A number of very important changes have recently been made by the Fair Work Commission to annual leave entitlements for employees covered by the Fair Work Act 2009.

It is now critical for you to familiarise yourself with these changes because:

  • the changes are already in full legal effect
  • non-compliance may result in prosecution and penalties, and
  • existing annual leave policies and procedures may now need to be updated

Cashing Out Annual Leave

For the first time, all Modern Award-covered employees are now able to cash-out a portion of their accrued annual leave. However, cashing-out is subject to four very strict rules which must always be followed:

  1. Employees can only cash out a maximum of two weeks’ annual leave every 12 months
  2. An employee must always have a remaining balance of at least 4 weeks after the cashing-out has been processed
  3. Each agreement to cash-out annual leave must be recorded in writing, and
  4. The amount paid to the employee must be no less than the amount they would have received had the leave been taken

All Employers should also note:

  • Employees under 18 years of age will also need their parent / guardian to sign the cashing-out agreement, and
  • Employers remain strictly prohibited from coercing or misleading employees into cashing-out their accrued annual leave.
  • A small number of Modern Awards are still subject to variation to permit cashing-out of annual leave. Always check the applicable Award carefully.

Employees who are not covered by either a Modern Award or an Enterprise Agreement remain free to cash-out annual leave, subject to the separate rules imposed by section 94 of the Fair Work Act 2009. These rules are the same as those listed above, except that there is no restriction on the amount of annual leave which can be cashed-out in each 12 month period.

Excessive Annual Leave

Many businesses find it difficult to effectively manage unwieldy annual leave balances. Fortunately, these latest changes by the Fair Work Commission now make it much easier to direct employees to take annual leave and thereby reduce – or eliminate – excessive leave balances.

Firstly, it’s important to note the definition of ‘excessive leave’:

  • If the employee is not a Shiftworker: 8 weeks’ annual leave
  • If the employee is a Shiftworker: 10 weeks’ annual leave

Most – but not all – Modern Awards now contain a ‘model directed leave term’. This new clause will allow your business to direct an employee to take annual leave. As is the case with cashing-out of annual leave, very strict rules apply:

  1. The employee and employer must firstly meet with one another and discuss ways of reducing the excessive leave balance. If they’re unable to reach agreement on when or how annual leave should be taken, your business can then direct the employee to take some of their annual leave. This is referred to as ‘directed annual leave’.
  2. The directed annual leave period must begin:
    • no earlier than 8 weeks, and
    • no later than 1 year from the date the annual leave direction is issued by your client
  3. The directed annual leave period must be at least one week long, and
  4. The employee must have at least six weeks of annual leave left after the directed leave period has been completed
  5. The Employer’s direction must not be inconsistent with any leave arrangements already in place. This includes any annual leave policies or procedures which apply in their workplace
  6. An employee may subsequently request annual leave despite the employer’s prior direction for it to be taken. If this happens, the employer must disregard their previous direction when considering the employee’s new annual leave request, and

If an employee has had an excessive leave balance for more than 6 months and the employer has not issued a direction for the leave to be taken, the employee can unilaterally take some of their leave. In this situation the same rules as mentioned above for employer-directed leave will also apply.

Leave in Advance

Most Modern Awards now expressly allow employers to provide their employees with annual leave in advance of that leave having been accrued by the employee.
Importantly, the new ‘model clause’ also expressly allows employers to deduct any subsequent ‘annual leave debt’ from the employee’s final pay if their employment ends before their accrued annual leave has returned to a positive balance.

The following rules apply to annual leave provided in advance of accrual:

  1. The mutual agreement must be recorded in writing
  2. The agreement must confirm the amount of leave in advance being provided, the date when that period of leave will commence
  3. The agreement must be signed by both the employer and the employee, as well as the employee’s parent or guardian if they’re under 18 years of age, and
  4. A copy of the agreement must be kept in the employee’s records

Payment of Annual Leave

A number of Modern Awards have historically required employees to be paid their full wage or salary in-full and up-front when then begin a period of annual leave.

Most Modern Awards imposing this obligation have now been amended to allow employees who are paid via EFT to continue receiving their wage or salary payments ‘as usual’ during their period of annual leave.


Contact us today to review your annual leave entitlements and even your long service leave.


The information provided here is of a general nature for Australia and should not be your only source of information. Please consult an experienced and registered tax agent as each small business’s circumstance will vary for end of financial year.