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Changes to payment of leave loading on termination of employment

Posted 23/05/2014 by Jaan Murphy


Changes to payment of leave loading on termination of employment

This FlagPost examines the changes proposed by the Fair Work Amendment Bill 2014, in relation to payment of leave loading on unused annual leave when an employee ceases employment, and what those changes would mean for employers and employees.

Background

Annual leave loading is designed to compensate employees for notional loss of overtime earnings whilst on leave. Despite this, it is relatively common in sectors where overtime payments are infrequent.

The Fair Work Act 2009 (FWA) changed the previous long-standing position that leave loading was not payable on termination, unless provided for by an industrial instrument (e.g. award, enterprise agreement). This led to various employer associations labelling the new legal position created by the FWA ‘confusing’.

Historical treatment of the payment of leave loading on termination

Prior to the FWA, legislation had provided that:

If the employment of an employee who has not taken an amount of accrued annual leave ends at a particular time, the employee must be paid a rate for each hour… of the employee's untaken accrued annual leave that is no less than the rate…. that…. is the employee's basic periodic rate of pay...

It also provided that industrial instruments (for example, awards) could include terms related to leave loading and whether it would be payable on unused annual leave when an employee ceased employment.

Hence the default position was employees whose employment terminated would not be entitled to receive annual leave loading on unused leave, unless altered by an industrial instrument.

The current position

In contrast subsection 90(2) of the FWA provides that:

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. (emphasis added)

It has been argued by employer groups that subsection 90(2) is ‘confusing’ as (apparently) it does not make it ‘clear’ how to calculate the amount payable to an employee whose employment is ceasing when:

  • they are eligible for leave loading
  • they have untaken annual leave, and
  • the relevant industrial instrument is silent as to whether leave loading is payable upon termination (or specifies that it is not).

One interpretation was that the amount payable must be calculated using the employee’s base rate of pay whilst the alternative was that it must include leave-loading, even where specifically excluded by an industrial instrument.

Judicial interpretation of subsection 90(2)

Despite suggestions that the interaction between subsection 90(2) and industrial instruments was confusing, as discussed in a previous FlagPost, it has not troubled courts or tribunals that considered it, with one Magistrate stating:

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.

Given that the operation of subsection 90(2) does not appear to have troubled the judiciary, the Fair Work Commission or the Fair Work Ombudsman (FWO), it is difficult to see how, from a statutory interpretation viewpoint, the interaction between subsection 90(2) and industrial instruments was ‘confusing’. However, it appears that the ‘confusion’ arose not from the legislation itself, but from the lack of policy clarity around the changes to the historical position regarding the payment of leave loading on termination made by the FWA.

A case of created ‘confusion’?

The ‘confusion’ around subsection 90(2) of the FWA appears to have originated in the previous Government’s failure to clearly communicate the nature, extent and reasons for the change. The Explanatory Memorandum, Supplementary Explanatory Memorandum and Minister’s Second Reading Speech did not mention the change from the status quo (or provide specific rationale for it) beyond re-stating the provision. Further, it appears that neither the change nor its rationale was communicated in the lead up to the FWA’s introduction.

Against this background, various employer groups argued that the legislation was ‘confusing’ and advocated for a return to the previous arrangements.

The Fair Work Act Review

In 2011 the previous Government commissioned an independent panel to review the FWA. A number of submissions, predominately from industry groups and employer associations, argued that subsection 90(2) was ambiguous and should be amended to ensure that whether leave loading is payable on termination be determined by industrial instruments. 

In its 2012 report the panel recommended that subsection 90(2) be ‘amended to provide that leave loading is only payable on separation where expressly provided under the relevant modern award or enterprise agreement’.

The Fair Work Amendment Bill 2014

The Fair Work Amendment Bill 2014 (Bill) will amend the FWA to give effect to the recommendation made by the review panel.

What do the changes means?

Assuming the Bill is passed, for employers, the changes mean that they no longer have to incur an additional cost (typically 17.5 per cent of the base rate of pay) when paying out employees’ annual leave on termination, unless the industrial instrument provides otherwise.

For employees, the changes mean that many would have their unused annual leave paid at their base rate of pay, and hence will receive less when ceasing employment.


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