The leave approval process in the hr_holidays module is a pretty basic one. An employee's leave can only be approved by a user in the HR Officer group (or higher). So, if you want to involve the employee's manager in the process you can either: 1) Give the manager HR Officer access or 2) Create your own (fairly sophisticated) module to override the default workflow

My "very rough" outline for how #2 would work:

1. Create a separate group called group_department_manager
2. Attach this group to the appropriate workflow transition
3. Add all department managers to this group
4. Modify 'ir.model.access' rules restricting access to 'hr.holidays'
5. Create 'ir.rule' object for 'hr.holidays' that would allow a user to only read/write records for users that are under him in the employee hierarchy :P