Do Your Employees Want to Cash Out Annual Leave?
Are your staff asking to cash out annual leave? It can be done, but there are strict rules you need to follow. The first step is to check whether the employee is covered by a modern award or enterprise agreement, because the rules depend on this. If they aren’t covered, the Fair Work Act still sets minimum requirements for annual leave cashing.
Below we break down the rules, when you can direct staff to take leave, and why it matters for your business.
Rules for cashing out annual leave
Under a modern award
Annual leave can only be cashed out if the award specifically allows it. Many awards allow cashing out, but not all. Always check the relevant award or agreement first. The following rules generally apply:
- The employee must have at least four weeks of annual leave left over after the amount is cashed out.
- A written agreement must be made each time an employee cashes out their leave.
- The employee must be paid the same amount they would have received if they took the leave, including leave loading if it applies.
- The employer cannot force or pressure an employee to cash out leave.
- In most awards, an employee cannot cash out more than two weeks of leave in a 12-month period.
Under a registered agreement
The same principle applies; annual leave can only be cashed out if the registered agreement allows it. The agreement will set out the specific rules, so always check the document before paying out leave.
For award or agreement-free employees
If an employee isn’t covered by an award or agreement, they can still make a written agreement with their employer to cash out annual leave, provided:
- At least four weeks remain in their balance, and
- Payment is the same as if the leave had been taken.
Tip: Always keep a signed written agreement and payroll records to show the amount paid, the date, and the leave balance remaining.
Can you direct employees to take leave instead?
Employers cannot force employees to cash out leave, but in some situations you may be able to direct them to take it.
Excessive leave accruals
Many awards allow employers to direct an employee to take leave if they:
- Have more than eight weeks accrued (or 10 weeks for shift workers),
- Receive at least six weeks’ notice, and
- Still have at least six weeks of leave left after taking it.
This helps businesses manage large leave balances and avoids the build-up of liabilities.
Business shutdowns
Some awards and agreements also allow employers to require staff to take leave during a temporary shutdown, such as a Christmas–New Year closure. In these cases, you must give proper notice and follow the specific rules in the award or agreement.
Why it's important to monitor and manage annual leave accruals
Large leave balances can become a significant financial liability, because any unused leave must be paid out when an employee leaves your business.
Encouraging staff to take regular breaks is also important for wellbeing and productivity. Employees who take leave tend to return refreshed, engaged, and more focused.
Finally, proactive leave management reduces the risk of compliance breaches under workplace laws. Clear processes make it easier to avoid errors, disputes, or underpayment claims.
Risks of getting it wrong
If annual leave is cashed out without following the correct rules, the consequences can be significant for your business.
Breaches of the Fair Work Act. Cashing out leave incorrectly is a breach of workplace laws. The Fair Work Ombudsman can investigate complaints, and non-compliance can lead to costly enforcement action.
Backpay liabilities. If an employee wasn’t paid the correct rate (including leave loading and superannuation, where applicable), the business may be required to backpay them. This can quickly add up, especially if the error has affected multiple employees over time.
Civil penalties. Employers who fail to comply with the rules around leave can face financial penalties. For serious breaches, fines can run into the thousands of dollars per contravention.
Employee disputes. Incorrectly handling leave can damage trust with staff and lead to disputes, grievances, or even legal claims. This can affect team morale and your reputation as an employer.
Payroll and record-keeping risks, Failing to keep proper written agreements and records of cashed-out leave can also be a breach in itself, leaving the business exposed if a dispute arises.
Getting leave management wrong can result in both financial and reputational damage. It’s far less costly, and far better for your team, to ensure the correct processes are followed from the outset.
Need help?
Managing annual leave correctly can be tricky, especially when awards and agreements have different rules. We can help you:
- Review your payroll and leave accruals,
- Check your obligations under modern awards or agreements, and
- Put systems in place to manage excessive leave balances.
Need guidance on annual leave? Contact our team.
