The Federal Court has interpreted the statutory annual leave standard in a way which requires payment for untaken leave on termination of employment to be calculated on the most favourable basis. Somewhat unexpectedly, the relevant statutory prescription has to be read quite separately from the related sub-clause which regulates payment when the leave is actually taken. 

Facts 

The Fair Work Act 2009 (Cth) (the Act) establishes a series of mandatory minimum employment entitlements called the National Employment Standards (NES). Failure to comply with the NES attracts a civil penalty. 

Any term of an employment contract or collective labour agreement (enterprise agreement) which is less favourable to an employee than the NES, is void. Any provision which is more favourable will be legally binding. 

One of the entitlements given by the NES is paid annual leave. Section 90 of the Act describes how payment for annual leave is to be calculated. 

When leave is taken, the employee must receive payment at the applicable base rate of pay for his/her ordinary hours of work in the period of leave (s.90(1)). 

When the employment comes to an end, the employer must pay for untaken leave on the basis of “the amount that would have been payable to the employee had the employee taken that period of leave“(s.90(2)). 

In this case, an enterprise agreement applied to the relevant employees. 

Clause 19.5 of the agreement said that on termination any untaken leave was to be paid on the basis of the ordinary rate of pay plus average bonus. 

Clause 19.6 of the agreement required that when annual leave was taken the employee receive the greater of:

  • his/her ordinary rate of pay plus 20%; or
  • his/her ordinary rate of pay plus rostered overtime, shift allowance, weekend penalty rates and bonus. 

The Litigation 

A dispute developed between the employer and the union representing the employees over the meaning of s.90(2). 

The union’s view was that “the amount that would have been payable to the employee had the employee taken that period of leave” means an amount determined by reference to what the employer would be legally obliged to pay if the leave had been taken. This brought into play clause 19.6 of the enterprise agreement – the employee must receive the greater of ordinary pay plus 20% or ordinary pay plus allowances, penalty rates and bonuses. To the extent that the enterprise agreement provides that untaken leave should be paid at a lesser rate (i.e. clause 19.5 – ordinary pay plus average bonus), it is void because it is less favourable than the NES.

The employer’s position was that s.90(2) referred to s.90(1) (i.e. to the mandatory minimum payment applicable to leave when taken) and not to any external legal obligation such as might be found in an enterprise agreement. The employer said that this was consistent with the location of s.90 within the NES, and the role of the NES as a code of mandatory minimum conditions. The effect of this position was that employees were entitled under s.90(1) to payment at the ordinary rate alone, but because clause 19.5 of the agreement gave a more generous entitlement (ordinary rate plus average bonus) it prevailed.

The employer applied to the Court for a declaration that its position was the correct one.

The Decision

The judge (Justice Buchanan), after examining s.90 within its context, said that the interpretation favoured by the union could not be excluded. It was necessary to refer to extraneous material to resolve the matter.

The Explanatory Memorandum tabled when the legislation was before Parliament, said the following:

“Subclause 90(2) provides that, on termination of employment, an employee is entitled to receive a payment in respect of any untaken paid annual leave. The payment will be equivalent to the amount that the employee would have been paid if the employee had taken the annual leave.”

Justice Buchanan concluded that the highlighted words showed an intention on the part of Parliament that s. 90(2) (unlike s 90(1)) would not be confined to “a statement of a minimum obligation”.

Consequently, the judge ruled that the union’s interpretation was correct and clause 19.5 of the enterprise agreement was void.

Significance

The fact that the NES – as a code of minimum conditions – can “rope in” an entitlement that exists outside the code runs contrary to the assumptions that many employers and employees have held about the operation of the system since it was introduced in 2010. It will be necessary to take a fresh look at the NES in light of this judgment.

A copy of the decision can be acceessed by clicking this link.