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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.
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.
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.
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:
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.
