Directing employees to take annual leave during a shutdown

If you close your business over Christmas and New Year, telling staff to use their annual leave is usually the plan. But the power to direct an employee to take paid annual leave is not automatic. It comes from a specific source, it is subject to a notice requirement in most awards, and every direction must be reasonable. Get any of those wrong and you can face penalties, back-pay orders and a dispute that lands in the Fair Work Commission or the Federal Court.

This article sets out the duties that apply when you want employees to take annual leave during a shutdown: checking where your power comes from, giving the right notice, satisfying the reasonableness test, dealing with employees who have not accrued enough leave, and paying public holidays correctly. It closes with a compliance checklist you can work through before you announce your shutdown dates.

Where the power to direct annual leave comes from

Paid annual leave is a National Employment Standard under s 87 of the Fair Work Act 2009 (Cth) (the Act). Most employees get four weeks a year, shiftworkers get five, and the entitlement accrues progressively during service. Casual employees do not accrue paid annual leave at all, so there is nothing to direct them to take; when the business shuts, they are simply not rostered and not paid.

In the ordinary course, annual leave is taken at a time agreed between the employer and employee under s 88 of the Act, and the employer must not unreasonably refuse a request to take it. A direction to take leave is the exception to agreement, and the Act allows it only through two routes.

First, for employees covered by a modern award or enterprise agreement, the award or agreement itself must contain a term that requires, or allows the employer to require, the employee to take paid annual leave in particular circumstances, and the requirement must be reasonable (s 93(3) of the Act). Second, for employees covered by neither an award nor an enterprise agreement, s 94(5) lets the employer require the employee to take paid annual leave, again only if the requirement is reasonable. The note to that provision gives two examples of when such a requirement may be reasonable: where the employee has accrued an excessive amount of leave, and where the enterprise is being shut down for a period, for example between Christmas and New Year.

The practical effect is that your starting point is always the document that covers the employee. Most employees in Australia are covered by a modern award, so the first question is whether your award contains a shutdown clause and what it says about notice.

The notice rule for award-covered employees

Since 1 May 2023, many modern awards include a standard shutdown term inserted as part of the Fair Work Commission's four-yearly review of awards. The Fair Work Ombudsman summarises the effect of these terms:

• employers may require employees to take paid annual leave during a temporary shutdown of the business;
• employers must give at least 28 days' written notice of the shutdown period to all impacted employees;
• the requirement to take the leave must be reasonable; and
• the 28-day notice period can be shortened only by agreement between the employer and the majority of the affected employees.

The 28-day notice requirement matters in practice. Announcing a Christmas shutdown in mid-December, two weeks out, will not satisfy an award that requires 28 days' notice, and a direction issued on that basis is vulnerable. Note also that the model terms are a floor, so check the specific clause in your award for any variation.

Two caveats. First, not every award carries the model term; some industries have their own existing shutdown arrangements, so confirm the position in the specific award that covers your employees. Second, if your employees are covered by an enterprise agreement, the agreement's shutdown terms prevail, and the same 28-day default does not necessarily apply.

Every direction must be reasonable

Both s 93(3) and s 94(5) make reasonableness a condition of a valid direction. The Act does not exhaustively define what reasonable means, but for award-free employees the statutory note points to excessive accrual and a genuine shutdown of the enterprise, and the Commission's model award terms are built on the same idea: a genuine temporary shutdown, proper notice, and a direction limited to the shutdown period.

Reasonableness is assessed against the employee's circumstances as much as your own. Relevant considerations include how much notice you gave, the length of the shutdown, whether the employee has enough accrued leave to cover it, the employee's personal circumstances and any prior arrangements, and the needs of the business. Consultation is also part of the picture, and this is where employers most often trip over.

The point is illustrated by Civil Air Operations Officers' Association of Australia v Airservices Australia [2019] FCA 1542. Airservices Australia directed two air traffic control employees to take recreation leave during its Christmas and New Year shutdown in 2015-16. The enterprise agreement required the annual leave program to be developed and implemented in consultation with each employee. The Federal Court found that by directing the employees without following that consultation requirement, Airservices contravened the enterprise agreement, and imposed a penalty of $12,000. The shutdown was genuine and the direction was otherwise unremarkable; it was the failure to follow the agreement's process that was fatal.

When an employee has not accrued enough leave

A shutdown of two or three weeks will often exceed an employee's accrued balance, particularly for newer employees. Under the model award terms, an employee who does not have enough paid annual leave to cover the whole period can agree with the employer on options for the uncovered days:

• using accrued time off or other paid time;
• taking annual leave in advance; or
• taking leave without pay.

