Court finds annual leave loading payable upon termination

Workplace Directions

It is often difficult to determine what amount of annual leave should be paid to employees following termination of their employment. Recently, in the Local Court, Magistrate Buscombe made some headway as to the approach that is to be taken in relation to ‘untaken annual leave’ under the National Employment Standards (NES) in the Fair Work Act 2009 (Cth) (FWA).

Under the NES, section 90(2) provides:

If, when the employment of an employee ends, the employee has a period of untaken paid annual leave, the employer must pay the employee the amount that would have been payable to the employee had the employee taken that period of leave. 

The application of section 90(2) has often brought varying treatments by both human resources practitioners and legal advisors. The recent decision is particularly significant as it is the first Court to have considered the construction of section 90(2) of the FWA. 

Magistrate Buscombe in Ryan v Whitehaven Coalmining Pty Ltd determined an application claiming the calculation and payment of an unpaid amount of annual leave arising from resignation from employment.

The employment was governed by a contract of employment which provided in Clause 13:

‘Your entitlement to annual leave, personal leave, and public holidays will be in accordance with legislation including the ‘Australian Fair Pay Conditions Standard’ in the Workplace Relations Act 1996 (Cth) and the provision of this Agreement set out below.’

Clause 14 of the employment contract provided:

‘You will accrue, on a pro rata basis, 5 weeks annual leave per year. When you take annual leave, you will be paid your ordinary rate of pay, plus a loading of 20%, or your projected roster earnings, whichever is the greater. If you leave Whitehaven, or if you are terminated, you will be paid any untaken annual leave you have accrued at the ordinary rate.’

As described by Magistrate Buscombe ‘clause 14, therefore, provided that a loading of 20% or projected roster earnings on top of the ordinary rate of pay was to be paid if the applicant took annual leave during the course of his employment. If, however, he left the respondent’s employment or his employment was terminated, any untaken annual leave would be paid out at what was described as, ‘the ordinary rate’.

In addition to the contract of employment as at the time of the resignation, the Whitehave Open Cut Operations (Tarrawonga) Enterprise Agreement applied to the Applicant’s employment. Clause 14 of the enterprise agreement provided:

‘Entitlements to leave are in accordance with the entitlements set out under the applicable FW Act provisions and the provision of Agreement set out below.’

Clause 14.1 of the enterprise agreement provided that:

‘…employees are entitled to 5 weeks annual leave per year, accruing progressively. For periods of annual leave, employees will be paid the greater of: – their ordinary time rate of pay and an annual leave loading of 20%; or – the projected rostered earnings. In each case employees will receive the bonus payment set out at clause 12.3.’

The enterprise agreement did not deal with what was meant to occur when the employment came to an end and the employee had untaken annual leave. 

In relation to the interaction of the NES and the Enterprise Agreement, His Honour noted:

‘An Enterprise Agreement may include terms that are ancillary or incidental to the operation of an entitlement of an employee under the NES. It may also include terms that supplement the NES ‘but only to the extent that the effect of those terms is not detrimental to an employee in any respect, when compared to the NES’, see section 55(4).’

His Honour noted:

‘The effect of what can be done under s55 of the Fair Work Act in terms of the NES, and in particular in relation to the payment of annual leave, is that an employee is to be paid annual leave under s90 either at the base rate of pay, which is the minimum standard, or at a rate of pay that is not the base rate of pay, but which is not detrimental to the employee. That means an employee is either to be paid at his or her base rate of pay, or at a rate of pay that is higher than his or her base rate of pay. 

What rate is applicable depends on the terms of the Enterprise Agreement. If the Enterprise Agreement provides that the base rate of pay is to apply, or is silent as to what rate of pay is to apply, annual leave is to be paid at the base rate of pay. If the Enterprise Agreement provides for annual leave to be paid at a rate that is higher than the base rate of pay, that is the rate that is to apply when annual leave is taken.’

His Honour was of the view that section 90(2) provides insofar as untaken annual leave is concerned, a minimum standard. In his view ‘…that minimum standard, is that an employee, whose employment comes to an end, is to be paid the amount that he or she would have been paid if they had taken the unpaid annual leave as at the date the employment ends.’ 

The effect was that the enterprise agreement provided for the payment of taken annual leave at a rate that was greater than the base rate of pay and therefore that rate would be used for any untaken annual leave at the end of the Applicant’s employment and would be calculated at that rate on payment of untaken annual leave on termination. The effect is that the NES provides a minimum starting point which needs to be considered in reference to any applicable enterprise agreement or employment contract. 

In light of this decision, we recommend that any untaken annual leave to be paid on termination be carefully considered.

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