Long Service Leave (LSL) is a workplace obligation that is unique to Australia and a small number of countries. In an Australian context, it dates back to our colonial history and was originally conceived to allow public workers to sail back to their European homelands once a decade.
Here and today, Australian employers need to navigate a complex web of State, Federal and Industry-level regimes to deliver employees the entitlements they are owed. The lack of a harmonised approach means that most national employers need to deal with a diverse range of qualifying periods, service concepts and payment approaches, and have robust systems and processes to calculate them correctly.
The compliance challenge can be significant, and regulators are now taking an increasingly active approach to enforcement. Now more than ever, employers should be prepared for potential challenges in their approach to LSL compliance and be aware of the potential consequence of inadvertent error.
What do you need to know?
Source of LSL obligations
Depending on an employee’s circumstances, an employer’s LSL obligations can arise under State / Territory legislation, an Enterprise Agreement or even a pre Modern Award. While the interaction between the different sources can be complex, for most employers their obligations arise under State / Territory legislation.
Each of the State / Territory Acts differ to varying degrees. While some apply consistent qualifying service periods and overall leave entitlements, they often differ in how they conceive a service period and how you calculate the ultimate payments owed. For example, NSW and Victoria apply a different combination of averaging periods to determine the rate of pay for certain employees, NSW and Queensland differ on whether certain penalties are included in rate of pay calculations, Victoria and Queensland differ on when and to what extent unpaid leave contributes to an employee’s service and NSW, Victoria, Queensland and Western Australia all differ on the averaging periods applied when quantifying the LSL payments owed to casual employees.
These nuanced differences means it is critical that employers know the precise source of their obligations for each individual employee and have a clear and settled understanding of what this requires.
Payroll system configuration
Complying with LSL obligations will typically require employers to monitor, record and store payroll data over an extended period and perform calculations on both a recurring and ad hoc basis.
As most payroll systems cannot readily perform all calculations required, employers often need to invest in additional configuration or rely on a patchwork of spreadsheets and manual processes to address system limitations. While maximising automation is usually preferable, it is critical that employers have a clear understanding of their obligations and workforce profile when implementing in-system calculations and continually monitor these to ensure they remain fit for purpose.
Active regulators
Over the last 3 years there has been a significant increase in the number of publicly disclosed LSL compliance errors by major Australian employers. Moreover, there are a growing number of examples where multi-million dollar underpayments have occurred and at least one example where underpayments have exceeded $15 million.
Over the same period, there has also been a shift in many of the State / Territory regulators’ approach to compliance enforcement. More than ever, regulators are exercising their powers to proactively audit employers and are increasingly prepared to prosecute offenders through court proceedings.
Developing interpretations
In addition to the increase in formal prosecutions, employers, unions and regulators alike have shown an increased willingness to test the scope of the State / Territory regimes.
Over the last 3 years alone, court and tribunal decisions have been handed down in relation to a wide range of matters, including the ability for overseas and interstate service to contribute towards a particular State’s LSL entitlements, the ability for a pre-modern Award to replace a casual’s LSL entitlements under State legislation, the meaning of a ‘week’ and how penalties are to be calculated and applied in the case of a successful prosecution.
In addition to these developments, a number of the State regulators have been revisiting their own interpretations of the Acts they administer. For example, the NSW regulator has recently updated their published guidance to reflect a renewed position on how to calculate the LSL entitlements of casual employees.
What do you need to do?
The current LSL compliance environment can present a considerable challenge. To respond appropriately, Australian employers should prioritise the following initiatives:
Proactively analyse your compliance position
It is recommended that all large Australian employers proactively assess their current state of LSL compliance and implement measures for ongoing monitoring. To begin, employers should understand whether any prior reviews have occurred, what they did / did not examine and the results they produced, whether there have been any subsequent changes to employee locations and/or working profiles, whether there have been any (internal or external) queries in particular areas and what is currently documented by way of LSL policies and system configuration. With the benefit of the above, employers can make an informed decision on how to target their enquiries at appropriate scale and yield greatest value for effort.
Be prepared for regulator enquiries
In the event of an enquiry from a State / Territory regulator, employers should be prepared to proactively respond to all data requests and engage in a cooperative manner. As responding to data requests can often require a large retrieval of historic data across multiple systems (or potentially obsolete systems), employers should be prepared to move at pace and, if needed, proactively negotiate more achievable timelines for delivery. As regulator enquiries will often involve a sample testing of individual employee results, employers should be well prepared to explain any differences in the calculations performed and the justification for the treatment adopted.
Consider your ongoing strategy to manage LSL
As many employers are still relying on a combination of automated and manual processes to manage their LSL obligations, payroll and HR personnel often spend considerable time both performing and reconciling key calculations. To minimise risk, employers should consider their future strategy for managing LSL, including the opportunities to enhance system capabilities or potentially outsource calculations to free up internal resources.
