The entitlement to paid annual leave is one of the basic employment rights enshrined within the National Employment Standards in the Fair Work Act 2009 (Cth) (FW Act).1

Although employers are generally aware of the mechanics of the accrual and taking of annual leave, there remains confusion in relation to the correct treatment of annual leave  where an employee is away from work while receiving workers compensation payments or when an employee’s role is terminated.

Employers should be aware of two recent cases which have shed light on these issues, and to a Bill which is currently before the Federal Senate.

Do employees accrue annual leave while away on workers compensation?

The Federal Circuit Court of Australia made it clear in the recent decision NSW Nurses and Midwives’ Association v Anglican Care2  (NSW Nurses Decision) that, at least in New South Wales, employees will continue to accrue annual leave while they are absent from work and receiving workers compensation benefits.

Relevant legislation

Under the FW Act, an employee is not entitled to take or accrue any leave while they are absent from work because of a personal illness or injury for which they are receiving workers compensation payments  (Compensation  Period)  under a “compensation law,” unless that same compensation law actually permits an employee to take or accrue any leave during a Compensation Period.

The Workers Compensation Act 1987 (NSW) (Workers Compensation Act) is a compensation law which allows employees to receive workers compensation payments without deduction during periods where they are also entitled to receive paid annual leave. However, it does not explicitly permit an employee to take or accrue leave during a Compensation Period.

The decision

Judge Emmett found that the Workers Compensation Act “expressly provides the opportunity for the worker to receive both workers compensation and accrue annual leave.” In her view, “a liberal approach to statutory interpretation is appropriate when dealing with legislation aimed at protecting the safety of workers and providing for compensation to injured workers.”

For these reasons, Judge Emmett found that the Workers Compensation Act permits an employee to take or accrue any leave during a Compensation Period for the purposes of the FW Act. NSW employees therefore accrue annual leave during a Compensation Period, and have had this entitlement since the commencement of the FW Act on 1 January 2010.

This decision has been appealed by Anglican Care, however at the time of publication judgment remains reserved.

What is the correct rate for paying out annual leave on termination of employment?

According to the FW Act, if an employee has any accrued but untaken annual leave at the termination of their employment, “the employer must pay the employee the amount that would have been payable to the employee had the employee taken that period of leave.”

This has for many years raised the question of whether accrued but untaken annual leave should be paid out at an employee’s ordinary rate of salary, or whether annual leave loading should also be paid out if an employee is entitled to such loading.

Justice Buchanan of the Federal Court has dealt with this long running issue.In Centennial Northern Mining Services Pty Ltd v CFMEU.3  Justice Buchanan found that if an employee is normally entitled to annual leave loading, then this loading will also be applicable to any accrued but untaken annual leave paid out on termination. According to Justice Buchanan, what the  FW Act is essentially saying is 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 remains untaken.”

This decision applies to all annual leave paid out since the commencement of the FW Act on 1 January 2010.

Centennial Northern Mining Services Pty Ltd has appealed this decision. However, at the time of publication the appeal has not yet been heard.

The Federal government’s proposed changes to the FW Act

The Fair Work Amendment Bill 2014 is currently before the Senate. The Bill contains provisions which will not allow employees to accrue annual leave during periods of absence on workers compensation. If this Bill passes, its changes will only apply to a Compensation Period beginning after its commencement. Employees in NSW receiving workers compensation benefits will be able to take or accrue annual leave until then, subject to the appeal decision of the Full Court of the Federal Court.

The Bill also contains provisions which would overturn the effect of Justice Buchanan’s decision in Centennial Northern Mining Services, by only requiring employers to use an employee’s base rate of pay in relation to accrued but untaken annual leave paid out on termination.

CHECKLIST FOR EMPLOYERS

  • Consider whether any employees who have been away from work while on workers compensation since 1 January 2010 have been accruing annual leave during their time away, and whether that is consistent with your award, enterprise agreement or the applicable legislation in your State or Territory.
  • Check whether annual leave loading was applicable to any of your employees who have had their employment terminated since 1 January 2010 and, if so, whether the loading was applied to any accrued but untaken annual leave which was paid to them.
  • Track the progress of the Fair Work Amendment Bill 2014 and understand the effect the Bill will have on your business if it passes in its current form