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Why you MUST monitor employee leave balances

Many small businesses fail to monitor accrued leave balances for their employees. This can impact your business significantly.

Accrual of annual leave (and long service leave) has the potential to put your cashflow at risk. Should one or more employees resign with a stockpile of unpaid annual leave, the resulting payout could set your working capital back by a considerable amount.

Similarly, multiple staff may ask for extended periods of leave at the same time. If you aren't able to satisfy reasonable requests for holidays, it can cause disillusionment amongst your staff and could impact morale across the business.

A real life example

Below is a recent example from a client who did not heed our warnings (names have been changed)

Joan had been a long time employee of Jim's small family run appliance store. Being a small business, hours at work had always been fairly flexible for employees, however, under their award annual leave had been accruing and Joan's leave balance had ballooned out to 9 weeks, plus she was owed another 10 weeks long service leave. Joan decided to retire from work and Jim was forced to pay out the 19 weeks leave owed, as well as employ a new person to work in the shop.

This put an enormous strain on the businesses ability to meet it's financial obligations. Jim needed to approach his bank for an additional $25,000 in order make this payment to Joan.

Your Bookkeeper's role

Every month your bookkeeper will run a number of quality checks on your Xero file. One of these checks is to check for excessive employee leave balances. If an employees leave balance is 80% or more of their annual leave entitlement, they will let you know and offer some suggestions for resolving this

Please note that this service is only provided if your bookkeeping agreement includes a payroll service.

Additionally, we will not advise you if Directors/Owners of the business have excessive leave balance.

How do you fix this?

Fortunately as business owners you do have the power to manage the amount of leave your staff have accruing. Depending on your industry, you have the option to:
  1. Direct your staff to take a holiday or
  2. Negotiate a payout of excessive leave.

There are various Industry rules when directing your staff to take leave. For example in most manufacturing industries excessive leave is deemed to be eight weeks or more owing. Be sure to check the specific regulations and rules which cover your industry.

Alternatively, you may instead wish to simply pay the excessive balance to your employee when it's convenient for you. Annual leave cash-outs must be agreed upon by both you and your employee, and cannot leave the staff member with less than four weeks of leave.