How to budget for employee leave

Arranging annual leave for team members can feel like a catch-22 for small business owners. On one hand, you want employees to take a holiday: they’re entitled to it, everyone needs a break from time to time, and you don’t want an accrued leave balance hanging over your head. On the other hand, with the workload spread across just a few people, it’s hard not to notice when someone is absent.

According to Katie O’Connor, a principal at accounting firm RSM Australia, planning ahead can reduce the costs associated with annual leave and make sure business continues as usual. “Annual leave needs to be factored into your cash flow and balance sheets, so you know what the final position is at the end of the day,” she explains.

Here are three ways small business owners can minimise the effects of employee breaks.

1. Calculate the costs

Annual leave can generate several costs, starting with the employee’s wages. Under the National Employment Standards (NES), all full-time and part-time employees in Australia are entitled to four weeks’ annual leave pay – more if they’re a shift worker, or if their award or agreement allows it. Some business owners also need to pay annual leave loading, depending which state or territory they’re in. This is usually an extra 17.5 per cent payment on top of an employee’s base rate. Another potential cost can arise if a business owner needs to pay for extra resources to cover the absent team member's workload.

O’Connor explains that all these expenses must be included in a business’ financial plan. “If you haven't calculated employee entitlements and potential costs correctly, it can leave you short on cash,” she says.

Long service leave should also be front-of-mind for small business owners. “Many employers don’t make provisions for long service leave,” O’Connor reveals. “Let’s say a team member wants to take 13 weeks' long service leave: you’ve got to pay all of that out, potentially in one go. That’s quite a hit to the bank account.”

2. Encourage employees to take leave

According to a 2016 Roy Morgan report, Australia’s paid workforce has almost 134 million days’ worth of accrued annual leave. That means every employee, on average, has around 16 days of unused leave.

Allowing team members to store leave in this way is bad practice, says hranywhere founder Martin Nally, a director at AB Phillips and lecturer at the University of Melbourne. “It's not a good business decision to have large leave balances accrued,” he says. “Every time an employee’s wage increases, that accrual goes up. If someone leaves the business, you’ve got to pay it out at the higher rate.”

O’Connor agrees, explaining that many business owners don’t realise they need to calculate leave at an employee’s current pay rate. To prevent any shortfalls, she says it’s important to update leave records regularly. “Business owners should review it on a yearly basis, at a minimum,” she suggests. “But it wouldn’t hurt to review them every six months or quarterly – or whenever wages have increased. Look at your leave provisions and make sure you’ve made the necessary changes to your budget.”

It’s not just finances that can suffer when leave is left to gather. An employee’s wellbeing is also at risk. “You need to make sure your team is on top of things,” O’Connor says. “They need to be mentally and physically fit. If they’re exhausted and still working through, problems could arise if they do something wrong on the job. That could incur another cost, depending on what needs to be fixed.”

While the Fair Work website states that it's up to each employer and employee to agree on the timing and duration of annual leave, employers can direct team members to take time off in certain situations. But the employer’s request must be reasonable. For example, they need an employee to take time off because they have an excessive annual leave balance, or because the business is shutting down for a period such as Christmas.

Nally believes transparency is key to handling such situations. “Try to be as flexible as possible, but let employees know there are certain times you can't be,” he suggests. “What you need to be doing is planning, informing and consulting with your team. Sometimes when you engage them and get them to solve the problems, it takes the issue away.”

Planning ahead for when staff are away on leave is crucial for the wellbeing of your small business


3. Plan ahead

Some business owners create policies relating to annual leave: whether it needs to be used within the year it accrues, for example, or when it can (and can't) be taken. But when you only have a small team, Nally believes it’s best to keep things simple. “Establish some guidelines that work for your business,” he says. “Don't let it become complicated; just use common sense, be flexible and consistent.”

He adds that it’s the responsibility of the business owner to take a ‘horizon approach’ to the year ahead. “Certain times are more critical than others,” says Nally. “Map out a calendar to see when your busy periods fall, then talk to your team about what will be required over the next few months. You should be able to predict good and bad times for planned holidays.”

Once timings are agreed, business owners can prepare themselves for employee absences by establishing a pre-holiday plan. “Talk to your team member about the critical things that will need to be addressed when they’re away,” Nally suggests. “Check on the status of projects and nominate the people that can be approached in their absence. Also address anything that needs to be done before they get back. If they’re a shift worker, decide who will cover them, and who the backup will be if they're not available. Managing leave takes a fair bit of work, but the outcomes of that effort far outweigh any disadvantages.”

Checklist: How to prepare your finances for employee leave

Trying to keep track of your team's leave tally? Katie O'Connor says small business owners should ask themselves these nine questions:

1. Have the correct number of days been calculated for all entitlements?

2. Have the correct wage rates for all employees been applied to the calculation?

3. Am I following the correct state/federal award?

4. Am I liable to include leave loading?

5. Are there any employees who have accrued excessive amounts of holiday leave? (Try to have no more than four weeks owing for each team member.)

6. What are my plans if employees are away for extended periods: do I need to employ extra resources or can the workload be spread over the existing team?

7. At what point should I be accruing any long service leave?

8. Have I accounted for any unused leave in my financial statements?

9. Do I have enough cash resources to pay for extended leave taken by employees?

The Fair Work website offers a range of tools, including a Leave Calculator and record-keeping template, to help business owners keep track of leave-related costs.