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How to Prevent Annual Leave Accrual from Crippling Your Business

Annual Leave

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With the end of the financial year fast approaching on June 30, this is the perfect time to review your staff’s annual leave accrual and take positive steps towards preventing difficult a financial situation for your business arising as a result of staff’s annual leave building up, as allowing staff to accumulate too much leave could end up crippling your business.

It is important to consider the impact it could have on your small to medium-sized business, and be aware of the law regarding employees’ rights to carry accrued leave over into the following year.

Problems associated with accrued annual leave

If you are a small to medium-sized business, then you are likely to be running on tight profit margins and managing cash flow can be an issue. If one or more staff members leaves or resigns and you end up owing them for unused leave hours, it could be a huge obstacle. Also, consider the problems that could arise if you find that staff are owed leave at the end of the working year and more than one employee wants to book time off at the same time, or at an inconvenient time for you.

Delays, a poor impression of your processes, or departments not working effectively could leave your customers with a negative impression of your business – and financial hardship for you. In addition, staff might ask to carry leave over to the following year, creating problems at a later date.

The law regarding accrued annual leave

Employees can carry over accrued annual leave to the next year, but by law, there are two situations in which you can direct an employee to take annual leave. According to the Fair Work Ombudsman, an employer can direct an employee to take annual leave if the business is closing for holidays (over Christmas or Easter for example), or if an employee has accumulated excess annual leave. What constitutes ”excessive” differs between industries; more information is available on the Australian Government’s website, and it’s extremely important to know your rights as an employer in your industry so you can enforce leave on staff members with excessive accrual.

How can you stay on top of it?

Larger companies have HR departments to keep on top of annual leave, but without that resource how do you keep on top of the leave hours of all of your staff members and still push forward with your business? It’s not easy! But good accounting and business management software can really help you out.

An EPR platform, like MYOB EXO, is the simplest way to keep on top of it. Most ERPs come with a core finance / accounting software, and can be integrated with a payroll module, which will not only allow you to keep track of accrued and taken leave for each staff member, you can also get a snapshot of how your financial situation would look should you have to pay out a lump sum for accrued leave if a team member were to hand in their notice.

Payroll tracks the amount of leave that has accrued and shows the monetary equivalent of the days that are owed to individuals. Add-ons can calculate leave entitlement, manage requests and approvals, and monitor and show accruals and deductions of leave hours. The software can effectively manage the full life cycle of an individual’s leave, whilst ensuring compliance with employment laws and regulations.

Once you know what leave is owed, you can think about how you will finance this in the event the leave must be paid out. This is a good topic to discuss with your accountant when you do year-end tax planning.