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Are you shortchanging employees on Annual Leave entitlements?

Are you shortchanging employees on AL entitlements on departure?
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A recent case in the Federal Court has cleared up the long running confusion about an employer’s obligations to include annual leave loading and other penalties when calculating the payment of untaken annual leave entitlement, at the end of employment.

The issue was divided by two competing interpretations as to what the law required. On one side was the view that the National Employment Standards (NES) in the Fair Work Act 2009 (Cth)required that the untaken annual leave be calculated on the basis of the employee’s base rate of pay. On the other hand was the view that annual leave loading, shift loading, rostered overtime, weekend penalty rates and other such penalties must be included in determining the calculation to satisfy the requirement that the employer must pay the amount that would have been payable had the employee taken that period of leave, as required by the Act.

Noting the ambiguity of the NES, Justice Buchanan of the Federal Court took into consideration the Explanatory Memorandum of the Fair Work Bill 2008 to arrive at the view that “an employee should not suffer a reduction in the value of unpaid annual leave if employment comes to an end while paid annual leave entitlement remains untaken.” This was despite the relevant enterprise agreement stating that upon termination of employment, employees were only entitled to payment of accrued annual leave based on their ordinary rate of pay plus an average of their bonus.

The Federal Court also found that the provision in the enterprise agreement in relation to payment of unused annual leave had no effect because it operated in a way that excludes the operation of the Act. Therefore, upon termination of employment, employees covered by the enterprise agreement are entitled to be paid out their accrued annual leave at the same rate they would have been entitled to if they had taken the leave during employment.

What does this mean for employers?

For the moment, this means that, despite what is in an agreement or award, upon termination of employment an employee is entitled to payment for their accrued but unused annual leave entitlement and, if applicable, annual leave loading.
Employers who made payments on the basis that only the untaken annual leave at base rate of pay was required may now expect claims for the difference from their previous employees.

However the Fair Work Bill Amendment 2014 proposes amendments to the wording of the NES provision to the effect that accrued but untaken annual leave is required to be paid at the employee’s base rate of pay, unless a higher payment is required under a contract, modern award or enterprise agreement.

How can we help?

Contact a member of our Employment Law Team for further discussion or advice.


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