3 Strategies to Reduce Your Annual Leave Liability

ELMO’s latest Employee Sentiment Index reveals how much leave the average worker in Australia and New Zealand has accrued.

Leave liability is on the radar for many HR and finance teams as businesses near the end-of-year break. 

Thanks to the border closures and pause on travel during the pandemic, many employees accrued leave in excessive amounts rather than take a holiday. And now, despite global travel resuming, the trend appears to be continuing. 

What is leave liability?

When an employee leaves their job, they are entitled to be paid for certain types of unused leave. The total amount the employer owes for this accrued leave is called leave liability. Depending on the employment agreement and national labour laws, different types of leave may contribute to this liability. Annual leave liability tends to be one of the biggest forms, given that employees accrue 20 days of annual leave each year.

It’s crucial for businesses to manage this liability effectively, to ensure a balance between supporting employee wellbeing and maintaining financial health of the organisation.

It’s a financial liability because employers must pay an employee for any period of untaken annual leave. The payment has to be the same as what the employee would have been paid if they took the leave. Crucially, annual leave does not have to be taken each year, meaning it rolls over

In Australia, some awards and agreements include rules around whether an employer can direct employees to take their annual leave – for example, by the end of the financial year. 

For employees not covered by an award or agreement, employers can only require them to take a period of annual leave if the requirement is reasonable. This tends to include a shut down period or when the employee has excessive annual leave. According to Fair Work, excessive leave is generally considered to be 8 weeks of annual leave or 10 weeks if they’re a shift worker.

How much leave does the average worker have?

The Q3 Employee Sentiment Index revealed that the average worker has just under 16 days of annual leave accrued. But worryingly, almost a quarter of Australian workers have accrued the yearly annual leave entitlement of four weeks (20 working days).

When it comes to personal leave, the average employee has accrued 14.4 days – close to one and a half times the annual entitlement of two weeks/10 working days.

In New Zealand, New Zealand employee have accrued an average of 15.3 days of annual leave, a slight decrease of 15.8 days from last year. One in five New Zealand workers have accrued the yearly annual leave entitlement of four weeks/20 working days or more saved.

Regarding personal leave, the average New Zealand employee has 112 days of leave saved, close to two days more than in Q3 2022 (10.6 days).

Three strategies to reduce leave liability

Employers are getting increasingly more creative about how they encourage employees to use their annual leave. 

1. Introduce a leave bonus scheme

One incentivising strategy might include introducing a leave bonus scheme. Under such a scheme, employees who utilise their annual leave wholly within a given leave year may receive a reward or bonus for doing so. 

Rewards could take various forms, such as wellness vouchers, additional annual leave days, or a direct monetary bonus. By making this attractive to employees, you incentivise them to take their well-deserved time off, supporting them to rest and recharge.

It could also be incorporated into other incentive schemes in operation.

Example: A company is running an end-of-year incentive scheme to encourage their sales team to hit their annual targets. As part of the Ts and Cs, employees will only be eligible for the prize if they have less than 30 days annual leave accrued. They’re incentivised to book leave in advance to qualify for the incentive scheme.

2. Promote a healthy work-life balance culture

It’s important to foster a culture that values time off as essential for optimal performance and wellness. Regularly communicate the importance of taking annual leave with your staff and promote its benefits, like improved mental health and increased productivity. 

Actively encouraging staff to take their holidays reinforces the message that their wellbeing matters to the company and reduces the stigma that can sometimes be attached to taking leave.

It’s also worth using your leaders as role models, encouraging them to share when they’re taking leave with their teams and the wider business, as well as anecdotes and pictures from their trips. It can be incredibly powerful to see leaders normalising taking time away from the office, spending time with family or friends. 

3. Make leave planning easier and more transparent

Booking leave should be as frictionless as possible to reduce your leave liability. That means the leave application process is easy-to-use, quick to do, and most importantly, accurate. Otherwise, employees may feel booking leave is a pain and actively try to avoid it. It also makes them less likely to put their sick leave into the system.

HR professionals should ensure there’s a transparent system of applying for and planning leave is in place; this might include using leave management software that makes it easy for employees and managers alike to see how much leave time is available. 

Make the leave application process hassle-free. Share information on quieter periods, ideal for taking leave and encourage employees to plan in advance both for their benefit and to ensure business continuity.

ELMO Software makes it simple to manage the leave process – for both employees and HR. Our HR platform is designed with your employees in mind, providing staff with an easy-to-use interface to plan, request and check their leave balance. With configurable notifications and leave forecasting, managers can stay on top of their team’s leave requests and entitlements for better planning and decision-making.