Why untaken annual leave costs your business actual money

Greg Morris, CEO of Sebata Holdings

Statutory vs annual leave

This minimum annual leave entitlement is referred to as "statutory annual leave". Employees may also be granted annual leave – but this is not regulated by statute, so employers may decide on the terms and conditions around it. For example, the employer may regulate payment for additional annual leave and permit payment for untaken additional annual leave.

Now, workers who don’t use annual leave create a problem because accrued leave pay is registered in the company's books as a debt.

That’s right: the provision for the annual leave account would be a liability account; a liability that will need to be paid, but has not yet been paid.

Very serious implications

But this is more than just an on-paper problem. Let’s say your company has had a very good year, but there’s a large amount of untaken leave. The leave provision is an offset against profit at year end, which could skew your profits downwards and show a poorer year than was the case.

And this, simply because your people didn’t take time off.

This phenomenon is also problematic if an employee leaves the company, and they have to be paid – because you pay them out at their higher salary, not at the salary at the time they did not take their leave.

Now, in a situation of downsizing, employees are less likely to take leave in an effort to appear to be ‘indispensable’. But counter to this is the financial impact: while you’re more likely to increase the accrual – decreasing profit – the increase won’t be greater than the saving of full-time wages.

So accrued annual leave actually affects the company's balance sheet.

Whose responsibility is it?

You might think that smaller businesses, hamstrung by tighter profit margins and constricted cashflow, would face a greater problem. But I believe that, because they have more workers, bigger companies have a bigger issue. The liability is larger, and the systems more procedural and less agile.

Some corporate employees intentionally take less leave to earn a larger income. But whose responsibility is it to oversee, keep track of and manage the ‘leave bill’? In my opinion, management – not HR – should be ‘managing’ it, because it impacts the business’s financial performance.

If the management of employees’ annual leave balances is one of the criteria for managers’ performance reviews, it focuses their attention on leave accruals – and perhaps on uncovering the reasons why employees are not taking leave. But managers should not place pressure – direct or indirect – on employees to avoid taking leave, because ‘we won’t be able to cope’.

On the other hand, employees should not hoard their leave entitlements – either for a lengthy holiday, a contingency against illness, or to accrue a large untaken leave balance that will be paid out if they’re retrenched or dismissed.

Tips and techniques to try

Above and beyond a company’s leave policy however, there are two ways to look at this topic: people management and profitability.

I would advise that you not look at the negative financial impacts in isolation.

By looking after your staff and ensuring they are taking their leave and getting the rest they deserve, you are actually increasing profit – granted, in addition to an ‘easy win’ financially. And, in terms of helping to ensure that your people do take their annual leave, I have some suggestions:

• Empower management to meet proactively with their direct reports to schedule leave.
  
• Remind managers that untaken annual leave is an unnecessary cost to the company.
  
• Work to break up big leave balances into smaller chunks within the current leave cycle.

This is a common issue in the public and private sectors. Leave stacks up into the next year and beyond. And as it accrues, it goes on the bottom line. So if you want to avoid the significant liability of accrued annual leave, take action.