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.

Comments

  • 21/01/2014 1:48 PM
    Flabmeister said:

    A few ancillary questions. Is there any information regarding the legal costs involved in this case? Is there any indication of the likely total extra cost to employers if the ruling is applied in all situations similar to Mr Ryan's? (From the final paragraph, possibly not much.) Will there now be a flood of claims similar to Mr Ryan's from other people to whom it applies? (From the final paragraph, possibly more a leaky tap than a tsunami.)

  • 21/01/2014 1:49 PM
    Jaan Murphy said:

    Hi Flabmeister To answer your questions: 1. No. The case does not mention legal costs. It would be unusual for a case brought under the Fair Work Act 2009 to involve a costs order as section 570 prevents a party being ordered to pay costs unless the court is satisfied that the proceedings were vexatious, or a party’s actions or omissions were unreasonable and caused the other party to incur costs, or where a party unreasonably refused to participate in the proceedings. As none of these applied to Ryan v Whitehaven it would appear that as with most FWA related litigation, neither party was ordered to pay costs. 2. No, the judgement does not provide any indication of the expected financial impact on employers. However, the Australian Mines and Metals Association (an intervener in the case) provided evidence to the Court (summarised in para 38 of the judgement) that, as of the hearing, of the 122 modern awards, 112 provided for leave loading. Of those 112, 29 explicitly state that the leave loading is not paid on termination, nine provide that it is to be paid on termination and 74 are silent on the matter (as was Mr Ryan’s enterprise agreement). Based on the ruling in Ryan v Whitehaven this would mean that employees covered by 83 (i.e. 9 + 74) of the 112 modern awards that deal with leave loading would be entitled to have leave loading paid on untaken annual leave at the time of their termination of employment. Whilst this might seem like a significant increase, as noted in the flagpost it would appear that industry practice prior to Ryan v Whitehaven was to ‘err on the side of caution’ in regards to the interpretation of s 90(2) and thus pay out leave loading on untaken annual leave balances when an employee ceases employment. 3. It could be assumed that any increase in such litigation would be proportional to the prevalence of the practice of not paying leave loading on untaken annual leave. Given that it appears that most relevant organisations have recommended that leave loading be paid, it would appear the risk of a significant increase in such claims in the near future is unlikely. That said, as section 544 imposes a six year time limit on applications brought under the relevant Part of the Act (Part 4-1) there is a risk that a substantial number of claims going back to the commencement of the FWA could be launched. In short, whilst it is difficult to predict if Ryan v Whitehaven will lead to an increase in litigation pertaining to unpaid leave loading on untaken annual leave, it would appear to be unlikely.

  • 21/01/2014 1:49 PM
    Economics Sucks! said:

    Here is another question for you, if unused leave is paid out as a workplace entitlement, why isn't accrued long service leave? have there been any cases to test this?

  • 21/01/2014 1:49 PM
    Jaan Murphy said:

    Hi there If an employee is entitled to long service leave and they haven’t taken it at the time their employment terminates, then it must be paid out to them at their current ordinary rate of pay (although it should be noted that this depends on the nature of the termination). However, the situation differs where an employee is not yet entitled to take long service leave. Entitlements to long service leave can be governed by an industrial instrument, or state or territory law. An employee may be entitled to long service leave after a period of continuous service ranging from seven to ten years with the same or a related employer, depending on the state or territory in which they live, the relevant industrial instrument. An employee’s entitlement for a pro-rata payment of accrued long service leave on termination varies depending on the relevant state or territory law or industrial instrument, but is generally available only after a minimum period of five years continuous service. For example, in NSW a pro-rata payout is available after five years, whereas in Queensland and Victoria a pro-rata payout is only available after seven years of continuous service. As such, an employee may not be entitled to be paid out accrued long service leave where they have not met the required minimum period of continuous service under the relevant state or territory law or industrial instrument. In terms of cases, some recent decisions that may be of interest to you are: • Cutler v Derwent Howard Media Pty Ltd, in the matter of Derwent Howard Media Pty Ltd (Subject to Deed of Company Arrangement) (No 2) [2011] FCA 939. This case examines an employee’s entitlement to be paid pro-rata long service leave where they have been terminated for serious misconduct. • ACE Insurance Ltd v Trifunovski (No 2) [2012] FCA 793. This case provides a useful illustration regarding how courts interpret entitlements to pro-rata long service leave upon termination of employment arising from industrial instruments.


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