Cashing Out Annual Leave: A Guide for Australian Employers

Can Employees Cash Out Annual Leave?

Annual leave is one of the most valued work entitlements in Australia, providing employees the opportunity to rest, recharge and spend time away from work. There may be occasions however when an employee prefers to receive payment for a portion of their accrued annual leave instead of taking time off work.  Cashing out annual leave may be an option in such situations.

Quick answer: what is cashing out annual leave?

Cashing out annual leave is when an employee receives direct payment of their annual leave instead of taking paid time off work

While cashing out annual leave is permitted in certain circumstances, employers need to recognise that this is not simply a matter of processing a payroll request. The Fair Work Act 2009, the National Employment Standards (NES), Modern Awards and Enterprise Agreements contain rules that must be followed. Failure to comply with these requirements can expose employers to significant legal and financial risk.

Key takeaways for employers

• Annual leave can be cashed out, but only where workplace laws permit it and the relevant requirements are satisfied.
• Casual employees cannot cash out annual leave because they do not accrue paid annual leave entitlements in the first place.
• Before approving any request, employers should ensure they understand the applicable Modern Award, Enterprise Agreement or NES provisions. They should also ensure the employee retains at least four weeks of annual leave, receives the correct payment and signs a separate written agreement for each cash out arrangement.
• Getting it wrong can result in underpayment claims, disputes and potential breaches of workplace laws.

Can annual leave be cashed out?

The short answer is yes, but only if specific conditions are met.

The Fair Work Act 2009 provides that paid annual leave can only be cashed out where it is permitted by a Modern Award, Enterprise Agreement or through a written agreement with an Award- or agreement-free employee. Employers cannot simply pay out annual leave whenever they choose.

For employers, the first step is to determine whether the employee is covered by a Modern Award or Enterprise Agreement and review the relevant industrial instrument provisions relating to annual leave cashing out.

What does the National Employment Standards require?

The NES establishes several minimum safeguards that apply when annual leave is cashed out.

These include:

• The employee must retain at least four weeks of accrued annual leave after the cash out arrangement.
• Each cash out arrangement must be documented in a separate written agreement outlining the amount of leave being cashed out, the amount the employee will be paid and the date it will be paid
•  If the employee is under 18 years of age, their parent or guardian must also sign the written agreement
• The employee must receive at least the same amount they would have received had they taken the annual leave rather than cashed it out.

These requirements are designed to ensure employees continue to have access to a meaningful period of annual leave for rest and recreation while still offering flexibility where appropriate.

Employers and employees can use the Agreement to cash out annual leave when cashing out annual leave.

What do Awards say?

Many Modern Awards contain annual leave cashing out provisions. While the wording varies slightly between awards, the requirements are generally consistent with the NES.

Importantly, some awards impose additional requirements. For example, many awards limit the amount of annual leave that can be cashed out to a maximum of two weeks in any 12-month period.

This means employers should never assume that because one employee has been allowed to cash out annual leave, the same arrangement will automatically apply to another employee covered by a different award.

Before approving a request, employers should carefully review the applicable Modern Award or seek professional advice to ensure compliance.

Cashing out annual leave for award-free or agreement-free employees

An award-free or agreement-free employee can make an agreement with their employer to cash out their annual leave if the:

• agreement is in writing;
• employer pays the employee the same amount the employee would get if they had taken the leave, and
• employee has at least 4 weeks left in their leave balance after the rest is cashed out.

Is an employer required to approve a request?

No: an employee does not have an automatic right to cash out annual leave.

Cashing out annual leave requires an agreement between the employer and employee. In practical terms, this means an employee can request to cash out annual leave, but the employer is not obligated to approve the request. Likewise, an employer cannot force an employee to cash out annual leave.

The arrangement must be genuinely agreed between both parties.

Practical example: employee needs money to fix the car

Sarah works full-time as a Medical Receptionist and has accumulated eight weeks of annual leave.

She approaches her employer and asks whether she can cash out two weeks of annual leave to assist with some unexpected vehicle expenses.

