5 ways to manage debt caused by unused leave

11th December, 2015

office staff

For a smaller business, the debt caused by unused leave can lead to various challenges, especially if you’re running on tight profit margins or cash flow is a problem. For instance, you’ll need to find cash to pay out unused leave when a staff member resigns, or find ways to cope when an employee wants to take four consecutive weeks leave.

“Business has turned down and I need to let a staff member go, but that person has 6 weeks accrued leave and we don’t have the cash to pay them out!”

“A key employee has resigned and she has 8 weeks accrued leave. It’s going to cost me a fortune!”

Of course you should always comply with the law and treat your staff appropriately, but for a new business, it’s quite common to tackle things as and when the need arises. It’s usually when a business is established (or after a problem has occurred) that the owner realises it’s time to take a more businesslike approach to the people side of things.

If one of your staff has built up a lot of leave — and you’re wondering how you’ll deal with the consequences — now might be a good time to do some work on the human resources aspect of your business.

Fortunately, some common-sense communication, a chat with an employment law expert, and asking your bookkeeper to help can help you cope with the challenges of unused leave.

By the way, this doesn’t mean you need to turn yourself into an HR expert, or hire an HR manager. You can learn from what the folks at the big end of town do. Bigger businesses have the same issues to deal with as you, and they use staff policies and procedures and accounting practices to manage the problem. You can do the same.

Here are five suggestions for how to manage the debt caused by unused leave.

1. Talk to individual team members

If an employee has excess accrued leave, under some circumstances you can require them to take some time off. It’s sometimes possible for staff to cash out leave, depending on your specific business and employment agreements. But the first step is to check the legal aspects, including what’s in your employment agreements.

Once you know where you stand, as with many workplace matters, a good place to start is by talking. Sit down with your team member, explain that you want him or her to take some leave, and work with them to agree a leave plan that suits you both.

2. Discuss leave with all your staff

If you’d like to have a bit more structure round leave planning, you could start the New Year by asking all staff to book in their leave — or a portion of it. Remember, taking time off is an important part of helping staff stay fit for work, so let them know you take this aspect of things seriously!

3. Modify your bookkeeping

Your payroll software will track the amount of leave staff have accrued. In addition, you can ask your bookkeeper to set up a provision for annual leave in the accounts. This means you’ll be able to see the monetary equivalent of the amount of leave owed to your staff.

Once you know what leave is owed, you can think about how you will finance this in the event the leave must be paid out. This is a good topic to discuss with your accountant when you do year-end tax planning.

READ: Bookkeeping basics: Guide for business owners

4. Update employment agreements

This takes care of future employment arrangements, and it’s where you contact an employment law expert. They can identify if changes can be made to your employment agreements to help in your quest to better manage leave. Depending on the size of your business, it might also help to subscribe to the services of a specialist HR advice firm.

5. Create an employee handbook

An employee handbook, or staff policies, can be helpful as a reference tool and reduce misunderstandings about how leave is handled in your business. Now might be the time to create one. To start with, this might just cover the basics of why and how you want people to plan their leave. You can add to the handbook over time.

Debt caused by unused leave can pose a challenge for a small business, but in some ways it’s a sign that your business is taking off! With a little thought and some expert advice, you can implement business management practices that help internal communication, encourage staff to take the leave they are entitled to, and reduce your anxiety over planning for leave.

This is general advice only. Your particular circumstances will require a customised approach and specialised advice. Contact a specialist HR or Employment adviser before tackling an employment-related matter in your workplace.