The ongoing uncertainty of the COVID-19 pandemic will make anyone feel like they’re in need of a break. However, as employers count the cost of the disruption to their businesses, it’s important to review leave management policies and processes now as this can have a significant impact on an organisation’s labour cost.

All employees are entitled to a minimum of four weeks of annual leave and between five to 10 days of sick or personal leave. There is huge potential to get this wrong — particularly where there are manual processes involved.

Even worse, if employees either unintentionally or deliberately fail to record leave accurately, or altogether, organisations are faced with direct and indirect costs to their bottom line, such as those associated with productivity loss and cover staff.

Don’t be another cautionary tale

Ensure you’re compliant with the law. High-profile cases of employers in the private and public sector being caught out for underpaying employees and record-keeping breaches have become all too common and are often quite popular with the press. All employers are required, by law, to keep accurate records to ensure employees receive their correct employment entitlements for pay and leave. This includes keeping a record of an employee’s hours of work, the pay for those hours, their leave balance, and any leave taken.

By keeping an accurate record of leave, any errors in calculating leave entitlements and pay are minimised. This also reduces the cost a business may have to pay to undertake a remediation programme to backpay employees for historical payroll issues. This, potentially, may detail six years of pay records. Perhaps even more importantly, no business wants to expose itself to reputational damage as a result of regulatory action — something that can sink any business.

Leave leakage: the hidden cost to your workplace

Employee absence incurs significant costs to business. A Southern Cross and Business NZ survey found that employee absence cost the New Zealand economy NZ$1.79 billion in 2018. Furthermore, absenteeism (including taking sick days) has a direct cost of between NZ$600 and NZ$1000 per person, per year. The figures are even more pronounced in Australia, where the annual cost of absenteeism to the economy is thought to be in excess of AU$44 billion (AIG Absenteeism and Presenteeism Survey Report). Presumably, these are the absences that are recorded. But what about the ones that aren’t?

Leave is a liability that most organisations accrue, which is reduced as employees take leave. Leave leakage is when a salaried employee is absent and their leave is not recorded, either inadvertently or deliberately, resulting in the organisation’s leave liability not being reduced and the employee getting a paid day off.

Leave leakage can be demonstrated in three different employee scenarios. The first is where the employee is at work and accruing leave to add to their leave balance. This naturally coincides with their company’s leave liability increasing.

The second scenario shows an employee on annual leave. This is a good thing and can be beneficial to employees and employers. Encouraging staff to utilise the full extent of their annual leave entitlement not only improves their stress levels, general health, productivity, and retention but also helps the company’s leave liability to reduce accordingly.

However, in the third scenario, issues arise. An employee is on annual leave but because neither they, nor the company, have properly recorded that leave, the employee’s leave balance and the company’s leave liability aren’t reduced. This decreased productivity, with no corresponding decrease in leave liability, is an invisible cost to the business.

One organisation ran a test during a holiday period by sending an email to all staff during the break and then reconciling the automated out-of-office replies against the approved leave. Leave valued at over $250,000 was recovered through this simple exercise, even though it depended on employees setting up an out-of-office reply. It may also be possible to estimate leave leakage by reconciling other data sources that indicate employee absence with approved leave, such as security systems and network logins.

Leave leakage can frequently occur in organisations that rely on paper forms for leave requests. Paper forms can easily go missing, resulting in leave not being recorded. For example, if the employee fills out a paper form leave request, takes it to their manager for approval, and it is then lost, the employee gets the day off and the manager is still likely to accept the employee’s absence. Furthermore, software-as-a-service (SaaS) solutions move all your human capital management processes onto a digital platform. This allows you to remove pen and paper completely from your tracking and recording activities, building an entirely electronic audit trail that limits inaccuracies caused by human error. Digital solutions have never been more important at a time when more of us are working from home.

Every business should have the tools to accurately track leave. Not only can modern leave management systems give you visibility of how much leave your employees are taking, it can also give you a greater understanding of leave patterns and how this might affect your business.

How should I manage leave then?

A good payroll system can help you comply with your record-keeping obligations and minimise, or even eliminate, the risk of leave leakage. The following features should be considered:

  1. Your system’s reporting tool should be able to automatically send managers a report highlighting the leave that has been processed each pay cycle, any leave requests that have been submitted, and any leave requests that aren’t standard
  2. Ensure you understand what your compliance obligations are when it comes to the different leave types available to your employees, and make sure  your employees are set up correctly in the system to facilitate this
  3. Consider using electronic leave requests and approvals — unlike paper forms, a leave request entered via a portal or app will not be lost in transit and doesn't require manual entry by the payroll team
  4. Managers should be able to see current leave requests via a portal and/or app so they can reconcile absent staff with an approved leave request
  5. Sick leave requests, especially, should be made via a portal and/or app so they can be conveniently reviewed when an employee calls in sick — apps can also ensure a manager receives a notification on their phone when a leave request is logged, allowing them to call and check on the employee and approve or decline the leave request
  6. Have clear leave policies and ensure everyone is aware of them — make sure employees or managers know who to talk to if they have a query or are going to have a request that sits outside of the organisation’s policy. This ideally should be made available in the same portal that employees are submitting leave.

Effective leave management is a result of having a mix of coordinated organisational processes and great technology. Datacom is a market-leading provider of cloud-based payroll systems and we’re here to help you address your leave issues and the associated costs to your business.

Disclaimer: The content of this article is general in nature. It is not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose. Datacom expressly disclaim any liability to you or your business in relation to the information contained in this article, and you rely on any information solely at your own risk.

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