As part of the Fair Work Commission’s (FWC) 4-yearly review of the Modern Award system, the Full Bench of the FWC has announced a number of changes to the mandatory annual leave terms contained in most Modern Awards.  

The proposed amendments to the Modern Awards were subject to decisions in June and September 2015 and the appropriate wording has been subject to over a year of submissions and consideration. After receiving input from employer organisations and unions on the changes and their proposed wording, the FWC has released plain language model terms of the changes for comment.  

In its decisions setting out the proposed annual leave model terms, the FWC considered whether particular Modern Awards achieve their objectives in relation to the manner which they dealt with annual leave. It determined that the vast majority of Modern Awards required variation in regard to the following matters:

  • cashing out annual leave;
  • taking leave in advance of accrual;
  • payment for annual leave; and
  • directing an employee to use excessive annual leave accrual.

Cashing Out Annual Leave  

112 of the 122 Modern Awards will be amended to incorporate terms allowing employers and employees to agree in writing to the cashing out of the employee’s annual leave in certain circumstances. Previously, the National Employment Standards in the Fair Work Act 2009 did allow for cashing out of annual leave if a Modern Award allowed for this but most Modern Awards did not contain such provisions.  

The ability to cash out annual leave in accordance with the Modern Award will be subject to conditions and will require the agreement of both the employer and the employee. Any cashing out must not leave the employee with less than four weeks leave and the maximum that may be cashed out in any 12 month period is the equivalent of two weeks annual leave.  

Taking leave in advance of accrual  

In the event an employee has not yet accrued sufficient paid annual leave to use, the new Modern Award terms will allow an employer and employee to agree in writing for the employee to take annual leave in advance. The arrangement is subject to agreement and the employee cannot demand leave in advance of its accrual, the advance leave must be by agreement.  

Interestingly, the model term does not propose to limit the amount of annual leave an employee can take in advance. In the event the employee is terminated before they accrue the annual leave taken, the employer will be authorised to deduct from the employee’s last pay an amount equal to the annual leave taken but not accrued. Nonetheless employers should consider the risk of providing excessive annual leave in advance of accrual, as they may be left in the red if the employee leaves before accruing the leave already taken and their last pay cannot cover the amount owing.  

Payment for annual leave  

51 of the current Modern Awards oblige an employer to pay an employee their annual leave payment immediately before the commencement of the annual leave. This was an administrative issue to the extent the employer would be required to make arrangements for the calculation and payment of annual leave to an employee outside of the normal, regular pay roll process.  

The new changes will enable employers who pay by EFT to pay an employee their annual leave payment in their ordinary pay cycle, rather than before the employees departure. Relevantly this change will only be in regard to employees who are paid by EFT process. If payment is usually by cash or cheque the employer will have to continue to provide payment in advance.  

Directing an employee to use excessive annual leave accrual  

One of the bigger changes to 80 of the Modern Awards that will benefit employers is the ability to direct employees who have accrued excessive amounts of annual leave to take a portion of that leave. “Excessive annual leave” accrual will be defined to mean more than eight weeks paid annual leave.  

The direction by an employer will be subject to conditions, including that the employer and employee must first attempt to confer and reach agreement on how to reduce the excessive leave. Other conditions on the direction to take annual leave include:

  • the direction cannot result in the employee in having less than six weeks paid annual leave;
  • the direction cannot require the employee to take a period of annual leave of less than one week; and
  • the employee must be given at least eight weeks, but not more than 12 months, notice of the of the time the annual leave must be taken.

It is worth noting that employees will also have the ability to demand to take a period of their excessive annual leave if agreement cannot be reached on when it should be taken and they have had the excessive annual leave accrual for more than six months.  

Summary A summary of the Full Bench’s decision and the full wording of the model terms to be inserted into the Modern Awards, as well as a full checklist of which Modern Awards will be subject to change, can be found here.  

The model terms have been reworked to ensure they are expressed in clear, plain language that is easily understandable. While the final wording of the model terms may possibly be subject to further change, their substantial content will remain the same. The actual date of the insertion of these terms into the Modern Awards has not yet been announced but employers can expect their introduction in the near future.