Last week Justice Robert Buchanan of the Federal Court clarified the meaning of section 90(2) of the Fair Work Act 2009 (Cth) (“FW Act”) in deciding that at termination employees must be paid their annual leave entitlements at the same rate that this entitlement would have been paid had the employees taken their annual leave during their employment regardless of whether this amount was in excess of the minimum annual leave entitlement required under section 90(1) of the FW Act.

Centennial Northern Mining Services Pty Ltd v Construction, Forestry, Mining and Energy Union (No 2) [2015] FCA 136 (27 February 2015)

In a dispute over the payment of annual leave entitlements under the Centennial Northern Mining Services Enterprise Agreement 2011 (“EBA”), Centennial Northern Mining Services (“Centennial”), a New South Wales coal mine operator and the Construction, Forestry, Mining and Energy (“CFMEU”) offered two competing interpretations of section 90(2) of the FW Act.

Section 90 of the FW Act provides as follows:

“Payment for annual leave

(1) 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.

(2) 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.”

Relevantly clauses 19.5 and 19.6 of the EBA provided for different payments for annual leave entitlements, with employees who took annual leave during their employment receiving a greater benefit than employees who had their annual leave paid out as a result of termination of employment.

Centennial argued that the entitlement in section 90(2) is an guarantee of the minimum obligation to annual leave under section 90(1) (i.e. base rate of pay for the employee’s ordinary hours of work in the period) and that this did not prevent Centennial from differentiating between the annual leave paid at termination of employment and annual leave during the course of the employment provided both were above the minimum entitlement in section 90(1) of the FW Act.

Conversely the CFMEU asserted that “the amount that would have been payable” in section 90(2) of the FW Act was not just a re-statement of the minimum obligations under section 90(1) but instead required a payment of whatever was payable if the annual leave was taken during the employment. This meant that rather than the ordinary rate of pay in section 90(1) Centennial employees who had their employment terminated should have their remaining annual leave paid at their ordinary rate of pay plus the greater of either a 20% loading OR rostered overtime, shift allowance, weekend penalty rates and bonus (which was consistent with the leave payments they would have been entitled to under clause 19.6 of the EBA had they taken their annual leave during their employment).

Justice Buchanan agreed with the CFMEU stating at [34] 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 leave if employment comes to an end while paid annual leave remains untaken.”

What does this mean for employers?

This interpretation of section 90 of the FW Act means that employers should:

• review their current EBAs, contracts and policies and consider the enforceability of clauses that provide a lesser entitlement to annual on termination of employment;
• not offer increased annual leave payments during an employee’s employment if they are not prepared to pay the same entitlements at termination; and
• consider seeking legal advice if they are concerned about previous payments of annual leave under a mistaken interpretation of section 90(2) of the FW Act.

Looking forward

The confusion associated with section 90(2) of the FW Act will hopefully be resolved once the Fair Work Amendment Bill 2014 (which is currently stalled in the Senate) is passed. The proposed bill aims to repeal section 90(2) of the FW Act to enable employers the flexibility to offer different rates of pay for annual leave during employment and at termination.