In brief: Pending any appeal, the Federal Court has answered one of the Fair Work Act's most debated questions: how much should an employee be paid out for their untaken annual leave when their employment ends? Senior Associate Andrew Stirling reports.

HOW DOES IT AFFECT YOU?

  • When an employee's employment ends, the employer must pay out any accrued but untaken annual leave.
  • Untaken annual leave must be paid out at the same rate that the employee would have been paid had the employee actually taken the leave during their employment. This includes any applicable annual leave loading, shift loadings and other penalties that would have been paid if the employee had taken the leave while employed.

Background

The Fair Work Act says that when an employee's employment ends and the employee has accrued annual leave, the employer must pay the employee the amount that would have been payable to the employee had the employee taken the leave. There are two ways to interpret this:

  • Payment should be calculated using the employee's base rate, since that is the rate that the Fair Work Act prescribes for payment during annual leave. This interpretation has been adopted by the Fair Work Commission when approving enterprise agreements.
  • Payment should be calculated using the same rate that the employee would have been paid if they had actually taken the leave. This might be the employee's base rate, but it might also include annual leave loading, shift loadings and other penalties, depending on the employee's terms and conditions. This interpretation has been preferred by the Fair Work Ombudsman.

The case

Centennial Northern Mining Services Pty Ltd has an enterprise agreement that requires employees taking annual leave to be paid the greater of:

  • their ordinary weekly rate plus a 20 per cent loading; or
  • their ordinary weekly rate plus rostered overtime, shift allowance, weekend penalty rates and bonus.

However, the enterprise agreement also says that on termination of employment an employee is paid for accrued but untaken annual leave based on their ordinary weekly rate of pay plus a bonus.

The court was asked to declare that the enterprise agreement's rate of payment for annual leave on termination complied with the Fair Work Act. To make the declaration, the court needed to decide that the Fair Work Act required annual leave to be paid out at the employee's base rate.

The court refused to make the declaration.1 It interpreted the Fair Work Act as requiring annual leave to be paid out using the same rate that the employee would have been paid had the employee actually taken the leave during their employment. In this case, this was the greater of the ordinary weekly rate plus the 20 per cent loading or the ordinary weekly rate plus rostered overtime, shift allowance, weekend penalty rates and bonus.

Given the ambiguity in the Fair Work Act, it would not surprise us if the matter was appealed. We will keep you updated if an appeal occurs.