Annual leave loading - The beneficial view is confirmed

A Full Court of the Federal Court (the Full Court) has confirmed that if employees receive other benefits when taking annual leave during their employment, such as annual leave loading, they are legally entitled to be paid all those benefits on termination employment together with any accrued but untaken annual leave.

Background

The CFMEU argued that having regard to the National Employment Standards (the NES), 58 redundant employees were entitled on termination of employment, to also be paid the benefits they would have received  had they taken annual leave, which, in this case was the greater of the 20% loading or the employee's weekly rate of pay plus overtime, shift allowance, weekend penalty rates and bonus,  notwithstanding that the enterprise agreement did not provide that benefit on termination of employment.  

At first instance, the Court found in favour of the CFMEU in finding that the enterprise agreement sought to exclude the more beneficial entitlement on termination of employment, which it could not do.  

To review our prior article on the initial decision [click here].

The employer appealed the initial decision.

Findings

The Full Court dismissed the appeal and found that:

• under the NES an employee is entitled to be paid on termination of employment,  accrued but untaken annual leave at the rate the employee would have been paid had he or she taken annual leave;
• if a relevant modern award or enterprise agreement provides for payment of annual leave at a higher rate than the NES, then the NES requires the higher rate to be paid to the employee on termination of employment; 
• the NES does not limit the payment of accrued untaken annual leave to an employee's base rate of pay but extends to all benefits (including annual leave loading) payable to an employee when taking annual leave; and
• an award or an enterprise agreement cannot exclude the NES.

In considering the matter, the Court commented that:

"The intention of the legislation is that untaken annual leave is payable at the rate at which it would have been paid had the employee taken it at the time the employee was eligible for it."

Going Forward

Unless the matter is appealed to the High Court, it is now settled that all benefits provided to employees when taking annual leave must be paid together with accrued but untaken annual leave when the employment is terminated.

There is, however, potential for this decision to be reversed by legislature.  The Fair Work Amendment Bill 2014 (the Bill), currently before the Senate, if passed in its current form, will among other matters, amend the NES provisions to provide that unless a relevant award or enterprise agreement provides for a more beneficial provision, an employee will receive payment for accrued untaken annual leave at their base rate of pay (expressed as an hourly rate) which applied immediately before the termination.

Further, in the 4 year modern awards review, the ACTU sought to insert a standard clause which would have the effect of requiring employers to pay annual leave loading on termination of employment.  Although the Fair Work Commission held its decision in the 4 year modern review in abeyance pending this Full Court decision, wherever an award or enterprise agreement provides for annual leave loading, employers will now be obliged to also pay it on termination of employment irrespective of the ACTU's application and the Bill. 

However, if the Bill is passed, a properly constructed contract of employment may relieve employers from paying employees on termination of employment, benefits they would have been paid when taking annual leave. 

If you would like to know more about this case or payment of accrued annual leave on termination of employment 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.