Federal Court resolves debate about annual leave loading termination payments

Since 2010 there has been ongoing confusion about whether annual leave loading (and other payments associated with annual leave) must be paid to employees upon termination of their employment.

The Fair Work Act 2009 (Cth) requires an employer to pay an employee during a period of paid annual leave at their base rate of pay for the ordinary hours, which would have been worked during the period.

The Act also requires that when paying out accrued annual leave upon termination of employment, the employer must pay the amount that would have been payable had the employee taken that period of leave during employment.

Despite this, some modern awards and enterprise agreements contain clauses requiring payment of annual leave loading (or other additional payments) during annual leave but not when paying out accrued annual leave upon termination of employment.

In the recent decision of Centennial Northern Mining Services Pty Ltd. v CFMEU (No. 2) [2015] FCA 136 the Federal Court determined that Centennial’s employees who were covered by the relevant enterprise agreement were entitled to annual leave loading (and other payments associated with annual leave) upon termination of their employment. This was despite the enterprise agreement stating that upon termination of employment, employees were only entitled to payment of accrued annual leave based on their ordinary rate of pay plus an average of their bonus.

The Federal Court found that the provisions of the Act meant that an employee should not suffer a reduction in the value of unpaid annual leave if employment comes to an end while paid annual leave remains undertaken.

The Federal Court also found that the provision in Centennial’s enterprise agreement in relation to payment of unused annual leave had no effect because it operated in a way that excludes the operation of the Act. Therefore, upon termination of employment, employees covered by Centennial’s enterprise agreement are entitled to be paid out their accrued annual leave at the same rate they would have been entitled to if they had taken the leave during employment.

What does this mean for employers?

For the moment, this means that despite what is in an agreement or award, upon termination of employment an employee is entitled to payment for accrued but unused annual leave and, if applicable, annual leave loading.

The Fair Work Amendment Bill 2014 proposes to amend the Act so that accrued but untaken annual leave is required to be paid at the employee’s base rate of pay. If this amendment is passed, then upon termination of employment, employees will only be entitled to payment of annual leave loading if their award, agreement or contract requires it.

We will keep you updated about these amendments.

This article originally appeared in Cooper Grace Ward’s Workplace Relations & Safety Risk Management Adviser – May 2015. Click here to download the full newsletter