The problem with Australia’s current employee leave entitlements, and a proposal for the future

I believe we have a problem in how employee benefits are stored and utilised in the Australian context. The problem is, some of our benefits disappear due to choices that we make, leaving incentive for some employees to ‘game the system’ in an attempt to stop this from happening. 

This in turn creates an adversarial and unethical conflict between the system, the employee, and the employer, causing a breakdown that ultimately disadvantages all parties in lost benefits, lost productivity, conflict and a reduced perception of fairness.

In this article, I want to propose an alternative to the present system and explain the benefits that it will entail. But first, let’s look at what happens now:

Employee benefits

Presently, employees should be given three broad benefits in exchange for work, which are:

• Wages: This is the salary or hourly rate they receive;
• Superannuation: The money that gets transferred directly to their super fund for retirement; and
• Leave Entitlements: Various forms of leave including:
  • Annual Leave (AL);
  • Personal (Sick/Carers) leave;
  • Long service leave (LSL);
  • Parental leave;
  • Domestic violence leave;
  • Compassionate leave; and
  • Community service leave.

The problem with leave

I believe there is a problem with how leave entitlements are handled. None of the seven entitlements outlined above follow an employee from one employer to the next. Not one. Additionally, only two of the above can be cashed out when an employee resigns (AL and LSL), with LSL requiring someone to have completed seven years of service before that can happen. The rest simply vanishes. I’m sure you can agree that’s not a great outcome for the employee, and surprisingly it’s not good for your business either, as I’ll explain later.

Let’s look at the example using personal (sick) leave. 

An employee, Jane Smith, has worked in a company for five years and has had perfect health. She never takes a sick day and has accumulated 50 days of sick leave. If Jane leaves that company, then she, from her perspective, loses those 50 days of accumulated benefit. Knowing this, if Jane ever wanted to leave the company, she may decide to start taking lots of sick days in an attempt to ‘recoup’ this benefit she is about to lose. Her employer can clearly see this is happening, resulting in a damaged relationship and a reduction in the company’s productivity.

Let’s now look at Jane Smith and her long service leave (LSL) entitlement. Same person, same company, same five years. This time, unable to game the system, she has lost five years’ worth of theoretical LSL. Her company has effectively gained a windfall from her moving on. 

Even annual leave suffers. Rather than having time off, the remaining leave is paid out as a lump sum. This initially sounds like an employee is getting all of their benefits, but that is incorrect.

What most don’t understand is that getting paid out is not totally equivalent to actually taking that leave. While on annual leave, an employee accumulates superannuation and more leave, of every variety. None of this occurs when they cash out leave, meaning employees are effectively only getting a portion of the benefit.

Except even most employers are unhappy with this situation. In private business, especially the small business sector, the effect on cashflow is seen as a negative because some leave payouts are quite large. This can be hard to swallow when you lose talent and have to pay them out a significant sum at the same time. Businesses see it as double penalisation. 

The solution

So, what could be a solution? I think leave entitlements should be handled in the same manner as superannuation. 

In this solution, employers would transfer an employee’s leave entitlements to a third party, an ‘Entitlements Fund’, for lack of a better term. Each pay day, an employer would contribute the monetary value of all the employee’s leave accrual to an entitlements fund. When an employee takes leave from an employer, they could then be paid by a fund, rather than your business. This takes the burden off the employer and lets the employee have greater control over their benefits for the long term. 

Potentially, there is also an opportunity to combine this entitlements fund with superannuation funds. Benefits and superannuation should be held together so that the benefits can contribute to employees’ superannuation while they sit unused. This provides financial benefit over the long term and gives employees incentive to use them judiciously.

There are still things that need to be worked out:

• How would this work, practically speaking? Would an employee have to apply for leave twice? Once with your company and once with the fund?;
• Can an employee access their benefits whenever, or do they have to receive approval from their present company?;
• Could employees just cash out leave and not use it normally? Would this have a negative effect on the mental health of the individual?; and
• Since this would increase the cost of employment on a pay-cycle to pay-cycle basis, would companies be willing to do it?

Having said that, I think this would have three distinct advantages for employers, including:

• A reduced risk of employees abusing the system and taking out excess sick leave, as this entitlement is carried from one employer to the next. This leaves employers with enhanced productivity and a better relationship with their staff;
• Businesses would contribute to leave entitlements on a pay-cycle by pay-cycle basis, smoothing cashflow; and
• During any employee leave periods, all leave will be virtually ‘unpaid’ from a cashflow perspective. This means when employees head on leave, their cost to the business is reduced correlating exactly with the missing productivity from an absent employee.

And for employees as well:

• All leave entitlements would follow them from one employer to the next, giving access to additional funds across their career and between jobs as well. Similar to having a personal safety net; 
• This is particularly advantageous for both LSL and sick leave. This gives everybody a steady increase in benefits over time, not just those people who stay at the same company their entire careers; and
• All types of leave would contribute to an employee’s superannuation returns, by sitting in their super accounts and earning returns from investment until used. 

Overall, this proposed solution to leave entitlements could be an interesting opportunity for both employers and employees alike.