Is an employee who resigns entitled to leave-loading on their unpaid annual leave?

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Is an employee who resigns entitled to leave-loading on their unpaid annual leave?

Posted 19/08/2013 by Jaan Murphy

Since the Fair Work Act 2009 (FWA) was introduced, there have been differing views regarding how to calculate the amount payable to an employee who has untaken annual leave when they cease employment. Is it calculated using the employee’s base rate of pay, or must it (if the employee is entitled to it) include leave-loading?

Stephen Edward Ryan v Whitehaven Coal Mining Pty Ltd (Ryan v Whitehaven)* may be the first case to have considered the issue. The court ruled that where an employee is entitled to leave-loading, the amount payable for any untaken annual leave must include leave‑loading.

The NES and leave loading


Under the National Employment Standards (NES), there is no entitlement to leave loading. The NES is a safety-net of minimum standards that applies to every employee covered by the FWA. The NES entitles an employee to at least four weeks annual leave for each 12 months of service at their base rate of pay (which excludes leave loadings, overtime or penalty rates).

However, the FWA allows modern awards and enterprise agreements to include terms that are incidental to (or supplement) the NES, provided they do not disadvantage the employee when compared to the NES.

Examples include allowing employees to cash out unused personal leave or providing leave loading. It was not disputed that under the enterprise agreement Mr Ryan was entitled to leave loading.

So what was the dispute about?


Mr Ryan was employed by Whitehaven as a mine operator in August 2008 and resigned in May 2011. Whitehaven paid Mr Ryan his untaken annual leave, without the 20% leave loading. Mr Ryan commenced action against Whitehaven for the unpaid leave loading.
All parties agreed that if Whitehaven were required to pay the leave loading, it would amount to $2376.25. The dispute centred on the meaning of section 90 of the FWA:

Payment for annual leave
(1)  If, in accordance with this Division, 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 employee's ordinary hours of work in the period.
(2)  If, when the employment of an employee ends, the employee has a period of untaken paid annual leave, the employer must pay the employee the amount that would have been payable to the employee had the employee taken that period of leave.

In particular, the parties disagreed on the interpretation of subsection 90(2).

Submissions


Very basically, Whitehaven argued that ‘the amount that would have been payable to the employee had the employee taken that period of leave’ in subsection 90(2) should be interpreted as requiring untaken annual leave to be paid at the employee’s ‘base rate of pay’ as defined in section 16.

In summary, Mr Ryan submitted that, because of the plain English meaning of subsection 90(2), when he resigned the amount of unpaid annual leave should have been calculated in the same way as if had he taken annual leave before resigning, thus including leave loading.

View of the court


Magistrate Buscombe rejected the submissions of Whitehaven and, after outlining the application of relevant High Court cases and legislation regarding statutory interpretation, found that the effect of section 55 of the FWA (in terms of the NES and its application to payment of annual leave) is that under section 90:

…an employee is either to be paid at his or her base rate of pay, or at a rate of pay that is higher than his or her base rate of pay.

Magistrate Buscombe appears to have considered the absence of the defined term ‘base rate of pay’ from subsection 90(2) significant, noting:

If the Commonwealth Parliament had wanted to provide that the minimum standard in relation to the payment of untaken leave upon the end of employment was to be at the base rate of pay, it would have been a very easy matter for it to do so.

The court also noted that where an employee is not entitled to leave loading, they would be paid at their base rate of pay.

Practical effect of the decision


Some commentary suggests that there has ‘long been’ controversy over the correct interpretation of subsection 90(2), with industry associations, employer groups, unions and the Fair Work Ombudsman having differing interpretations and one group previously suggesting that the issue would benefit from ‘legislative clarification’.

However, a number of private HR and employment relations companies, as well as the Fair Work Ombudsman, had previously interpreted subsection 90(2) of the FWA as in Ryan v Whitehaven. As such, it appears that the dominant industry practice was to pay untaken annual leave with leave loadings to employees when they resigned. As noted by one organisation: ‘… the ruling is probably not the last word on the matter, however [it] reflects the current position.’





* NSW Local Court, 26 July 2013. The case has not been published on the NSW Caselaw website at the time of publication of this FlagPost, but can be obtained from the court registry.


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