Changing How Annual Leave is Accrued

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Sometimes employees have been set to accrue leave based on a set number of hours per week, but as their employment progresses, they're consistently working more or less hours. Is it OK to change them to accrue leave based on hours worked rather than a set number of hours? (See this article that compares the different ways of accruing annual leave).

We generally don't advise changing the leave accrual basis when employees already have existing leave balances. The reason is that both the number of hours available and the leave rates for at least the next 12 months will be based on the initial accrual approach. When you change, a different quantity of leave will accrue, but if paid out at the average rate then the old history will still have an effect on this rate.

Here's an example. Let's say the employee has consistently been working an average 45 hours per week, but accruing leave based on 40 hours. If his normal rate was $20/hour then his average rate (at which leave should be paid out) will be $20 x 45 / 40 = $22.50. Now you change his accrual method to be based on hours worked. From now on he will accrue more leave per week (3.47 rather than 3.08 hours per week) and the average rate over time will move back to $20/hour.

Let's say that when the leave accrual method was changed the employee had 40 hours available, accrued using the original 40 hours per week approach. If the employee took that leave immediately, it would get paid out at $22.50 / hours. However if the employee waited for 12 months before taking it, it would only get paid at $20 / hour. So that change was disadvantageous to the employee.

Conversely, assume the employee had used all their leave available when the change was made. After 6 months they have accrued 90 hours (since they've averaged 45 hours per week) and they take this leave. Because there is still 6 months of history from when the accrual was based on 40 hours per week, the average rate will be higher than $20, probably around $21.50. So the employee will be paid around $100 more.

You should be aware of these issues before making changes to the annual leave accrual approach.

If the employee has been accruing the leave for a short time then you can potentially recalculate the hours that should have accrued and update this on the Leave tab, then on the Pay Records tab you can update the Average Rate Hours in the list of pays - just change the values in that column in the list of pays then re-save. In the example above, this column would show 40 hours and you will change each line to the actual hours paid.

However if leave has become due and some leave has been taken this sort of adjustment can become very complicated.

Another option if the employee has no leave available (or a very small amount) is to finish the employee, then restart them. By restarting the employee a line is drawn in their leave history and only pays since their restarting date affect their leave history. Note that this will reset all leave balances so you will need to ensure that any sick or alternate leave details are updated after restarting and if there was any residual annual leave balance, that this was paid out.

 

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