Is your business prepared for the real costs of employee leave?

Man with laptop on surfboard business risks employee leaveFor many small businesses, employee leave entitlements create operational and financial headaches as the business scrambles to cover that person’s job while they’re on leave. According to RSM Australia, it’s important for these businesses to understand the real costs of leave and how to minimise them, especially in the lead-up to the end-of-year holiday season.

Katie O'Connor, principal, RSM Global, says, “For many businesses, the immediate concern is having the resources to cover the absent employee’s job, but there are many other factors that the business manager also needs to consider.

“For example, they may have increased wage costs because they need to hire a casual replacement or pay current staff overtime rates. If the employee has accumulated more than four weeks’ leave, the business may need to pay holiday leave at a higher rate compared to when the employee earned it. They may also be required to pay leave loading.”

These factors may put considerable pressure on a business’s cash flow if they are not addressed correctly. It’s important that businesses are aware at all times of their employees’ entitlements. If a business does not have a provision for leave entitlements in their financial statements or records, then they can’t know with certainty what their liability is.

Katie explains, “Employee long service leave is an example of leave that can have significant implications for the business. If an employee decides to request three months’ long service leave, and the business has not budgeted for it, then it may not be able to pay suppliers at the same time. This could force a business to access its overdraft facility, for which it will be charged higher interest and bank fees. However, the business could have avoided these extra expenses by just being aware of their obligations and ensuring funds were available when needed.”

Another mistake companies make is provisioning for long service leave pay at historical rates, which is the salary the employee received when they commenced working with the company. But the employee would have received pay rises in subsequent years, creating a potentially-significant shortfall when it comes to paying out that leave.

Annual leave and long service leave entitlements vary from state to state and depend on any Workplace Agreements that may be in place. Businesses should ensure that they are using the correct governing legislation or agreement when calculating leave entitlements.

“Proper employee payroll management is essential to avoid unplanned and potentially crippling expenses. If companies don’t know what employee leave will cost in the next 12 months, then they should seek professional advice to avoid the traps,” advises Katie.