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Leave loading clarification needed for employers

Submitted on Monday, 29th October 2012

A Fair Work Australia Commissioner has agreed with Victorian Chamber and the Fair Work Act review panel that the issue of whether employers should pay annual leave loading on leave paid out to an employee upon termination of their employment would benefit from "legislative clarification".

Commissioner Donna McKenna's comments were in relation to an enterprise agreement involving Inghams Enterprises, where the proposed agreement states "no annual leave loading is payable if an employee resigns for any reason, except permanent and total incapacity".

Section 90 (1) of the Fair Work Act states that leave periods must be compensated at the "employee's base rate of pay for the employee’s ordinary hours of work in the [leave] period". Section 90 (2) then states that employers are required to pay departing employees "the amount that would have been payable to the employee had the employee taken that period of leave".

There has been confusion about whether this termination pay should also include any applicable leave loading, given the lack of reference to 'base pay' in section 90 (2), contrasted with the historical intention of the loading, which was to compensate employees for the notional loss of overtime earnings. Notably, leave loading has not previously been a feature of the Fair Work Act predecessors and the Fair Work Act contains no other reference to it, except to state that modern awards may contain terms for leave loading.

The modern awards, which came into effect in 2010, explicitly address the treatment of payment (or otherwise) of leave loading payment on termination. The current interpretation of the Fair Work Ombudsman is that leave loading on termination is payable as a general rule arising from section 90 of the Fair Work Act, regardless of a modern award provision stating otherwise. This has the effect of a newly created award system potentially littered with incorrect terms and conditions.

The issue was addressed by the recent Fair Work Act review, where the panel members recommended section 90 be amended to explicitly state that leave loading is not payable on termination of employment "unless a modern award or enterprise agreement expressly provides to that effect".

Commissioner McKenna commented that the proposed Inghams agreement "probably runs foul" of section 90 and agrees with the review panel that the issue would benefit from an amendment to the legislation.

It has been our experience at Victorian Chamber that there remains considerable confusion among employers due to the ambiguous nature of the wording of section 90 coupled with the interpretation of the Fair Work Ombudsman. We submitted to the Fair Work Act review earlier this year that payment of annual leave on termination (namely, whether leave loading or other penalties are payable) should be a matter left within the ambit of the modern awards.

The Federal Government did not address the leave loading issue in its initial response for the review, and the ambiguous nature of the wording remains. Victorian Chamber supports Commissioner McKenna and the Fair Work Act review panel in urging a change in the wording of the legislation, so all employers know with certainty where they stand when it comes to annual leave loading and termination payouts.

See the Policy section of the Victorian Chamber website for a full summary of Victorian Chamber's policy and advocacy activity.

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