Opening the Floodgates: Annual Leave Loading is Payable Upon Termination

In Centennial Northern Mining Services Pty Ltd v Construction, Forestry, Mining and Energy Union (No 2) [2015] FCA 136 (27 February 2015), the Federal Court mandated that annual leave loading is payable upon termination irrespective of any clause within an award or enterprise agreement stating that it is only payable when an employee actually takes the annual leave.

The decision deals squarely with the meaning of section 90 of the Fair Work Act (FWA), which states that:

  • 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.
  • 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.

Section 55 of the FWA prohibits a modern award or enterprise agreement from excluding any provision of the NES, with section 56 confirming such a term would have no effect (to the extent of the contravention).

In this case the enterprise agreement stipulated (clause 19.5) that “On termination of employment an employee is paid for accrued but untaken annual leave at their hourly rate of pay applicable to their ordinary weekly rate of pay… plus average bonus”.  It also provided (clause 19.6) that an employee taking annual leave must be paid the greater of:

  • the employee’s ordinary weekly rate of pay plus a loading of 20% of that rate, or
  • the employee’s ordinary weekly rate of pay plus rostered overtime, shift allowance, weekend penalty rates and bonus.

The employer argued that section 90(2) of the FWA created an entitlement which is referrable only to the obligation arising under section 90(1) (the base rate of pay for ordinary hours which would have been worked during the period of annual leave).

The employees argued that section 90(2) required payment of the whole amount which would actually have been payable during a period of annual leave (as calculated under clause 19.6 of the Enterprise Agreement).

The Court agreed with the employees.  Given the uncertainty created by section 90(2) of the FWA, the Court looked at the intention behind the legislation.  The intention behind section 90 was to ensure “than 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 untaken”.  Thus the Court concluded that clause 19.5 of the enterprise agreement had no effect.

It will be interesting to see if this decision is appealed.  In the meantime it opens the floodgates for employees (terminated since 1 January 2010) to claim they have been underpaid.

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