An employer has been hit with a $17K fine for delayed payment of a terminated employee’s accrued annual leave, plus damages. This case sets an important precedent for employers.

A recent Federal Court ruling has shed light on confusion about when employers are required to pay certain entitlements to an employee following their termination, including payment in lieu of notice, accrued but untaken annual leave and redundancy pay. 

The Fair Work Act (FW Act) itself does not prescribe a deadline or express time frame, aside from the general provision governing payments and frequency of salary under section 323(1) of the FW Act that requires all amounts payable to an employee to be paid in full and at least monthly. 

However, the Federal Court has recently examined the section of the FW Act governing the payment of accrued but untaken annual leave and found that it must be paid out on the day the termination took place.

The case concerned an employee who received payment of their accrued but untaken annual leave three months after their termination. The Federal Court held that this payment was three months late and in contravention of section 90(2) of the FW Act. As a result, the Court handed down a penalty of $17,000, which comprised approximately 25 per cent of the maximum applicable penalty.  

In an unusual twist, the Court also awarded $10,000 general damages to the Applicant due to the material effect the delay had on them, which resulted in distress due to the financial strain he experienced. 

Ignorance of the law is “no excuse” 

Whether an employee leaves your organisation voluntarily or if they are fired or dismissed because of redundancy, you must pay their unused annual leave.

In this case, the employer submitted that the delay in payment was due to limited knowledge of Australian employment law, and concerns about the accuracy of the leave records. 

The payment was processed once the employer was made aware that they needed to meet their obligation to pay the accrued annual leave as they had no explicit proof that the annual leave records were incorrect.  

The Court highlighted that to achieve general deterrence, a clear signal needs to be sent to the Australian community that all employers must know and understand their obligations under the FW Act and that lack of care and ignorance of the law is no excuse.  

This decision serves as a reminder to not only fulfil your obligation as an employer to know and understand the law, but, if in doubt as to whether an entitlement is payable or not, take adequate steps to investigate or seek expert advice. 

Following best-practice guidelines may not be enough to ensure compliance if you’re not up to date with case law.

As summarised by the Court, “It is not sufficient that one can have a mistaken belief and then take no steps to verify the circumstances.”  

“Following best-practice guidelines may not be enough to ensure compliance if you’re not up to date with case law.” – Michael Kriewaldt, Associate, Jewell Hancock Employment Lawyers

The legal implications 

Interestingly, this decision follows another Federal Court decision concerning paying notice upon termination. On appeal, the Court held that under section 117(2)(b) of the FW Act, payment in lieu of notice is a mandatory prerequisite to lawful termination and must be paid before the dismissal comes into effect.

It has become common practice for employers to provide payments in lieu of notice to outgoing employees after the termination date of their employment due to conflicting information available online. This decision makes it clear that to be considered a lawful termination, notice payments must not occur after the date the employment has ended.

A legal interpretation of the two Federal Court decisions suggests payment of notice and any accrued unused entitlements must be received by the outgoing employee on the day employment ends – something that’s not widely known by employers.      

These two decisions are particularly significant because they’re likely to be binding authorities for any junior courts, such as the Federal Circuit and Family Court of Australia, where the majority of termination entitlements disputes are ventilated. 

Further, it seems likely that the timing of redundancy payments would follow the same reasoning.

Ensuring compliance  

The decision to terminate an employee is generally demanding and can be challenging to enact.      

Before moving to terminate, it’s imperative to understand your obligations as set out in the FW Act and any applicable award or agreement. Non-compliance with these obligations will contravene the FW Act and may subject your organisation to pecuniary penalties. 

Employers should always practice procedural fairness when determining whether to end an employment relationship. 

The employee should receive written notice of their termination, which states the date that the dismissal will take effect from and ensure payment of any owed entitlements on termination. This includes any outstanding wages owed, notice, accrued annual leave, long service leave, the balance of any time off instead of overtime, and any redundancy pay, as applicable. 

Michael Kriewaldt is an Associate at Jewell Hancock Employment Lawyers.

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