It’s a typical scenario for many business owners. An employee puts in an application for annual leave for a tropical break to Hawaii. You smile as you put yourself in their shoes imagining yourself lying on the beach with a cocktail and then reality hits and you start to think how it will impact you and your business. Your immediate concern is having the manpower to cover your absent employee but there are many other factors that you also need to consider. These include the following six areas
Six questions to keep in mind with staff annual leave
- Increased wages? Will you have increased wages due to the need to hire a casual replacement or pay current staff overtime rates?
- Is it over four weeks? How many weeks has the employee accumulated? If it is over four weeks you may end up paying holiday leave at a higher rate to that when the employee earned it.
- Is leave loading applicable? Are you required to pay leave loading?
- Are your calculations correct? Have you correctly calculated the actual leave entitlement in days and dollar value?
- Is your tax up to scratch? Have you applied the correct tax?
- What about unused leave? Are you required to calculate a provision for any unused Leave in the accounts of the business?
Do you know what your liabilities are?
The factors above may put considerable pressure on a business’ cash flow if they are not addressed. It’s important that you are aware at all times of your employees’ entitlements. If you do not have a provision for leave entitlements in your financial statements or records then how do you know what your liability is?
Meet Joe Smith – an annual leave example of where you can go wrong
Here is just one example of the matters to consider and the potential implications:
- Joe Smith has been working for you for 15 years and was looking forward to taking his long service leave entitlement. He applies for 13 weeks leave and starts booking his holiday.
- His current monthly salary before tax is $10,000 (approximately $7,100 net) therefore the company must pay him $30,000 less tax (approximately $21,300 net) when he takes his leave.
You haven’t provided for this and there are a number of suppliers who now want to be paid. This forces you to access the overdraft facility for which you are charged increased interest and bank fees. If you had provided for this, you would have been aware of your obligations and could have ensured funds were made available. This would have saved outlay on unnecessary bank fees and interest and potential late payments to suppliers.
What if however, you think you have been providing for leave entitlements but you have been doing it at historical wages rates when it was accumulated? Your provision for Joe shows only $15,000 but this is because his wage was considerably less when you first started providing for it. All of a sudden you need to find another $15,000 in your cash flow to cover additional wages and taxes. Once again you need to access your overdraft facility and you are charged interest and bank fees.
Annual leave and Long Service Leave entitlements may also vary from state to state and depend on any Workplace Agreements that may be in place. You should ensure that you are using the correct governing legislation or agreement when calculating leave entitlements. The differences in these mainly relate to Long Service Leave, They are associated with quantity and time i.e.. when do the obligations to accumulate Long Service Leave begin and how many weeks is the employee entitled to.
Plan now and avoid future pressure-cooker situations
Do you know what employee leave will cost you in the next 12 months? And if not how can you expect to take that well-earned break that you have been dreaming about. Our Business Advisory team can help you reach your preferred holiday destination stress free. We are happy to assist you should you have any questions or concerns regarding your leave obligations. Find out more from your local RSM Business Advisory Team.