Annual leave loading - the beneficial view prevails…

The Federal Court has found that untaken benefits payable during employment such as annual leave loading are to be paid when the employment is terminated.

The case before the Federal Court

The main issue before the Federal Court was whether accrued but untaken annual leave when paid on termination of employment, attracted annual leave loading, or alternatively, rostered overtime, shift and weekend penalty payments, as it did when annual leave payments were made when annual leave was actually taken during employment.

Background to the case

Traditionally, annual leave loading has not generally been payable on termination of employment.

The Fair Work Act 2009 (the Act) provides that:

a.  where an employee takes a period of paid annual leave, the employee must be paid at their base rate of pay for their ordinary hours of work in the period; and

b.  when the employment of an employee ends, any untaken annual leave must be paid to the employee at the amount that would have been payable to had the employee taken that period of leave.

The Fair Work review panel (the Panel) in 2012 recommended amending the Act to provide that annual leave loading would only be payable on termination if a relevant award or enterprise agreement provided for it. To review our prior article regarding the Panel's findings [click here].

The Panel's recommendation was included in the Abbott Government's Fair Work Amendment Bill 2014, which is currently stalled in the Senate.

The payment of annual leave on termination of employment is also currently being considered by the Fair Work Commission as part of its Four Yearly Review of Modern Awards. Some disparity between the various provisions of the awards exist as follows:

• 112 awards make provision for annual leave loading, of which:

- 15 awards specify that leave loading is payable on termination;

- 19 awards specify leave loading is not payable on termination; and

• 78 awards remain silent on the issue.

The Fair Work Ombudsman currently advises that, having regard to provisions of the Act, if an employee is entitled to receive annual leave loading during employment, then annual  leave loading must be paid out when the employment ends, regardless of any provision provided in an award, enterprise agreement or contract of employment.

The decision

His Honour, Justice Buchanan determined that the relevant Act provision "is not confined to a statement of minimum obligation, but is a statement to the effect that an employee should not suffer a reduction in the value of unpaid annual leave if employment comes to end while paid annual leave remains untaken."

Consequently, employees are entitled to receive payment of leave loading (or as in this case, overtime and penalty/shift rates) on accrued but untaken annual leave paid upon termination of their employment so long as they had that entitlement whilst they were working for the employer.

This entitlement applies regardless of any provision in an award, enterprise agreement or contract of employment which may prescribe otherwise.

Conclusion

Given the lack of clarity provided by the Act and the contentious nature of this debate, it remains to be seen if the decision will be appealed. No doubt the Fair Work Commission will also take this decision into consideration as part of the Four Yearly Review of Modern Awards.

Subject to any appeal, for now, employers are obliged to pay terminated employees their accrued but untaken annual leave at the rate that the employee would have been paid had they taken the annual leave while they had been employed - this includes, where applicable, leave loading or penalty/shift rates regardless of an award, enterprise agreement or employment contract provisions providing otherwise. 

The following reference documents have been utilised in drafting this article:

1. Fair Work Commission Background Paper, 4 Yearly Review of modern awards - Annual leave common issue (AM2014/47) 30 May 2014.

2. http://www.fairwork.gov.au/ending-employment/notice-and-final-pay/final-pay

If you would like to know more about this case or payment of annual leave on termination generally, please contact National Workplace Lawyers on  +61 2 9233 3989.

National Workplace Lawyers

Note — this is for information purposes only and does not purport to be comprehensive or to render legal advice.