Proposed Changes to Annual Leave Provisions in Modern Awards

As part of its first four yearly review of modern awards, the Fair Work Commission has accepted requests by employer groups to insert clauses into modern awards concerning annual leave entitlements.  

As part of its first four yearly review of modern awards, the Fair Work Commission has accepted requests by employer groups to insert clauses into modern awards concerning annual leave entitlements.  

Every four years, the Fair Work Commission (FWC) is required to review all modern awards. As part of the first four yearly review since modern awards were introduced in 2010, the FWC has considered submissions made by employer groups and unions relating to excessive annual leave, cashing out annual leave, annual close downs and annual leave entitlements on termination.

Excessive annual leave

The FWC has drafted a model term that it proposes be inserted into all modern awards. The term provides that if an employee has accrued more than 8 weeks’ paid annual leave (or 10 weeks if a shift worker), an employer who wishes for the annual leave to be reduced must meet with the employee and must genuinely try to agree upon a way in which the employee will reduce their excessive annual leave. If agreement cannot be reached, an employer may give a written direction to an employee requiring them to take a period of annual leave. The notice must:

  • Ensure the employee still maintains at least 6 weeks annual leave after their annual leave;
  • Not require an employee to take annual leave for a period of less than one week;
  • Ensure the employee receives notice of at least 8 weeks’ but less than 12 months before being required to take annual leave;
  • Not be inconsistent with any leave arrangement agreed between the parties.

The FWC said that the model term:

“incorporates the employer’s right to direct an employee to take their excessive annual leave but also makes provision for the circumstance where an employee accrues excessive paid annual leave but no employer direction is made.”

The FWC will finalise the model term after considering any further submissions that are made.

Cashing out annual leave

A model term concerning the cashing out of annual leave was also drafted after the employer group’s claim was accepted, with the FWC adding additional safeguards for employees. The model term, which is to be incorporated into all modern awards, provides that:

  • After cashing out, an employee must retain at least 4 weeks annual leave;
  • A maximum of 2 weeks’ paid annual leave can be cashed out in any 12 month period;
  • Employers must maintain specific records relating to cashing out of annual leave;
  • If an employee is under 18 years of age, a parent or guardian must approve the cashing out of annual leave.

The FWC said that despite “acknowledging that the purpose of annual leave is to provide a period of rest and recovery from work… there is a significant demand for a provision which facilitates the cashing out of accrued leave.”

Annual close down

The employer group sought to insert a model ‘close-down’ clause into 65 modern awards to enable businesses to shut down and require annual leave to be taken at the best time in terms of production or service delivery.

The FWC rejected the employer group’s claim, finding that the proposed term was not reasonable and that whilst it was desirable for provisions dealing with annual leave to be uniform across modern awards, close down provisions are the exception to this and warrant consideration on an award by award basis.

The FWC will further consider the issue when reviewing individual awards.

Granting leave in advance

The FWC accepted the employer group’s request seeking to vary 48 modern awards to include a provision which will allow an employee to take annual leave before the leave has accrued. The agreement to grant leave in advance must be made in writing and signed by both the employee and employer.

If, on termination, an employee has taken annual leave in excess of their entitlement, the employer will be able to make a deduction from any money payable in order to ensure that the employee pays back the annual leave that was taken in excess.

Payment of annual leave entitlements on termination

The ACTU sought to vary 118 modern awards to provide that on termination, an employer would have to pay an employee the amount that would have been payable if the employee had taken the leave whilst still employed.

As the Full Court of the Federal Court is currently hearing an appeal of a case concerning this matter, the FWC found that there was a degree of uncertainty surrounding the issue and adjourned the matter until after the Full Court had handed down its decision. 

EFT and paid annual leave

The employer group sought to vary 51 modern awards which currently require the employer to pay an employee for annual leave prior to the employee taking the leave. The historical reasoning for this was to enable employees to have access to the money before they left for annual leave in a time when electronic funds were unavailable and employees were paid by cash or cheque.

The FWC granted the employer group’s request, allowing an employer to pay an employee by electronic funds transfer (EFT) in accordance with their usual pay cycle while on paid annual leave.

Purchased leave

Ai Group proposed a clause be inserted into awards that would allow an employer and an employee to agree to a purchased leave arrangement where an employee would pay an amount to receive additional annual leave.

The FWC found that there was interest in providing such an arrangement. Interested parties have the opportunity to make submissions on the issue, after which the FWC will publish a discussion paper.