In this In Brief, we examine the Fair Work Commission (FWC) Full Bench decision in Canavan Building Pty Ltd  FWCFB 3202 (29 May 2014) (Canavan). This decision, by a specially-convened five member Full Bench (Ross J, Hatcher VP, Acton SDP, Cargill C and Wilson C), resolved conflicting lines of authority about whether an enterprise agreement can provide for the pre-payment of annual leave.
In Canavan, the FWC Full Bench refused to approve an enterprise agreement that contained a clause purporting to permit the payment of an annual leave entitlement prior to the period of leave itself, on the grounds that such a provision was inconsistent with the National Employment Standards (NES) under Part 2-2 of the Fair Work Act 2009 (FW Act).
ANNUAL LEAVE PROVISIONS
Section 186(2)(c) of the FW Act provides that the FWC, prior to approving a proposed enterprise agreement, must satisfy itself that the terms of the agreement do not exclude any provision of the NES. Relevantly, the NES provides at section 87(1) that an employee is entitled to four weeks of “paid annual leave” for each year of service.
Section 55 provides that an enterprise agreement may include a term that is ancillary or supplementary to the operation of a NES entitlement, but only to the extent that the term is not detrimental to the employee when compared with the NES. Notes to that section provide examples, including that:
- an ancillary term would include a term under which an employee may take twice the statutory minimum amount of leave at half the rate of pay; and
- a supplementary term would include a term that permits the employee to take more than the NES minimum amount of leave, or to take annual leave at a higher than normal rate.
Section 89(1) states that an employer must pay an employee at the employee’s base rate of pay for the duration of any annual leave period. Sections 92-94 set out rules in relation the cashing out of annual leave.
Finally, section 12 defines “paid annual leave” to mean “paid annual leave to which a national system employee is entitled under section 87”.
THE ENTERPRISE AGREEMENT
In this case, the employer applied to the FWC for approval of the Canavan Building Pty Ltd Enterprise Agreement 2013 (Agreement). The Agreement purported to provide that payment relating to periods of annual leave would be incorporated as a loading into the employees’ hourly rate of pay. This meant that payments for a period of annual leave would be made as a component of the employees’ ordinary pay, in advance of the period of leave itself.
This arrangement was described at clause 41 of the Enterprise Agreement, which provided (in part) that:
“… payment for annual leave is made progressively in advance and is incorporated into the wage rate prescribed by clause 35 of this agreement …”.
The Agreement also incorporated a number of other entitlements into the hourly rate, including the base award rate of pay, redundancy, personal leave and overtime entitlements. This meant that the employees would receive a single hourly rate which incorporated all entitlements arising under the Building and Construction General On-Site Award.
CONFLICTING LINES OF AUTHORITY
As indicated above, prior to the decision of the Full Bench in Canavan, the authorities had conflicted concerning the ability of an enterprise agreement to provide for payment of annual leave entitlements in advance of the actual taking of annual leave.
In Mr Irving Warren; Hull-Moody Finishes Pty Ltd; Mr Romano Sidotti  FWAFB 6709 (Hull-Moody Finishes), a Full Bench of Fair Work Australia considered a similar clause.
The majority in that case (Watson VP and Hamberger DP) noted that the only difference between the payment of leave under that clause and payment under the NES was the timing of the payments. In each case, the employee was entitled to receive payment for the period of leave, and an authorised period of absence from work. The majority noted that, in its view, nothing in the NES required that a payment for annual leave be made at any particular time.
In a dissenting decision in Hull-Moody Finishes, Commissioner Cambridge emphasised the importance of the context in which the annual leave entitlement appeared, i.e. as part of a “safety net” of national legislative minimum entitlements providing basic benefits to employees. Placing due weight on the “beneficial, protective” context of the provision, he found that the relevant annual leave clause defeated the “fundamental notion” of unpaid leave, as:
“[t]he redirection of the payment into an hourly rate creates such disconnection with the period of absence from work so as to effectively make the period of absence a period of unpaid leave.”
Justice Gray of the Federal Court of Australia adopted a similar approach to Commissioner Cambridge in Construction, Forestry, Mining and Energy Union v Jeld-Wen Glass Australia Pty Ltd (2012) 213 FCR 549 (Jeld-Wen Glass). In that case, a preserved Australian Workplace Agreement sought to permit an employee to receive an extra 1.5 hours’ pay each week in lieu of paid personal leave under section 97 of the FW Act. Relevantly, Gray J noted that the entitlement to payment for a period of personal leave under section 97 arose at the time that the leave was taken. This meant that an employer could not separate the entitlement to payment for the leave from the period of leave itself.
The conflict between the reasoning in these two decisions subsequently led to a number of inconsistent FWC decisions at first instance.
DECISION IN CANAVAN
The Full Bench in Canavan found that the relevant clause in that case conflicted with the NES in at least two key respects.
First, section 90(1) of the FW Act requires that payment for annual leave be made at the base rate of pay as it applies at the time that the leave is taken. However, the Agreement provided for specified pay increases at regular time intervals. The effect of this was that the Agreement, if approved, would permit payment for annual leave at one rate of pay, whereas leave may be taken at a later time when a higher rate would apply. This would contravene section 90(1).
Secondly, the Full Bench considered that the consistent use throughout the FW Act of the words “paid annual leave”, rather than merely “annual leave”, indicates that the former phrase must be read as a composite expression, in which “payment for the leave is inextricably linked to the leave itself”. On the ordinary understanding of that phrase as a composite expression, the Full Bench held that “paid annual leave” meant annual leave provided together with pay. In doing so, it followed the reasoning of Gray J in Jen-Weld Glass.
The Full Bench indicated, further, that the scheme of pre-payment of annual leave in the Agreement amounted to cashing out of annual leave in a manner inconsistent with section 93 of the FW Act.
CONSEQUENCES FOR EMPLOYERS
The decision in Canavan provides certainty to employers, who may have considered seeking the inclusion in an enterprise agreement of a clause permitting the payment of an annual leave entitlement prior to the period of leave itself. Following Canavan, it is clear that an enterprise agreement containing a provision of this kind would not be approved by the FWC.
Although not expressly decided, the Full Bench indicated that a similar clause seeking to allow pre-payment of personal/carer’s leave entitlements would also not be approved for reasons similar to those pertaining to the annual leave provision – i.e. inconsistency with the relevant NES provisions.
Employers therefore need to exercise caution, when negotiating proposed enterprise agreements with employees/unions, to ensure that annual leave, personal leave and other NES entitlements are not unlawfully compromised by relevant agreement provisions.