Partner, Erin McCarthy and Law Clerk, Shauna Roeger explain a recent decision of the Federal Court regarding payment of annual leave to employees on termination, and whether caps on retrenchment pay with reference to age are discriminatory.

On 27 February 2015, Justice Buchanan of the Federal Court of Australia delivered a judgment that considered two questions regarding the interaction between provisions of the Fair Work Act and an enterprise agreement. Firstly, whether payments for accrued but untaken annual leave must include annual leave loading and secondly, whether a retrenchment pay provision that capped payment to the amount that would be paid on retirement, was discriminatory based on age.

The issue regarding annual leave had been a long standing point of contention, with industry associations, employer groups, unions and the Fair Work Ombudsman adopting different interpretations of the National Employment Standards. On one interpretation, the National Employment Standards only required accrued but untaken annual leave to be calculated with reference to the employee’s base rate of pay, but on another, it required payment to include annual leave loading, shift loading and other penalties, depending on the particular employee’s terms and conditions.

This issue had been considered previously by the NSW Local Court in Ryan v Whitehaven Coal Mining Pty Ltd [2013] NSWLC 11. Magistrate Buscombe found that a worker who had leave owing on resignation was entitled to have it paid out at the rate he would have received had the leave been actually taken (which in that case was the greater of the employee’s ordinary rate of pay plus 20% annual leave loading, or the employee’s projected rostered earnings).Despite this, the possibility remained that this decision would be overturned by a subsequent decision of a Superior Court.

Annual leave on termination payable at higher rate

The first issue to be resolved was what the National Employment Standards required regarding annual leave loading. Section 90(2) of Fair Work Act provides that if, when an employee’s employment ends, the employee has a period of untaken paid annual leave, the employer must pay the amount that would have been payable to the employee had the employee taken that period of leave.

The Centennial Northern Mining Services Enterprise Agreement 2011 had a provision that provided for the payment of accrued but untaken annual leave with reference to the ordinary rate of pay plus average bonus. Centennial Northern Mining Services Pty Ltd sought a declaration that the enterprise agreement did not contravene the Fair Work Act. The CFMEU alleged that the clause was not permitted, arguing that the National Employment Standards in the Fair Work Act required payment of the whole amount that would actually have been payable during the period of annual leave. In this case, annual leave payments were to be the greater of the employee’s ordinary weekly pay plus 20% loading, or the employee’s ordinary weekly pay plus rostered overtime, shift allowance, weekend penalty rates and bonus. More commonly, agreements and awards provide for 17.5% loading.

Justice Buchanan noted that the National Employment Standards were ambiguous. To assist in interpretation, his Honour looked to the Explanatory Memorandum to the Fair Work Bill 2008. The Explanatory Memorandum provided support for the CFMEU’s argument, as it stated that “[t]he payment will be equivalent to the amount that the employee would have been paid if the employee had taken the annual leave” (emphasis added).

Therefore, Justice Buchanan concluded that the National Employment Standards is:

“not confined to a statement of a minimum obligation, but is a statement to the effect 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.”

As the clause in the Centennial Northern Mining Services enterprise agreement operated in a way that detracted from the National Employment Standards, it had no effect. The practical effect being that the loading was payable on the annual leave payments on termination.

Given the ambiguity in the National Employment Standards, it would not be surprising for this aspect of the judgment to be appealed. It is also important to note that if the Fair Work Amendment Bill 2014 passes, the effect of this judgment will be limited in its effect. This Bill proposes to alter the wording of the current National Employment Standards, providing that the rate to be paid to an employee for untaken paid annual leave on termination, simply must not be less than the employee’s base rate of pay, unless a modern award or enterprise agreement expressly requires payment at a higher rate.

Retrenchment pay provision found to be discriminatory and unlawful

The second issue to be resolved was whether a term of the enterprise agreement was discriminatory and unlawful within the meaning of the Fair Work Act.

A clause in the Centennial Northern Mining Services Enterprise Agreement 2011 provided that the amount of retrenchment payment due to an employee is not to be more than the employee would have received had the employee remained in employment with the company until the age of sixty.

The context of this provision was that until 30 June 2006, coal mine workers in New South Wales were obliged to retire at the age of sixty years. While the intention of this clause may have been to avoid windfall gains by employees who would have retired, even if not retrenched, Buchanan J noted that there has never been a generally accepted industrial principle that employees passing some ‘average’ general age of retirement become disentitled to payment for compulsory retrenchment.

Justice Buchanan concluded that while the mandatory retirement was in place, it was arguable that a clause with such content would not be discriminatory. However, in the absence of a mandatory retirement age, the clause has a ‘dramatically different effect’ upon a long serving employee retrenched at age 60 or over, because no matter the length of the service, from age sixty onwards, no retrenchment payment would be available. The clause was directly discriminatory based on age, and was therefore an unlawful term that was of no effect.

As this issue arose in the context of an application to the Court for a declaration that the term was not discriminatory and unlawful, the application was dismissed. It is important to note that under section 186(4) of the Fair Work Act, the inclusion of a discriminatory term in an enterprise agreement will prevent the agreement from being approved by the Fair Work Commission.

Lessons for Employers

  • The Federal Court has clarified that the National Employment Standards in the Fair Work Act require annual leave to be paid out at the rate that the employee would have been paid if the annual leave had actually been taken prior to termination.
  • This may change if the decision is appealed or if the Fair Work Amendment Bill 2014 passes.
  • A provision in an enterprise agreement that purports to cap the amount payable for retrenchment payments to the amount that would be paid on reaching a certain general ‘age of retirement’ is a discriminatory and unlawful term.
  • The inclusion of a discriminatory term will prevent an enterprise agreement from being approved by the Fair Work  Commission.