Loaded hourly rates including annual leave payments allowed in enterprise agreements - But employers should exercise caution
A Fair Work Australia (FWA) Full Bench majority has recently held that a clause in an enterprise agreement that paid employees a loaded rate inclusive of payments for annual leave is valid, and does not constitute cashing out of annual leave under the National Employment Standards (NES): Re Application by Mr Irving Warren; Hull-Moody Finishes Pty Ltd; Mr Romano Sidotti  FWAFB 6709. However, as some uncertainty remains around this issue, employers should be careful to ensure compliance with the NES and other statutory requirements when negotiating enterprise agreement provisions.
Hull Moody Finishes Pty Ltd lodged an application with FWA for approval of an enterprise agreement under the Fair Work Act 2009 (Cth) (FW Act). The main issue considered by the tribunal was whether the annual leave clause in the agreement excluded the NES, and/or did not provide for cashing out of annual leave in accordance with the NES. The agreement provided that:
- Employees were entitled to annual leave “in accordance with the NES”.
- Employees would be paid a loaded hourly rate which included payment in advance for entitlements to annual leave, long service and personal leave, and to compensate for award penalty rates.
- Employees would be required to take at least two weeks’ annual leave, usually during the Christmas shut down period (the NES provide a minimum entitlement of four weeks’ paid annual leave: FW Act, s 87).
Decision at First Instance
Senior Deputy President O’Callaghan ( FWA 5618) considered whether the enterprise agreement should be approved, applying the requirements of s 186 of the FW Act. These include s 186(2)(c), which requires that the terms of an agreement do not contravene s 55. Section 55 provides that an agreement must not exclude the NES or any provision of the NES.
In deciding to refuse approval of the agreement, O’Callaghan SDP found that the agreement excluded a provision of the NES (in breach of s 55) on the basis that:
- Section 90 requires that employees be paid for annual leave periods at the base rate of pay for the employee’s ordinary hours during that time.
- The agreement excluded employees from receiving payment for their ordinary hours of work when on annual leave.
- The NES do not allow employees to be paid any amount of money in lieu of the entitlements to paid annual leave, unless the leave is cashed out in accordance with the requirements of s 93(2) (eg there must be an agreement to cash out, in writing, between the employer and employee; and the employee must be left with at least four weeks’ accrued annual leave).
- The annual leave clause in the agreement was not ancillary or incidental to the NES, and even if it was, it was detrimental to employees when compared with the NES (in breach of s 55(4)).
Hull Moody Finishes Pty Ltd and an employee representative appealed against O’Callaghan SDP’s decision to refuse to approve the enterprise agreement.
A majority of the Full Bench of FWA (Vice President Watson and Senior Deputy President Hamberger) upheld the appeal. The majority view was that the annual leave clause in the enterprise agreement did not exclude the NES, for the following reasons:
- Under the agreement, employees did not lose their entitlement to take annual leave and were not deprived of payment in respect of leave taken, or that would be untaken on termination of employment.
- The main difference between the normal operation of the NES and the arrangement under the agreement related to the timing of payments for annual leave. However, there is no obligation in the NES to make payment for annual leave at a particular time, such as the time when the leave is taken.
- The incorporation of payment for annual leave into the hourly wage rate did not amount to a cashing out of annual leave. The concept of “cashing out” involves the making of a payment instead of recognising an entitlement to paid leave. However, the loaded hourly rate under the agreement did not extinguish an employee’s entitlement to leave. Therefore, it was not necessary to consider whether the requirements for cashing out of annual leave under s 93(2) had been met.
- As the amount of annual leave to be taken under the agreement was equivalent to the NES, and the agreement provided for payment for annual leave at the level required by s 90, the arrangement was not inconsistent with the NES.
The third member of the Full Bench, Commissioner Cambridge, disagreed with the majority. In Cambridge C’s view, the relevant provisions should be considered in their context, providing minimum safety net entitlements for employees, including the protected benefit of four weeks’ annual leave. The fundamental notion of paid annual leave is defeated if no payment is provided at the commencement, or during the actual period, of leave. The agreement clause effectively made the leave taken a period of unpaid leave, and created a financial disincentive for employees to take leave. The arrangement amounted to a cashing out of annual leave, but without the safeguards provided by s 93(2). Therefore, the agreement should not have been approved.
As a result of the Full Bench majority’s decision, the agreement was referred back to O’Callaghan SDP for consideration of the remaining statutory tests for approval.
Implications for Employers
- The Full Bench majority’s decision indicates that enterprise agreements may include clauses that incorporate a payment for annual leave (or other leave entitlements under the NES) into a loaded hourly rate of pay. In these circumstances, annual leave is effectively paid in advance.
- However, a number of factors suggest that employers should exercise caution before entering into such arrangements. First, there was no union involved in negotiating the Hull-Moody enterprise agreement, and no counter-arguments to the employer’s position were presented in the appeal.
- Secondly, the fact that the Full Bench could not reach agreement in this matter suggests that the issue is by no means beyond doubt, and a differently constituted Full Bench or court may reach a different view.
- In the meantime, employers should take care (when negotiating agreements) to ensure that any arrangements that could be construed as cashing out annual leave entitlements follow the requirements of FW Act. s 93(2)).
- Employers should also ensure that agreements will meet the other statutory tests for approval, most importantly, the “better off overall test” (ss 186(2)(d), 193).
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.