The employer reviews the applicable Modern Award (Health Professionals and Support Services Award 2020) and confirms that cashing out annual leave is permitted. After cashing out two weeks, Sarah will still have six weeks of accrued annual leave remaining.

The employer prepares a written agreement detailing:

• The amount of annual leave being cashed out.
• The payment Sarah will receive.
• The date of the agreement.

Both parties sign the written agreement, and the payment is processed through payroll.

In this scenario, the arrangement is likely to comply with the Fair Work Act and the relevant award requirements.

A common mistake employers make

One of the most common errors occurs when employers attempt to reduce excessive leave balances by paying out annual leave without obtaining proper written agreement from the employee.

For example, an employer may identify that an employee has accumulated ten weeks of annual leave and decide to pay out two weeks in an effort to reduce the leave liability.

Even if the employee retains more than four weeks of leave, the arrangement may breach workplace laws if there is no separate written agreement and genuine employee consent.

Employers should also remember that reducing leave balances through cashing out is different from directing an employee to take annual leave. These are separate processes with different legal requirements.

Why annual leave cashing out requires caution

For business owners, annual leave liabilities can become a significant financial burden over time. It can therefore be tempting to encourage employees to cash out leave rather than take time away from work.

However, annual leave exists for an important reason. Employees who regularly take leave are generally more productive, engaged and less likely to experience burnout.

Employers should therefore view annual leave cashing out as a flexible option available in appropriate circumstances rather than as a routine strategy for managing leave liabilities.

When assessing a request, employers should consider:

• Whether the arrangement complies with the applicable award or enterprise agreement.
• Whether the employee will retain at least four weeks of annual leave.
• Whether a written agreement has been prepared and signed.
• Whether the correct payment calculation has been made.
• Whether the arrangement is genuinely voluntary.

Frequently Asked Questions

Can I cash out annual leave?

Yes, annual leave can be cashed out, provided it is permitted by the applicable Modern Award, Enterprise Agreement or the Fair Work Act 2009. The arrangement must comply with all relevant legal requirements, including a written agreement between the employer and employee.

Can I cash out 2 weeks of annual leave?

In many cases, yes. Numerous Modern Awards allow employees to cash out up to two weeks of annual leave in a 12-month period. However, employers should always check the applicable award or enterprise agreement, as specific rules may vary.

Do I have to keep 4 weeks of leave after cashing out?

Yes. Under the National Employment Standards, an employee must retain at least four weeks of accrued annual leave after any cash out arrangement. If cashing out leave would reduce the employee’s balance below four weeks, the arrangement cannot proceed.

Can an employer refuse a request to cash out annual leave?

Yes. Employees do not have an automatic right to cash out annual leave. Cashing out leave requires agreement between the employer and employee, meaning an employer can refuse a request if they consider it inappropriate or inconsistent with workplace policies or operational requirements.

Can an employer force an employee to cash out annual leave?

No. An employer cannot require or pressure an employee to cash out annual leave. Any arrangement must be genuinely voluntary and agreed to by both parties in writing.

What is the tax rate for cashing out annual leave?

Annual leave that is cashed out is generally treated as ordinary earnings and taxed in the same way as normal salary or wages. The amount of tax withheld will depend on the employee’s individual circumstances and the Australian Taxation Office’s withholding requirements. Employers should seek advice from their payroll provider, accountant or taxation adviser if they are unsure.

Does unused annual leave get paid out when you leave?

Yes. When employment ends, any accrued but unused annual leave must generally be paid out to the employee. This is different from cashing out annual leave during employment and is a separate entitlement that arises upon termination of employment.

Need help? Bare Bones Consulting are experts in all things HR for employers

If you are considering approving an annual leave cash out request or are unsure whether your employees can cash out annual leave under their Modern Award, the team at Bare Bones Consulting can help. Taking advice from an experienced HR professional before processing the request can save you significant time, cost and drama down the track.

Disclaimer: This article contains general information only and should not be relied upon as legal or professional advice. Before approving a request to cash out annual leave, employers should review the employee’s applicable Modern Award or Enterprise Agreement and seek advice if they are unsure of their obligations.