Background

The Fair Work Act provides that an employee’s entitlement to be paid for annual leave arises when an employee takes a period of paid annual leave, or when the employee has unused annual leave upon cessation of employment (section 90 of the Fair Work Act 2009 (Cth)). There is also a prohibition on cashing out annual leave (section 92) except in accordance with particular requirements (sections 93 and 94). However, is it possible for employers and employees to agree on arrangements for advance payment for annual leave?

A decision of the Full Bench of Fair Work Australia made toward the end of last year (Mr Irving Warren; Hull-Moody Finishes Pty Ltd; Mr Romano Sidotti [2011] FWAFB 6709)) appears to pave the way for employers to provide for rates of pay that are loaded with annual leave payments — that is, to pay annual leave entitlements incrementally and in advance of them being taken.  This method of paying annual leave has the effect of allowing employees to take leave, although the leave would be unpaid at the time of taking annual leave (as the annual leave payment would have been paid in advance).  In this short note, we analyse the majority’s decision and add a note of caution to employers who may consider relying upon the Full Bench’s decision.

First instance decision

The clause that was at the centre of the controversy (clause 34) provided that the wage rates in the proposed agreement were based on an hourly rate “loaded to provide compensation for penalty rates which would be payable under a relevant award and also incorporates payment in advance for annual, long service and personal leave.”  The annual leave clause in the proposed agreement also stated:  “It is noted that payment for annual leave is made progressively in advance and is incorporated into the wage rate prescribed by clause 34.”

At first instance, Senior Deputy President O’Callaghan found (Re Hull-Moody Finishes Pty Ltd Enterprise Agreement 2011 [2011] FWA 5618) that the relevant clause breached section 55 of the Fair Work Act.  Section 55 provides that an enterprise agreement must not exclude the National Employment Standards (NES) or any provision of the NES. Although the agreement did not expressly exclude the NES, his Honour found that the operation of the agreement failed to provide benefits derived from the NES.  His Honour also found that the “loading up” of pay rates to deal with annual leave NES entitlements amounted to “cashing out” of leave in a manner that breached s 93(2) of the Fair Work Act.

Decision on appeal

However, a majority of the Full Bench overturned O’Callaghan SDP’s decision to refuse approval of the proposed enterprise agreement.  Vice President Watson and Senior Deputy President Hamberger found that the agreement did not involve cashing out of annual leave as it did not extinguish the entitlement to take leave. The majority found that the agreement was consistent with the NES, as it expressly adopts the annual leave entitlement provided under the NES.  Watson VP and Hamberger SDP granted permission to appeal, and allowed the appeal, referring the application for approval to be considered in further detail by Hamberger SDP.

Commissioner Cambridge disagreed with the decision of majority, arguing in favour of upholding O’Callaghan SDP’s decision. Cambridge C stated that the majority had not given sufficient regard to the “protective context” of the relevant Fair Work Act provisions. According to Cambridge C, the notion of paid annual leave is defeated if an employee is not paid during their absence from work.  The practical outcome of such an agreement is to provide a financial deterrent for employees to take leave. According to Cambridge C, it was unlikely that employees under such an agreement would ever take their accrued leave, unless it was the two weeks required as part of the Christmas shutdown.

Indeed this aspect of the decision has attracted some controversy. The Tourism and Transport Forum and the Greens have also expressed concern that employees would not have an incentive to take annual leave under such an agreement.

Implications for employers

For employers, it appears that it would be lawful to make provision in an enterprise agreement for “loaded up” pay rates or other monetary payments to discharge the obligation to make annual leave payments in advance of that obligation arising.  The decision also seems to provide comfort for employers seeking to make similar arrangement in a common law employment contract.

However, employers would need to take care that the advance payment is sufficient to amount to the employee’s entitlement to annual leave each year.  If an employer did create an agreement to pay annual leave incrementally and in advance, it would be important for an employer to be aware of any wage increases as this may affect the amount owed to the employee in relation to leave.  The employer may need to “top up” the loaded rates payable to an employee, in order to compensate for the higher pay rate that the employee would have been paid, had they taken leave at a later date.

Employers seeking to rely on the decision should also note that the case was not subject to the usual rigours of opposing argument — the appeal was not opposed by any other party.  In addition, there is a significant division of opinion between members of Fair Work Australia (as matters stand, 2 members are on both sides of the issue).  Employers also need to be aware that a Court would not be bound by a decision of Fair Work Australia in deciding whether an employer had breached the NES in making annual leave payments in advance.  Employers therefore need to treat the Full Bench’s decision with caution.

Charles Power is an accredited specialist of workplace relations at Holding Redlich Lawyers