Leave policies are cornerstones of employee wellbeing and retention. However, for employers, these policies also create a complex web of liabilities that require careful navigation.

From accrued entitlements to unexpected terminations, navigating leave liability demands solid understanding and active management. In this regard, the results of Remchannel’s December 2023 Employee Benefits Guide revealed the dilemma that corporate South Africa faces.

Understanding the landscape

Leave policies encompass a range of absences, including vacation, sick leave, parental leave, and/or family responsibility leave. Each type of leave comes with its own set of regulations and nuances, depending on location and sector. The key pieces of the leave-liability puzzle therefore include:

• Accrual rates: Employees often accrue leave based on hours worked, or other criteria. These rates will be based on the employee’s final salary at termination. Failure to track these accruals accurately can lead to significant financial liabilities during termination or payout.
• Accumulation of leave: Some policies allow unused leave to be carried over to the next year, impacting future liabilities. Understanding carryover limits and implementing clear communication is critical.
• Documentation and approval processes: Meticulous documentation of leave requests and approvals ensures legal compliance, accurate leave liability provisioning, and a reduction in challenges in case of any disputes.
• Payment obligations: Employers are legally obliged to pay employees out for accrued annual leave at the termination of their employment. Understanding these obligations and accurately budgeting for them is essential.

Accumulated leave continues to be a major liability for South African organisations, but its prevalence depends on industry sectors. However, the majority (75.5%) of participating organisations surveyed by Remchannel reported that a portion of annual leave may be accumulated, meaning it may be carried over from one leave cycle to another.

This figure has reduced by 13 percentage points since the 2019 Employee Benefits Guide publication, indicating that South African organisations are trying to reduce their overall liability on the balance sheet.

Of interest are the results of the survey, which reveal the percentage accumulation of leave policy per industry sector, with 86.2% recorded in financial services; 57.9% in Fast-Moving-Goods, retail, logistics, light manufacturing, and fishing; 60% in information technology, communications, and media; 75% among state-owned enterprises (SOEs), higher education, public entities and non-profit organisations (NPOs); and 82.1% in the technical combination and/or manufacturing niche.

Just less than half of the participating companies indicated that excess leave accumulated is forfeited. However, the maximum number of days that may be accumulated at any one time averaged out at 32 days, and the highest cap extended to 180 days. Only two companies noted that there was no limitation in terms of a maximum overall cap, across some or all employee levels.

Retaining a large number of leave days on your company’s balance sheet can therefore create a significant liability, and could ultimately result in a major cash-flow problem.

Based on the number of days reported by participating organisations, the potential leave liability is shown in the graph below. The following assumptions can also be made:

• Some 50% of the employed individuals in the sample of 632 733 have accrued leave;
• the average median total guaranteed package across employee levels between job grading Paterson A1 and D5 is R540 000 per annum; and
• the minimum, average, and maximum allowable accumulation of leave has been averaged across all industry sectors, i.e. 8.8, 29, and 72.8 days respectively.

The potential leave liability of participating organisations in the December 2023 Employee Benefits Guide ranges from R5.7 billion to a staggering R47.8 billion. This cost doesn’t factor in any historical leave that may have been accumulated during the employment history of an individual employee.

On a national all-industry sector basis, the REMchannel® Online Salary Survey consists of just over a million data points. Using the same average number of days’ leave and the same assumption – i.e. 50% of employees have accrued leave – the leave liability for over 600 Remchannel Survey participants can be calculated to be in the region of between R34 billion and R84 billion (as at the close of November 2023).

Job grading Paterson A, B, and C band employees account for 48% of the liability, followed by 55% at the job grade Paterson D and E bands, and 2% for job grade Paterson F band employees.

Mitigating annual leave liabilities

Proactive measures can significantly reduce leave liability risks. Here are a few of the key strategies that companies can put in place:

• Clear and accessible policies: Develop readily accessible leave policies outlining employee rates, accumulation provisions, and approval processes.
• Efficient tracking systems: Implement a reliable system for tracking leave accruals, balances, and approvals. This may seem a strange comment in a digital world, but many organisations still use manual systems or have not developed the discipline required to manage or process leave requests in a timely fashion. Automated systems also minimise manual errors, and provide real-time data insights.
• Regular communication: Clearly communicate leave policies and any updates to employees. Encourage open communication about leave plans, and address any concerns promptly.
• Leave management training: Ensure that all managers are adequately trained on leave policies, compliance requirements, and best practices for handling leave requests. It's also imperative for managers to understand the impact of a large leave liability on their company’s balance sheet.
• Leave planning and forecasting: Encourage employees to plan and schedule leave requests in advance. Utilise workforce analytics to forecast leave trends, and ensure adequate staffing during peak periods.

Building sustainable leave programmes

While compliance is critical, a forward-thinking approach goes beyond avoiding legal troubles or liabilities. Building a sustainable leave programme should therefore involve:

• Flexibility and employee wellbeing: Consider offering flexible leave options, such as reduced hours or phased returns to work. This can accommodate diverse needs and promote employee wellbeing, ultimately benefiting both employee and employer.
• Culture of trust and openness: Foster a culture of trust and open communications regarding leave requests. This reduces tension, and encourages responsible leave usage.
• Investing in technology: Utilise technology to simplify leave administration, reduce paperwork, and streamline approvals. This can save time and resources, while enhancing the employee experience.
• Continuous improvement: Regularly review the value of your leave policies, which should improve the employee experience – especially in a post-COVID-19 environment, and a changing world of work. Gather feedback from employees and analyse data, so as to identify areas for improvement. Amend policies and practices based on the insights gained.

Leave liability management is a constant process, which requires ongoing attention and assessment. By understanding the regulatory and financial implications, implementing practical strategies, and encouraging a culture of trust and flexibility, firms can navigate leave liabilities effectively.

Managing this landscape, though complex, ultimately leads to a sustainable leave programme that supports employee wellbeing, limiting burn-out risk, and ensuring business success.