How to use annual leave to respond to market conditions

Mining company Glencore recently reacted to a depressed coal price by announcing a three week shutdown during which employees would be asked to take annual leave. As the Christmas period approaches, all organisations should be asking themselves how they can best use annual leave to respond to market conditions faced by their business.

Where those market conditions might involve a traditionally quiet trading period, directing employees to take annual leave can reduce leave liability, however, the rules around directing staff to take leave are not always straightforward. The Fair Work Act (FW Act) provides that annual leave is to be taken for a period agreed between an employee and his or her employer. However, if an employment contract says the employee will take leave over the Christmas period or annual shutdown, this limits the need for employers to direct an employee to take annual leave, as it is already agreed. If there is no such contractual term, or other prior agreement, the rules around requiring leave to be taken become significant.

Requiring an employee to take paid annual leave

The FW Act distinguishes between employees covered by awards and enterprise agreements, and employees who are not. For award/agreement covered employees, an employer can require an employee to take paid annual leave if the relevant award/agreement permits the employer to do so and the requirement is “reasonable”.

An award or agreement that contains a term about directing employees to take leave will usually further prescribe the conditions for doing so. For example, the Clerks – Private Sector Award permits requiring employees to take annual leave during a shutdown of operations, providing the employee is given at least four weeks’ notice. Other awards and enterprise agreements provide for a longer notice period, and others are silent on the issue.

An employer should also identify the source of the right to direct the taking of leave. If the right is restrictive, or the award/agreement is silent on the issue, then some thought (well in advance of the Christmas holiday period) should be given encouraging staff to take leave during the period. In that case, further thought should be given to addressing the issue in future versions of the enterprise agreement – or including a standard term in future employment contracts recoding an agreement about taking leave.

Even where the enterprise agreement deals with the issue, it requires clear words to give the employer the right to direct annual leave to be taken during a shutdown. This was the difficulty faced earlier this year by Wattyl in United Voice v Valspar (WPC) Pty Ltd [2014] FCAFC, where a Full Court of the Federal Court concluded that the right in the relevant enterprise agreement was to be read narrowly having regard to previously applicable awards, dating back 50 years. There, the business required employees to take rolling short periods of annual leave to coincide with reduced production periods because of an oversupply of product, but the Full Court found that the historical context of annual leave for these employees meant they could only be required to take leave in two week blocks – and the employer had therefore breached the FW Act.

Some direction needs to be given by the Fair Work Commission (FWC) on this issue and the FWC is now in a position to do so. The FWC is currently conducting a review of the award system. The inconsistent rules that employers must deal with across and within industries when it comes to directing employees to take leave will be looked at. For example, the FWC is hearing submissions on annual leave and shutdown periods during December 2014, and is expected to issue a decision with respect to award terms permitting employers to deal with excessive leave balances.

However, if the employee is not on an award/agreement, then the only rule relevant to an employer requiring an employee to take annual leave is that the requirement is reasonable.

Whether a requirement is reasonable can depend on:

  • the needs of the employee, and the needs of the employer’s business,
  • any agreed arrangement with the employee,
  • custom and practice within the business,
  • the timing of the requirement to take leave – for example, the time of year and the blocks of leave being directed, and
  • the period of notice given.

The FW Act already contemplates that it will generally be reasonable to require employees to take paid leave during a shutdown period between Christmas and New Year.

That proviso (reasonableness) still requires the individual circumstances of each employee to be taken into account, so the more an employer manages expectations through polices and employment contracts, the better the position they will be in.

What if the employee does not have enough annual leave?

If an employee has insufficient annual leave to cover the period of the Christmas shutdown, then the terms of the employee’s employment contract, or any applicable award/enterprise agreement becomes relevant.

In the absence of any term, there is no general ability under the FW Act to require an employee to take unpaid leave during a Christmas shutdown. So it would be a matter of negotiation with the particular employee, which could include requiring the employee to work during the shutdown as part of a “skeleton staff” or otherwise to take the period unpaid.

Refusing requests for leave

Of course, not all industries see a slump during the Christmas period. Employers operating in the hospitality, tourist and leisure industries, for example, peak at this time. Difficulties arise when employers receive an influx of holiday requests to coincide with their busiest time of year.

The FW Act prevents an employer from “unreasonably refusing” to agree to a request by an employee to take paid annual leave.

A reasonable refusal is likely to include a requirement to maintain minimum staffing levels. However that is likely to have to be balanced against the employee’s interests. For that reason, employers in these industries should consider having specific policies in place to manage employees’ expectations for the busier periods.