Why accurate leave management is so important

Managing employee leave might seem like a basic task for many businesses — especially smaller ones with only a few employees — but it's essential to keep on top of it for legal compliance as well as employee satisfaction.

Unless you diligently track, manage, and pay leave for every employee, your company could risk making costly errors. High-profile cases of large Australian employers not staying on top of leave entitlements and payments — including Qantas and Westpac — have highlighted how expensive mistakes can be. And that's not to mention the effect of poor leave management on your operational efficiency.

Leave management needs to be taken seriously 

Below are some prime reasons you should accurately manage employee leave.

Meet your legal obligations  

Under the Fair Work Act 2009, all Australian employers must keep accurate records of the daily hours every employee works and their pay for those hours, as well as the leave accrued, entitled leave, and leave taken. Failure to do so can mean being fined by the Fair Work Ombudsman and/or having to pay backdated leave.

Leave and holiday planning 

Managing absences in advance means you won't be regularly caught short without suitable cover or have to overload your existing team, so the business can continue to meet its obligations and deadlines smoothly.

Managing expenses

Paid time off and accrued leave can have a significant impact on your bottom line. Contractors or temps can be expensive — especially when you're trying to find someone to cover an absence in your workplace at short notice. It's essential to have a plan for covering employee leave. Think about aspects such as training any replacement workers, as well as the time and money you may need to spend finding a replacement. Having a temp recruiter or labour hire contact in your network could come in handy. 

Increased employee confidence 

Team members who know they're getting their proper leave entitlements have more confidence and trust in the business, which boosts engagement and motivation.

Reduced absenteeism and presenteeism 

Taking leave improves people's work-life balance and promotes good physical and mental health, which helps lower stress, improves focus, and reduces unscheduled days off. You might like to implement annual leave policies to ensure your employees aren't unnecessarily accruing a large amount of leave. This can help them get enough down-time, but also removes the cash flow burden that can come when a large amount of leave is accrued. 

Cash flow implications of leave management 

Reduction in productivity 

Whether you've hired a temporary worker or you and your team are trying to cover the absence, this can lead to a reduction in productivity. This can occur due to a number of reasons such as, the skill level of the people covering the absence, their knowledge of the business, or fatigue for those working overtime to cover the leave. 

A reduction in productivity may see your profit margin drop. If you're paying leave entitlements while your employee is away, it's important to ensure you are appropriately managing your cash flow for this period. 

Leave loading 

Leave loading, also known as holiday or annual leave loading, is an additional payment made on top of annual leave pay that some employees may be entitled to. While paid annual leave is a minimum entitlement for employees, leave loading is not guaranteed and depends on the employee’s award or agreement. Typically, leave loading amounts to around 17.5% of the employee’s annual leave pay, so it's important to remember that you may need to pay your employees a higher amount while they are on leave. 

Accrued leave liabilities

Unused leave accumulates as a liability on the balance sheet. As these liabilities grow, it can lead to unexpected cash outflows when employees take extended time off or leave the business. This is where an annual leave policy can help keep accrued leave at a manageable level. For example, if you have 10 employees, all earning $1,000 a week, and they've each accrued five weeks of leave, you would need to pay out $50,000 if they all decided to quit at once. While this scenario is very unlikely, it helps to show the impact accrued leave can have on cash flow. Add in 17.5% leave loading, and the amount is $58,750!

How to manage leave 

Effective leave management is essential for maintaining business continuity and employee satisfaction. Businesses should implement clear annual leave policies that outline accrual rates, notice periods, and approval processes to ensure both employees and management understand expectations. These policies should encourage employees to take regular breaks to avoid burnout while also balancing operational needs. Using a leave management system can help track leave balances, automate approvals of leave requests, and prevent scheduling conflicts. It's important to plan ahead by cross-training staff to cover key roles during absences, ensuring smooth operations and minimising disruptions to productivity and cash flow.

Paying out leave entitlements in a final pay

When an employee is leaving their role, it's important they receive the following in their final pay:

• Wages and any penalty rates for hours they have worked.
• Annual leave amounts they have accrued (including leave loading, if applicable).
• Any long service leave they have accrued. 
• Redundancy pay or payment in lieu of notice, if applicable. 

Sick leave, parental leave, or carer's leave are not required to be paid out.

How we can help

If you need more advice on this issue, please contact our team.

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