In March we reported on the decision of a single judge of the Federal Court which interpreted the annual leave component of the National Employment Standards (NES) set out in the Fair Work Act 2009 (Cth) (the Act).  The outcome ran contrary to the meaning which many stakeholders had assumed was correct.  The Full Court of the Federal Court has now confirmed that this interpretation of the trial judge is correct.

The disputed issue

Section 90 of the Act describes how payment for annual leave is to be calculated.

When leave is taken as a paid absence from work, s. 90(1) requires that the payment be calculated on the base rate of pay for ordinary hours of work.

When the employment comes to an end, s. 90(2) says that 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”.  The dispute was over what these words really mean.

The competing views

The employer’s view was that the two parts of s. 90 work together so that the “amount that would have been payable to the employee” had the employee taken the leave is an amount calculated in accordance with clause 90(1) which sets the minimum standard for payment when leave is taken – base pay for ordinary hours only.

The view taken by the union was that it meant the amount that the employer would be legally obliged to pay if the leave had been taken.   Because the employees were covered by a collective labour agreement which set out a particular calculation for the payment of leave when taken (and was considerably in excess of base pay for ordinary hours), this calculation prevailed.

The employer countered that such a result would mean that the NES was not operating in a manner consistent with its purpose – to establish basic minimum standards.

Trial and appeal

The trial judge rejected the employer’s argument and the employer then appealed to the Full Court of the Federal Court.

On the appeal, the employer pointed to the legislative history which showed a consistent intention to limit annual leave payments to the base rate for ordinary hours.  The employer also pointed to statements in the Explanatory Memorandum for the Act which it said showed that Parliament did not intend to change this longstanding position.

The three appeal judges accepted that section 90(1) creates the minimum standard: payment at the base rate for ordinary hours worked.  But this did not constrain s 90(2).  The difference in wording between the two provisions was significant and showed a clear intention that untaken annual leave be payable at the rate at which it would have been paid had the employee taken it at the time the employee was eligible for it –  and not simply at the base rate.