Incentive plan awards for employees on extended leave

The Albanese government has announced that superannuation will be paid on government-paid parental leave from 1 July 2025 to enhance economic security and gender equality (see HERE).

Many employers now also offer paid parental leave in addition to government-paid leave.

Given that women still carry much of the parental burden that reduces their career prospects and earnings, boards may want to consider how employees on extended leave are impacted by company policies for annual salary reviews and participation in incentive plans. Plan rules that are clear and reduce uncertainty can help ensure treatment is predictable and consistent across the organisation.

Incentive plan rules can vary significantly with regards to awards for employees that take additional leave during the performance period.

Examples include:

    1. Employees who work less than 3 months in the year are not eligible for any STI. This typically applies both to new joiners and any employees on extended leave.
    2. Employees who have taken unpaid leave or extended paid leave will have STI awards pro-rated for the actual number of days worked in the year.
    3. Combination of (1) and (2), e.g. employees have to work for a minimum period of 3 months to be eligible for STI. Awards will then be pro-rated if employees take more than 10 days of unpaid leave.
    4. Plan rules are silent on treatment (instead, company policy may be documented elsewhere).

In addition to treatment of employees on extended leave such as parental leave, plan rules may also need to consider employees that elect to take additional annual leave at reduced pay.

The Fair Work Commission is due to release its Modern Awards Review of Work toward the end of June. One question that has gained traction in the Commission’s Discussion Paper is the ability for workers to take annual leave at half pay. While not a common permanent item in Modern Awards, there is precedence.

As a way of managing leave during the pandemic, the Commission inserted a temporary Schedule into 99 Modern Awards in April 2020. Schedule X allowed workers to access two weeks unpaid pandemic leave and to take twice as much leave as their accrued annual leave at half pay. Schedule X was removed from the Awards between 30 June 2020 and December 2022.

Company policies can vary significantly on how employees can access annual leave at half pay. Some cap access to one week, some are silent on how much leave can be taken.  Others do not mention it at all, although under Fair Work Regulation 2.03 employers and employees may agree to the provision of extra annual leave in exchange for foregoing an equivalent amount of pay.

It is this regulation that informs how companies approach incentive payments when someone has taken annual leave at half pay. In our experience, most companies treat the leave as a form of leave without pay. For example, 10 days annual leave at half pay is treated as 5 days leave at full pay and 5 days as leave without pay.

Should the ability to take annual leave at half pay become a permanent part of Modern Awards, boards are encouraged to review their incentive plans to ensure employees are aware of the impact taking annual leave at half pay has on their incentive pay outcomes.

Boards may also want to consider the gender split. Is it women who take this leave? How is this reflected in pay gap statistics? Could the company do more to ensure more equitable leave taking across genders? Should the company re-consider incentive eligibility, especially for long term plans?

© Guerdon Associates 2024
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