managers’ attention on leave accruals, and perhaps on reasons why employees are not taking leave, and encourages them to be more proactive about it. However, it comes with the caution that managers must not place undue pressure on employees to take leave.

A further step managers could take is to consult with employees to prepare an annual leave plan each year. There could for example be a rule that every employee must take a block of at least two weeks leave. Employees who are planning a lengthy break in a future year may be allowed to take less leave this year, provided they commit to taking more in the future year.

Finally, it is important to take steps to ensure you have adequate staffing levels in the first place. Using various measures to make headcounts and their direct costs look more favourable in the short-term may backfire in the longer-term, with potential costs including increased employee turnover, decreased work quality and stress claims.

For help or assistance with annual leave management, talk to one of our HR Consultants in Brisbane today by completing our enquiry form here.

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