It's tough for a small business when employees take annual leave - but managing time off can also be one of your most powerful employee engagement initiatives. Martin Nally, Founder of hranywhere, opens in new window, explains the potential benefits.

How to manage staff leave

The smaller the team, the bigger the impact on the business when an employee takes annual leave.

“Managing staff leave is certainly a challenge for business owners, but transparency, good communication and flexibility will help you keep things running smoothly,” says Martin Nally, Founder and Managing Director of hranywhere, opens in new window and a lecturer at the University of Melbourne’s Faculty of Business and Economics.

The Fair Work Act, opens in new window sets out every employee rights and responsibilities, including leave entitlement, but not when leave should be taken. Therefore the employer and employee need to agree whether there are any blackout dates, such as at the end of the financial year.

“It’s very important to be upfront about the needs of your business – for example, you might require staff to take at least some of their leave at a particularly quiet time of year,” Nally says.

“At the same time, you want them to feel their needs are being taken into account," he continues, "so you should do your best to accommodate their preferences for the rest of their holidays. Where possible, leave should be discussed and agreed well in advance.”

Leave and employee engagement

Nally has been surveying each cohort of his postgraduate students as part of a longitudinal study of career anchors. His survey explores the things people consider non-negotiable in their jobs. These were originally identified by Edgar Schein in the 1970s during his time as a professor at the MIT Sloan School of Management.

“There are eight of them ranging from security to lifestyle,” Nally says. “I found that while baby boomers tend to have an equal distribution across all of them, 40 per cent of Generation Y put lifestyle first.

"In general, younger people don’t live to work, they work to live and, if business owners don’t understand this, there could be a great deal of tension when it comes to arranging leave.”

Nally cites an example of a young woman who wanted to spend six weeks in South America. “She had gone to great lengths to ensure her work would be covered while she was away, but her boss refused,” Nally says.

“When he told her that her only option was to resign, she did so reluctantly. She sought advice and, because the employer was found to have been unreasonable, he ended up paying out her leave entitlement, four weeks’ notice and another four weeks’ pay as compensation. A little more flexibility would have saved a lot of angst and expense.”

Benefits of taking time out

When it comes to leave, employee rights can work in both directions. Staff taking too little time off can negatively affect business growth as their productivity can wane.

“It’s very important that employees take the time off they’re entitled to so they have a chance to relax and unwind,” Nally says. “A holiday can help to prevent burnout, and there’s evidence that regular breaks from work have a positive impact on both mental and physical health.”

Big leave balances can also be very expensive for business. This is because, when it’s taken or paid out, employer regulations mean it has to be at the current rate of pay.

“If the leave has accrued over a number of years, this could add up to a significant extra cost,” Nally says. “Untaken annual leave is also recorded as a liability on your balance sheet."

“You need to encourage your team to take the leave they’re entitled to when it’s due in a way that has a minimal impact on the business. It won’t always be simple, but most issues can be resolved by being transparent about your needs and willing to consider a compromise.”

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Important information

 The information contained in this article is correct as of July 2018 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.