A Full Bench of the Fair Work Commission (FWCFB) has refused to approve an enterprise agreement that permits annual leave payments to be made progressively in advance by being incorporated into the employees’ hourly rate of pay, resolving conflicting authorities on this issue.

Implications for employers

This decision makes it clear that payment of annual leave entitlements by rolling up the value of such entitlements into the employee’s hourly rate of pay (and requiring the employee to then take annual leave unpaid) is not consistent with the right to paid annual leave under the National Employment Standards (NES). Accordingly, where an enterprise agreement seeks to allow such an arrangement, it will not be approved by the Fair Work Commission (FWC).

Background: relevant law

In approving an enterprise agreement, section 186(2)(c) of the Fair Work Act 2009 (FW Act) requires that the FWC satisfy itself that the provisions of the agreement:

  • do not exclude the provisions of the NES; or

  • supplement or are ancillary or incidental to the operation of an entitlement under the NES in a way that is not detrimental to an employee when compared to the NES.

Relevant provisions of the NES on annual leave include:

  • section 87(1), which provides that an employee is entitled to four weeks of paid annual leave. In particular, section 90(1) provides that if an employee takes a period of paid annual leave, the employer must pay the employee at the employee’s base rate of pay for the ordinary hours of work in the period; and

  • sections 92 to 94, which set out the circumstances in which paid annual leave is permitted to be cashed out. Relevantly, section 93(2) provides that cashing out is not permitted where it would result in the employee’s remaining accrued entitlement to paid annual leave being less than four weeks. Further, each cashing out must be authorised by a separate agreement in writing.

Background: facts

An employer applied to the FWC for approval of the Canavan Building Pty Ltd Enterprise Agreement 2013(Agreement). The Agreement made general provision for some NES entitlements to be paid in advance as part of the employees’ hourly rate of pay. In particular, the Agreement provided 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 FWC had to consider whether this did or did not comply with the NES requirements concerning paid annual leave.

The FWC’s approach to the issue prior to this case

Prior to this decision, there were conflicting decisions of the Federal Court of Australia and the FWC relating to the issue of whether an enterprise agreement providing for the pre-payment of annual leave had the effect of excluding the NES.

A Full Bench considered a similar clause to that in the Agreement in the case of Mr Irving Warren; Hull-Moody Finishes Pty Ltd; Mr Romano Sidotti [2011] FWAFB 6709.

A majority in that case found that the only real difference between the operation of the relevant arrangement and the NES was in the timing of the payment. The majority considered that there was no obligation in the NES to make a payment for annual leave at a particular time (although a delay in payment may be in a different category), and even if there was, payment in this manner would not amount to an exclusion of the entitlement to the payment. The arrangement didn’t involve cashing out annual leave because the pre-payment didn’t extinguish the entitlement to leave.

Commissioner Cambridge dissented however, preferring to focus on the provisions in the context of their nature and purpose, being to safeguard the entitlement to annual leave. He considered that the fundamental notion of paid annual leave was defeated by the resulting disconnect between the timing of the payment and the actual period in which it was taken due to the pre-payment arrangement.

A conflicting decision of the Federal Court, Construction, Forestry, Mining and Energy Union v Jeld-Wen Glass Australia Pty Ltd (2012) 213 FCR 549, related to the payment of an additional 1.5 hours per week in lieu of the entitlement to payment for sick leave taken under an Australian Workplace Agreement. The Court found that provision amounted to cashing out of the entitlement to payment for sick leave, which was not permitted by the NES. The Court considered that the requirement for payment only arises when the leave is taken. Although the Federal Court decision related to a different entitlement, it was clear that the Court’s reasoning was inconsistent with that of the majority in Hull-Moody.

This disparity in reasoning between Hull-Moody and Jeld-Wen led to inconsistency in subsequent decisions of the FWC on the issue.

Accordingly, when the application to approve the Agreement was received, the matter was referred by FWC President Ross straight to a Full Bench for determination.

Decision

The FWCFB, comprising President Ross, Vice President Hatcher, Senior Deputy President Action, Commissioner Cargill and Commissioner Wilson, preferred the approach taken in Jeld-Wen. The FWCFB found that the Agreement excluded the NES in two separate and distinct ways:

  • the NES requires the payment for annual leave to reflect the employee’s base rate of pay as at the time the leave is taken. As the Agreement provided for periodic increases in pay for the whole of its term, the FWCFB considered that the Agreement permitted annual leave to be paid for, at least in part, at an earlier and lower rate than that which applied at the time the leave is taken; and

  • “paid annual leave” is, in the FWCFB’s view, a composite expression. Payment is inextricably linked to the period of leave. In effect, payment must be provided together with the leave. As a matter of interpretation, the FWCFB found that the taking of leave was a precondition that had to be satisfied in order to trigger the requirement for payment.

The FWCFB further observed that:

  • the pre-payment arrangement under the Agreement was in effect a prohibited “cashing out” of the entitlement to be paid for annual leave. The Full Bench could not find a provision in the Agreement which would ensure the preservation of the NES minimum entitlement to four weeks of paid annual leave or require a separate written agreement authorising the cashing out; and

  • a likely consequence of its decision was that pre-payment for personal/carer’s leave would also exclude the NES, however declined to express a final view on this issue.

Canavan Building Pty Ltd [2014] FWCFB 3202 (29 May 2014)