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Penalties, overtime to be included in annual leave payouts

A LANDMARK decision handed down by the Federal Court of Australia will now see dismissed employees entitled to have allowances, penalty rates, overtime and loading calculated on top of their base rate of pay as part of their annual leave payout.

In an application to seek clarity for section 90 of the Fair Work Act 2009, mining company Centennial Coal argued that unused annual leave paid out at the end of an employment contract should be calculated at the base rate, concurrent with s 90(1) of the Act:

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.

However, the Construction, Forestry, Mining and Energy Union (CFMEU) contested the position. Specifically, the union sought that annual leave payouts should be calculated including all entitlements, as indicated under section 90(2) of the Act:

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.

The union raised contest between the Act and section 19 of its workplace agreement, which stated that while annual leave payments included rostered overtime, shift allowances and weekend penalties, annual leave payouts following termination were calculated at the base rate.

The union argued that the section of the company’s workplace agreement which dealt with annual leave payouts contravened section 90(2) of the Fair Work Act and therefore had no effect, as it stipulated annual leave payouts to be less than the national standard.

In determining the nature of the relationship between the Fair Work Act and the workplace agreement, Justice Buchanan considered the construction of annual leave payouts as they appeared in the Act.

“Subclause 90(2) provides that, on termination of employment, an employee is entitled to receive a payment in respect of any untaken paid annual leave,” he noted.

“The payment will be equivalent to the amount that the employee would have been paid if the employee had taken the annual leave.

“In my view, this lends support to the argument that s 90(2) (unlike s 90(1)) is not confined to a statement of a minimum obligation, but is a statement to the effect 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 untaken.”

In the same ruling, Justice Buchanan also assessed a provision of the workplace agreement stipulating that workers over the age of 60 were not entitled to retrenchment pay.

The provision followed a long-standing requirement that coal mine workers were required to retire at the age of 60, but the law had been repealed as of 2006.

Summarily, Justice Buchanan dismissed the application, ruling in favour of the trade union and determining the age limitation on retrenchment payouts constituted age discrimination.

Read the full decision here.

Implications for Employers

This case attracted significant interest from the business community, including an application by the Australian Chamber of Commerce and Industry (ACCI) to intervene in the proceedings, which was decidedly dismissed.

The Fair Work Commission also indicated intention to consider the outcome of the case in its own deliberations on a matter considering the proper construction of section 90 of the Fair Work Act, between ACCI and the Australian Council of Trade Unions (ACTU).

For employers, this signifies an important clarification around annual leave payouts, namely that penalty rates and other entitlements should be calculated as part of a final payout following termination of employment.

AREEA members are encouraged to contact a local AREEA office to speak to one of our workplace relations consultations about any specific impacts of this decision on your workplace entitlement policies.

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