Annual leave loading on termination


Context
Section 90(1) of the Fair Work Act 2009 (the Act) makes it clear that the payment for annual leave is at the ‘base rate of pay’. Section 90(2) of the Act indicates that upon termination an employee is paid what he would have been paid if he or she had taken the leave while working.

Modern awards such as the Vehicle Manufacturing, Repair, Services and Retail Award 2010 (VMRSR Award), provide for the payment of an annual leave loading when leave is taken. But clause 29.8 of the VMRSR Award determines that the leave loading is not paid on untaken leave paid out on termination. The VMRSR Award also provides a different and more beneficial payment than the ‘base rate of pay’ under the NES for annual leave when leave is taken during employment (see clause 29.7 of the VMRSR Award).

However, since 2011 the Fair Work Ombudsman (FWO) has taken the view that the National Employment Standards under section 90 requires the payment of the annual leave loading on untaken leave on termination. This is a departure from the accepted position over the history of award coverage in the vehicle industry and other industries since the introduction of the annual leave loading as a general award provision. The FWO has not attempted to prosecute any employers leaving it to individual employees to make any claims in a local court. However, a Federal Court case of Centennial Northern Mining Services Pty Ltd v Construction, Forestry, Mining and Energy Union (No 2) [2015] FCA 136 agreed with the FWO’s opinion.

Position
The above Federal Court decision imposes a further substantial cost input on businesses, particularly small businesses. The decision, if not corrected by legislation, makes a mockery of the award modernisation principles which led to the introduction of modern awards on 1 January 2010. The original award modernisation request in June 2008 specified that it was not the intention of the award modernisation process to increase costs to employers.

The introduction of the NES on the same date as modern awards commenced operating directly contradicts the intention of the award modernisation request in section 90(2) of the Act by adding an additional obligation to pay for annual leave loading when an employee is not physically taking annual leave.

Recommendations

  • A formal note should be included at the end of section 90 of the Act as follows:

    “Note: Section 90 does not prescribe conditions in relation to the payment or non-payment of the annual leave loading applicable under a modern award, enterprise agreement or a WR Act instrument.”

18 June 2015