Annual leave loading on accrued annual leave balances must be paid out when employment ends
Better HR – Australia’s leading online employment relations service for employers
A new approach being taken by the Fair Work Ombudsman (FWO) when it comes to leave loading has the potential to leave many businesses facing back-pay claims.
The new approach being endorsed by the FWO requires annual leave loading on accrued annual leave balances be paid out when employment ends – even if a Modern Award does not require the loading to be paid. Essentially, the reasoning behind this is that employees should not be disadvantaged for not taking their accrued annual leave before their employment ends.
This new approach has come about after the Commonwealth Government sought advice from the Australian Government Solicitor. The advice states that the National Employment Standards (NES) – which guarantee minimum work entitlements – provide that upon termination any accrued annual leave entitlements must be paid at the rate they would have been paid had they taken the annual leave whilst still employed.
So while a Modern Award may expressly stipulate that leave loading is not payable on termination, that particular provision is meaningless. The NES overrides terms in Modern Awards and agreements that are less generous.
Essentially, what this means is that if your Modern Award provides for leave loading on accrued annual leave, then you must pay leave loading on termination or resignation. To make matters worse, the FWO has indicated that employers should pay out leave loading retrospectively to 1 January 2010. It’s this retrospective nature of the ruling that has the potential to hit employers hard and, at the end of the day, it’s simply neither fair nor reasonable for employers.
If you have not paid leave loading on accrued holiday pay to exiting employees (because the Modern Award provisions indicated otherwise) then you are now exposed to back-pay claims from every one of those employees who want to recover the unpaid annual leave loading.
103 out of a possible 122 Modern Awards affected
With only 19 of the total of 122 Modern Awards unaffected by this new advice, there’s a high probability that your business may be affected.
So, to be clear, it now seems that employers who are required to pay an annual leave loading on accrued annual leave must include the loading when making termination payments to employees – whether the Modern Award stipulates this or not.
It’s vital that you understand which Modern Awards apply to your employees and that you also ensure that your business is compliant with the NES. After all, with this degree of complexity (it took the Australian Government Solicitor to sort this one out!) – is it any wonder that so many businesses get it wrong?
So, what steps should you take right now? Well, if your Modern Award includes leave loading, you must ensure that you include leave loading when calculating termination payments. Furthermore, any ex-employees who left your business from 1 January 2010 are eligible for any unpaid leave loading so it would be wise to set up a contingency fund to cover unpaid amounts in this year’s account.
Of course there’s nothing you could have done to prepare your business for this and while it may be reassuring to know that the FWO is unlikely to penalise your business for this underpayment, you will still be required to pay the loading. Remember, as a Better HR subscriber, we can assist your business to understand which Modern Awards apply to your business – and whether this new approach affects your employees. Simply use the “Ask an Expert” email service.
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This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice may be necessary in particular transactions or on matters of interest arising from this article. Better HR Pty Ltd (https://betterhr2021.wpengine.com/) is not responsible for the results of any actions taken on the basis of information in this article, nor for any error or omission in this article.