In a ruling focused on statutory interpretation, a full federal court bench1 recently confirmed that employers must pay out employees’ accrued but untaken annual leave upon termination at the rate the employees would have received had they taken such leave while employed.  Significantly, this rule applies to payment for overtime, shift allowances, applicable penalty rates, and leave loadings.

In Centennial Northern Mining Services Pty Ltd v. Construction, Forestry, Mining and Energy Union [2015] FCAFC 100 (23 July 2015), the federal judges squarely faced the issue of what rate should be used when paying out accrued but untaken annual leave at termination.  Centennial argued that the employees it let go as part of a redundancy2 should have been paid their annual leave at the ordinary rates per the 2011 enterprise agreement – i.e., their hourly rate plus “average bonus,” and nothing else.

In March, the court rejected Centennial’s argument, and denied its appeal in late July.  In so doing, the court made a distinction between the two subsections of Section 90 of the Fair Work Act 2009 (Cth), which in relevant part provide as follows:

Payment for Annual Leave

  1. If, in accordance with this Division, an employee takes a period of paid annual leave, the employer must pay the employee at the employee’s base rate of pay for the employee’s ordinary hours of work in the period.
  2. 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 full bench reasoned that sub-sections (1) and (2) dealt with two distinctly separate situations and rates, holding that sub-section (1) pertained to the minimum standard for ordinary hours worked, whereas sub-section (2) considered the rate an employee was to be paid specifically upon termination.  Thus, the rate used to pay out untaken annual leave at termination should include all payments and entitlements for which the employee was qualified had the leave been taken during employment.  Additionally, if a modern award or enterprise agreement provides for a higher rate, that rate would be used for payout under sub-section (2).  The court explained that “there is nothing in the legislative context which would require a different interpretation.”3

This is troublesome for critics of the Centennial ruling, who wish for legislators to fix what they consider a “drafting problem” and call for related amendments in the Fair Work Amendment Bill 2014.  If amended, higher rates (which include leave loading, etc.) would be paid out only if a relevant award so specifies – otherwise, annual leave would be paid out at the base rate upon termination.

Australian employers should take note of this clarification and ensure that any unused paid leave is paid out at the same rates the terminated employee would have received if taken during employment.