Agreements to take leave in advance or unpaid leave should be in writing so there is a clear record of what was agreed and the basis on which the employee was paid. If an employee will not agree to any of these options, you cannot simply leave them unpaid. A shutdown is not the same as a stand down, which is available only where employees cannot be usefully employed for reasons outside the employer's control. If you close the business voluntarily and an employee has no leave left and will not agree to unpaid leave, the safer assumption is that you remain liable to pay their ordinary wages for the period. A lawyer can confirm what your award's shutdown clause says about shortfalls before you rely on a particular approach.

Public holidays inside the shutdown

The Christmas and New Year shutdown almost always includes public holidays: Christmas Day, Boxing Day, New Year's Day and, in most states, other days around that period. You cannot count these days as annual leave. Under s 89(1) of the Act, if a period of paid annual leave includes a day that is a public holiday where the employee is based, the employee is taken not to be on annual leave on that day. The employee is instead entitled to be absent from work under s 114 and, under s 116, to be paid their base rate for their ordinary hours on the public holiday.

In practice this means two things. First, when you calculate how much annual leave a shutdown will consume, exclude any public holidays inside the period. Second, pay public holiday pay correctly: an employee who would ordinarily have worked on the public holiday is paid for it at the base rate without any deduction from their leave balance. A casual or part-time employee with no ordinary hours on the public holiday is generally not entitled to payment for it. The same logic applies where an employee has agreed to take unpaid leave for part of the shutdown: whether the public holidays inside that period are paid depends on the employee's ordinary hours, the award or agreement, and the terms of the unpaid leave arrangement.

What happens if you get it wrong

Directing annual leave without a lawful basis is a contravention, not just an administrative slip. Contravening a National Employment Standard is a civil remedy provision under s 44 of the Act, and contravening a modern award or enterprise agreement term is a civil remedy provision under s 45. The penalties available are up to 60 penalty units per contravention, and up to 600 penalty units where the contravention is a serious one. Penalty units are indexed periodically, and the amounts add up quickly where a direction affects multiple employees.

The enforcement picture is broader than penalties. The Fair Work Ombudsman can investigate a direction, recover any underpayment of wages or leave on behalf of employees, and take a business to court. Employees and unions can also bring proceedings themselves; in the Airservices case it was the union that sued and the court ordered the $12,000 penalty. Where the direction was unlawful, the practical consequence is usually that the leave is undone, the employee is paid for the period, and the employer wears the legal costs of getting there.

Disputes can also end up before the Fair Work Commission through the dispute resolution clauses in awards and agreements. A badly handled shutdown can sour the end of the year for staff and trigger a dispute just as you are trying to close the year.

A compliance checklist for your shutdown

Work through this list before you announce your shutdown dates:

• Confirm the source of power: read the shutdown clause in your award or enterprise agreement; for award-free employees, confirm the direction is reasonable under s 94(5).
• Check the notice requirement: most awards require at least 28 days' written notice to all impacted employees; a shorter period needs agreement with the majority of affected employees.
• Exclude casuals: they accrue no annual leave, so there is nothing to direct; they are simply not rostered.
• Assess reasonableness per employee: check each affected employee's accrual balance, personal circumstances and prior leave arrangements.
• Follow any process terms: if the award or agreement requires consultation, do it and keep a record.
• Agree shortfall arrangements in writing: advance leave, accrued time off or unpaid leave for the days not covered by accrued leave.
• Handle public holidays correctly: exclude them from the leave period and pay public holiday pay to employees with ordinary hours on those days.
• Keep records: retain the notice, any majority agreement to a shorter notice period, and each individual shortfall agreement.

How an employment lawyer can help

The steps above sound straightforward, but they depend on the precise wording of the award or agreement that covers your employees, and that wording varies from industry to industry. An employment lawyer can identify the correct award and shutdown clause, confirm the notice requirement that applies, and review your shutdown notice before it goes out. They can also draft the written agreements for advance leave and unpaid leave, and assess whether a direction to a particular employee is defensible before you issue it, rather than after a dispute has been raised.

If a direction has already been challenged, a lawyer can negotiate with the employee or their representative, respond to a Fair Work Ombudsman inquiry, and defend or settle any claim for penalties and back-pay.

Start with your award, not your shutdown dates

The mistake that costs employers the most is announcing the shutdown first and checking the award afterwards. The 28-day notice rule is a hard deadline, and the Airservices case shows that a genuine shutdown is not enough on its own if the agreement's process was not followed. Before you email staff about the Christmas closure, pull up the award that covers them and confirm two things: that it contains a shutdown clause, and how much notice it requires. If you are not sure, that is the point at which an hour with a lawyer is cheaper than a penalty or a back-pay order.