Purchasing Additional Annual Leave

[belinda]

We have an employee who wishes to purchased additional annual leave. This is new to us, and our payroll company has adviced that the easiest way to do this is to deduct monies from his pay each month to pay for this additional leave accrual. What I am not sure about is whether we should be paying super on his gross salary before or after the deduction has gone through.

Belinda

[Moz]

Annual leave is a benefit that is accrued based upon the number of hours or days worked.

To my mind he is not really "purchasing" additional leave, he is opting to reduce his salary in return for working fewer hours.

I can't see how this is any different from someone who works part time, in which case the super would not be paid, because the hours have not been worked to earn it.

I don't profess to be an expert, but in any agreement I would avoid any reference to "purchasing leave". His hours are being reduced and his salary is being reduced accordingly, at his request (in writing!)

[Qld IR Consultant]

Belinda, I have first hand experience of a Purchased Leave system and to be honest they never work the way they are intended too. You will spend more time trying to explain it to staff and triple checking calculations etc than it is worth.

My experience is you pay the super on the gross salary, and the payment for the leave is a deduction after tax, thus mitigating any FBT impact.

But my professional advice to you is don't do it.......

[Qld IR Consultant]

Also, if you decide to go ahead with it make sure the leave is fully "paid" for before they take it.....A client of mine got caught out big time doing it the other way......

[Cottoneyes]

I've only ever seen it offered to employees on salary, and now thinking about it don't believe it could work for anyone paid by the hour (ie tradies, factory workers etc)

Like Qld IR Consultant said, it is more of a hassle than it can be worth at times, however if you're trying to be an employer of choice, you need to investigate it as it is becoming more and more common. Having said that, if your rem strategy and policy is sound, it only takes a bit more work to get it up and going. There are a few pitfalls though:

Example of how it would work - employee is on $52K base with 9% super for a package of $56,680 ($4,680 in super). Employee wishes to purchase 2 weeks of additional annual leave, which is in fact 2 weeks of leave without pay spread out over the entire year, so take 2/52ths of their annual salary away to make the new base for the year of $50K, super at 9% of $4,500 and the purchased annual leave of $2,180 to keep the package at $56,680. (Note the $2,180 will not go through the payroll, check with your finance team on how they want to record this liability in the books)

Doing it this way keeps the PAYG calculations correct, ensures the correct super is paid, has no FBT liability. The deduction should not be after tax as the employee does not earn the amount.

Make sure you record this leave seperate to the normal annual leave (have your payroll set up a new leave type) so you can keep track of this liability for your own records and to show in your financials correctly.

Areas of concern:
As stated above, make sure you have the policy in place for when the employee can take it and what happens if they leave with the leave being already taken.
How long does the employee need to be in employment before they can apply - ie out of probation, 1 years service, 2 years service etc.
When can they apply for it - in my experience it makes it easier if they can apply for it only once a year, and to coincide with the annual increases makes it all a bit easier as well
What happens if the employee gets a pay increase or changes positions mid year - you'll need to recalculate the package so best to ensure it is well communicated first on how this will be handled
What happens if the employee does not take the leave - In my experience across a few organisations you'll get half of the applicants will not use the leave, all policies I've worked with so far require the balance to be reimbursed at the end of the year and the employee has to reapply for it the next year. Some employees use this as a savings scheme and will apply and not use the leave year after year. 2 more areas for you policy is something to exclude employees applying for the leave if they have done so for say 2 years previously and not used it, and also consider anyone with 8+ weeks of normal annual leave should be able to apply for it as well
The normal rules of annual leave will not apply to this either, so take the opportunity in your policy to put in other items like ensuring the employee takes this leave prior to the other leave, and also whether they need to take it in one lot or as they wish.