A full court of the Federal Court has ruled employees are entitled to be paid their full rate of pay for any unused annual leave on termination, including such add-ons as bonuses, shift allowances and leave loading.
Many employers who have mistakenly believed the Fair Work Act provided for annual leave on termination be paid at the employees base rate of pay (and no add-ons), now face potentially large back-pay bills. This is because the legislation has been in place since January 2010.
The case involved the proper application of the National Employment Standard on Annual Leave. Under the legislation, the relevant section about what to pay when an employee actually goes on annual leave, directs employers to pay holiday pay “at the employee’s base rate of pay for the employee’s ordinary hours of work in the period”.
Implicit in this is the exclusion of add-ons referred to above unless they are specifically included in an award or agreement, such as annual leave loading. However the very next sub-section of the Act refers to pay-outs on termination but simply says “the employer must pay the employee the amount that would have been payable to the employee had the employee taken that period of leave.”
Arguably, this could be taken to mean the amount as stipulated in the first sentence, namely the “base rate of pay”. But this was not the interpretation the full court has put on the words. The full court said that if the wording of the two sub-sections did suggest that, but through oversight or inadvertence the legislation did not reflect what parliament intended, that was beside the point. The court must uphold the will of parliament “as it is expressed in the law”.
This anomaly was identified long ago and is the subject of an amendment bill in the federal parliament where it has been held up in the Senate. All the major players in the workplace relations arena know the legislation does not reflect the long term situation with relation to unused annual leave payments on termination.
Employers should make sure they are paying employees on termination the full amount the employee would have received had they proceeded on leave. The passage of the proposed legislation is doubtful. One way to ensure this ‘windfall’ is not exacerbated is to appropriately craft agreement clauses to make clear bonuses and shift payments are expressed as applying only when actual work is being performed. And to not refer to these payments as “all-purpose”, or to pay them when an employee takes leave.