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INPRACTICE   Casual leave entitlement ruling could hit SME cash flows

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Casual leave entitlement ruling could hit SME cash flows

A Federal Court decision has set a precedent for casual employee work entitlements. Here’s how practitioners can help their clients assess the potential impact.

Elizabeth Fry | November 2020

In May 2020, the Federal Court ruled that some casual employees working regular and ongoing shifts have the right to certain benefits enjoyed by permanent staff, such as annual and personal leave and public holidays.

Notably, the court also ruled that topping up workers’ pay through casual loading does not offset leave liabilities. This essentially means that some casual employees could be entitled to both paid leave and casual loadings, typically worth 25 per cent of their pay.

Practitioners with clients that employ casual staff should recommend they review their contractual arrangements with these employees in light of the Australian Securities and Investments Commission’s (ASIC) updated FAQ. Specifically, the corporate regulator is asking businesses to consider whether they should provide for back-pay owed to additional employee entitlements in their financial statements. 

Ram Subramanian, policy advisor, reporting at CPA Australia, says “this issue is of utmost importance to firms across Australia as it could put further pressure on already weak balance sheets that have had to accommodate the adverse financial impacts of a global pandemic”.

“Business owners are still trying to get their heads around what this means for them,” Subramanian says. “The potential liability for casual employee entitlements could stretch back six years. The challenge is that not all employers may be able to establish what kind of leave entitlements, if any, are owed to their casual employees, without seeking external legal or professional help which, of course, comes at a cost”.

Subramanian recommends that businesses with casual staff prepare financial statements even if they are not legally obliged to do so. “Financial statements provide the lens through which to check how well or how badly their company is travelling,” he says. 

“Companies may not yet be aware of the recent ruling and its potential impact on their finances" he states, pointing to CPA Australia guidance which provides useful information on how to calculate a potential liability in financial statements.

Weighing the scenarios

The CPA Australia guidance highlights a range of possibilities under Australian Accounting Standards; for example, businesses trying to establish whether or not there is a financial impact. The guide considers both AASB 137, which deals with provisions and contingent liabilities and AASB 119, which covers employee benefits. 

Of course, there may be some employers who can establish with high certainty that they have a financial obligation in respect of leave entitlements to casual employees, and they will need to carry a provision for that liability on the balance sheet.

At the other end of the scale, Subramanian states, are those businesses that are unaffected by the ruling because they have no casual employees.

“But there are several scenarios in between those two extremes and businesses need to know where they sit,” he emphasises.

Unfortunately, he notes that it is impossible to cover all scenarios in the guidance. Its primary aim is to raise awareness of the matter in the business community. Nonetheless, it also provides high-level guidance on legal matters that could arise and points to relevant accounting standards and requirements that apply.

After considering the guidance material, businesses may need to think about seeking external advice if they cannot work out whether the issue affects them and to what extent.

A hit to cash flow

It is the potential dent in business cash flow that most concerns Subramanian. 

“Businesses could be severely hit if they are not careful,” he warns. For him, the real question is whether the ruling will place an extra financial burden on businesses already suffering from the financial impacts of COVID-19. “They are already going through a rough patch with the global pandemic anyway – this could be the proverbial straw that breaks the camel’s back”.

Businesses needs more than just accounting advice. Subramanian suggests that practitioners look at the guidance and talk through the main points with business owners. “If a client is likely to be affected, it then becomes a question of risk mitigation.”

He suggests owners start looking carefully at casual worker contracts, which is a sentiment echoed by Paul O’Halloran, a workplace relations partner at Colin Biggers & Paisley Lawyers.

O’Halloran says employers should separately identify casual loadings in employment contracts and payslips and expressly state that these are to be paid instead of paid annual leave and other entitlements.

“That said, more prescriptive contractual clauses will, of themselves, not be enough if the true nature of the relationship has all the features of a permanent arrangement,” he says, noting that the High Court is set to rule on the matter in the middle of 2021.