The legitimacy of paying an employee a loaded wage rate inclusive of a value for annual leave (meaning that any annual leave taken will then be unpaid), has been the subject of recent debate.

On 29 November 2011, the Fair Work Commission (the FWC) handed down its decision in Mr Irving Warren; Hull-Moody Finishes Pty Ltd; Mr Romano Sidotti [2011] FWAFB 6709 (Hull-Moody). This decision was an appeal relating to the approval of an enterprise agreement. In upholding the appeal, a majority of the FWC held that the pre-payment of a loaded wage rate inclusive of annual leave did not constitute the ‘cashing out’ of annual leave, and, as a result, did not contravene the rules around cashing out arrangements in the Fair Work Act 2009 (FW Act). As a result, the enterprise agreement containing this provision could be approved.

The majority held that the real difference between the pre-payment of annual leave as a loaded rate, and the conventional method of paying annual leave when it is taken, was the timing of the payment, and that the provisions relating to annual leave in the FW Act did not oblige payment to be made at the time leave was taken.

In February 2012, the Federal Court adopted a different approach to this issue. In CFMEU v Jeld-Wen Glass Australia Pty Ltd [2012] FCA 45 (Jeld-Wen), the CFMEU alleged that the employer Jeld-Wen had, by pre-paying an employee a loaded rate for personal/carer’s leave (rather than annual leave), contravened section 101 of the FW Act. This section sets out the mandatory terms for the cashing out of personal/carer’s leave under modern awards and enterprise agreements.

While in Jeld-Wen Gray J dismissed these allegations (on the basis that the relevant agreement providing for the pre-payment arrangement was neither a modern award nor an enterprise agreement), he held that the arrangement did constitute a ‘cashing out’ arrangement as the pre-payment arrangement was in ‘substitution’ for the employee receiving paid personal leave. His Honour held that ‘the mere fact that money was paid in advance would not render the payment any less a payment in substitution for the entitlement than if the payment were made after the entitlement.’

The tension between these decisions has been magnified by two further FWC decisions in June 2013, in BM & KA Group as Trustee for BM &KA Group Unit Trust [2013] FWC 3654 (BM & KA) and Fortress Systems Pty Ltd [2013] FWC 3789 (Fortress Systems). In these decisions, which dealt with pre-payment of annual leave clauses, the FWC preferred to follow the approach adopted in Jeld-Wen, namely, that the clauses are impermissible cashing out clauses.

While a Federal Court decision would ordinarily be a relevant authority for the FWC, Jeld-Wen is arguably distinguishable as it dealt with different provisions of the FW Act, and the specific comments made by Gray J were not necessary in order to determine the application. In contrast, the decision in Hull-Moody was directly relevant to these applications (as they also concerned the approval of enterprise agreements), and applying Hull-Moody would also be consistent with the long standing principle in Pacific Access Pty Ltd v CPSU (1998) 83 IR 323 that obliges a single FWC member to follow binding Full Bench authority, even if the member considers the approach to be wrong.

The judgements and decisions disapproving predisapproving pre-payment arrangements appear to be based on two grounds: a narrow approach to statutory interpretation, and also policy considerations. The statutory interpretation rationale is that as the FW Act refers to ‘paid annual leave’ the ‘payment’ component must be associated directly with the ‘annual leave’ component, and not paidnot paid at a different time.

The underlying policy basis for this approach (first suggested in the minority decision of Cambridge C in Hull-Moody) appears to be an aversion to creating a ‘financial disincentive’ for an employee who has been paid for annual leave in advance to actually take the annual leave without concurrent payment (having presumably already spent the payment in advance).

It is unknown whether the decisions in BM & KA and Fortress Systems will be appealed. If the decisions are allowed to stand, employers, employees and possibly even FWC members will be in the uncertain (and unsatisfactory) position of not knowing whether to follow the existing (and undisturbed) Full Bench decision in Hull-Moody, or whether to adopt the Federal Court’s recent approach in Jeld-Wen.