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Annual leave can now be cashed out under most modern awards, following a determination by the Fair Work Commission (FWC) last year, which comes into effect from the first pay period on or after 29 July 2016. This change will impact millions of employees in Australia who are covered by the relevant modern awards. The change does not apply to employees covered by an enterprise agreement or otherwise not covered by a modern award, although many employees under these alternative types of cover are already entitled to cash out annual leave under existing arrangements.

The change that allows cashing out of annual leave takes the form of a model clause inserted into most modern awards. The key features of the model clause are:

  • no more than two weeks' accrued annual leave can be cashed out in any 12-month period
  • the cashing out of leave cannot result in an employee's remaining accrued annual leave entitlement being less than four weeks, and
  • each instance of cashing out of leave must be agreed to in writing and signed by the employee (or their parent/guardian if under 18).

Inserting this provision to allow the cashing out of annual leave was sought by employers, but hotly contested by unions. In approving the proposal, the FWC noted they had previously been reluctant to allow the cashing out of leave because it could undermine the purpose of annual leave—to provide employees with a physical and mental respite from work. However, the FWC felt that with the more frequent use of these provisions in enterprise agreements and with agreement-free employees, that it should meet the demand—especially given that the provisions could be drafted to include safeguards to protect entitlements (as set out above).

The model clause is one of a raft of amendments to modern awards, forming part of the FWC's four-yearly review. Other changes to modern awards around the accrual and taking of annual leave include allowing employees to take annual leave before they've accrued it and when an employee can be directed to take excessive leave.  

One of the more controversial proposals being considered in the review is whether weekend penalty rates should be reduced. This is set to be determined by the FWC in September 2016.

In view of these changes, businesses should consider whether the model clause applies to their employees and, if so, whether they or their employees wish to take advantage of the model clause to facilitate the cashing out of annual leave. Employers should also ensure that appropriate records are kept of any agreement for the cashing out of leave, as this will be a requirement under the model clause and may be enforced by the Fair Work Ombudsman.

A full list of the modern awards that have incorporated the model clause can be accessed here

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