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Cashing out annual leave means an employee receives payment instead of taking time off work. While it sounds fairly easy, cashing out leave entitlements is subject to legislative restrictions and formal requirements.  Employers need to tread carefully before actioning an employee request to cash out leave entitlements.

Annual Leave

The National Employment Standards (NES) enshrined in the Fair Work Act 2009 provides in section 92 that annual leave must not be cashed out, except in accordance with a Modern Award or Enterprise Agreement under section 93 of the NES. Therefore, it is only where cashing of annual leave is specifically provided for in a Modern Award or Enterprise Agreement that it is in fact permitted.

Additional rules that apply when cashing out annual leave include:

  • an employee needs to have at least 4 weeks annual leave leftover
  • a written agreement needs to be made each time annual leave is cashed out
  • an employer can't force or pressure an employee to cash out annual leave
  • the payment for cashed out annual leave has to be the same level as what the employee would have been paid if they took the leave.

Long Service Leave

The cashing out of long service leave is only allowable when provided for by the relevant state or territory long service leave statute. In Queensland the Industrial Relations Act 1999 provides for LSL. Specifically section 53(2) states that if the relevant industrial instrument (Modern Award or Enterprise Agreement) provides for the cashing out of LSL, payment may be made in accordance with the industrial instrument, if the employee and employer agree by a signed agreement Section 53(3) and (4) of the Industrial Relations Act 1999 is also relevant and states that if no industrial instrument provides for cashing out of LSL, then the employee may make an application to the Queensland Industrial Relations Commission. The Commission will only order the employer to make the payment where they are satisfied the payment is being made on compassionate grounds, or ground of financial hardship.

The cashing out of annual leave or LSL without regard to the above legislative restrictions and formal requirements can leave employers subject to claims at a later date as you cannot legally reduce an employee's leave accruals. Despite an informal agreement, an employee could seek to take the 'cashed-out' leave at a later date, or claim underpayment. Employees can make an underpayment claim up to six years after their employment ends.