In a recent decision, a Full Bench of the Fair Work Commission did not approve an  enterprise agreement which proposed that annual leave be paid for as a loading on  or incorporated into employees’ hourly rates of pay.1  The Full Bench held that the  terms of the agreement contravened the Fair Work Act 2009 (the FW Act).

Facts

Under the Canavan Building Pty Ltd Enterprise Agreement 2013 (the proposed Agreement), annual leave would have been paid as a loading on or incorporated into the employees’ hourly rate of pay rather than the employees being paid for annual leave at the time that leave is taken.

The issue of prepayment of annual leave has lacked clarity due to conflicting decisions, including:

  1. Hull-Moody Finishes Pty Ltd2 where a Full Bench of Fair Work Australia approved an agreement under which employees’ annual leave entitlements were prepaid by incorporation into hourly rates of pay rather than being paid at the time  the leave was taken. The Full Bench in Hull-Moody considered that the prepayment of annual leave was not contrary to the FW Act; and
  2. Construction, Forestry, Mining and Energy Union v Jeld-Wen Glass Australia Pty Ltd3, in which Justice Gray of the Federal Court considered the validity of an Australian Workplace Agreement to the extent it provided for pre- payment of personal/carer’s leave in lieu of payments being made when the leave was utilised.  The Court held that this arrangement amounted to the cashing out of personal/ carer’s leave and was contrary to an employee’s statutory entitlement to take paid personal/carer’s leave.

Decision

In Canavan, the Full Bench rejected the decision in Hull-Moody and followed the approach taken by Justice Gray in Jeld-Wen.  It considered that the expression “paid annual leave” in the NES should be treated as a composite expression, where payment for the leave is inextricably linked to the leave itself. For this reason, “paid annual leave” should be understood to mean that the pay is provided together with the leave. The enterprise agreement under consideration instead provided for payment of annual leave on a progressive basis in advance, rather than at the time annual leave is taken.

The Full Bench also held that self-funded or prepaid annual leave is not merely ancillary or incidental to the operation of the NES annual leave provisions. For an enterprise agreement to be consistent with the FW Act, it must require annual leave payments to be made:

  1. immediately before the leave is taken; or
  2. at identified intervals during the period of leave; or
  3. in accordance with the normal pay cycle at the time leave is taken.

The Full Bench considered that the interpretation of the relevant provisions in the FW Act underlying the proposed Agreement (and as stated in Hull-Moody) could lead to consequences unintended by the legislature. An example cited by the Full Bench is that it could open the door for claims by employees that their annual leave entitlements over the life of the enterprise agreement be paid out in advance in a single payment, regardless of whether that annual leave is ever actually taken.

The Full Bench also considered that the scheme of ‘prepayment’ of annual leave in the proposed Agreement constituted cashing out of annual leave, which was inconsistent with the intention of the  FW Act.

Bottom line for employers

This case demonstrates that an enterprise agreement, or for that matter any contract or policy, which provides for payment of annual leave in advance, such as by an addition  to normal salary payments, will be contrary to the NES.

The Full Bench has given Canavan the opportunity to offer undertakings which might allow the Agreement to be approved under the FW Act.

It is unclear what effect the decision will have on other existing enterprise agreements which are already approved and which contain similar terms to those disapproved by the Full Bench in this case.