A coal mining company is up for serious back-pay, after an appeal in the Federal Court found the correct payment for employees’ unused annual leave on termination includes all aspects of their pay, including bonuses and shift allowances.  

The case hinged on the proper interpretation of the Fair Work Act where it provides the National Employment Standard (NES) for annual leave. The legislation refers to when an employee actually goes on annual leave, and directs employers to pay holiday pay “at the employee’s base rate of pay for the employee’s ordinary hours of work in the period”. 

The company applied that same approach to annual leave on termination, using the “base rate of pay” to work out employee entitlements. However the ruling indicated that the legislation, in the next sub-section of the Act, refers to pay-outs on termination simply saying “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 interpretation the bench put on this differed, because the words “base rate of pay” did not appear in that sub-section. The Court reasoned that if the proper approach was as the employer had argued, then the words “base rate of pay” should have appeared in the legislation regarding pro-rata leave payments on termination.  

The case highlights what appears to be an anomaly. On the one hand, an employer is obliged to pay only the base rate of pay when an employee proceeds on a holiday. Conversely, when an employee is terminated, the employer is obliged to pay any additional amounts “that would have been payable” under their award, enterprise agreement or employment contract. 

This issue has been raised before in the context of annual leave loading. Generally, until the Fair Work Act commenced in 2009, no annual leave loading was payable on pro-rata leave on termination. This same subsection of the legislation has created a new benefit for employees (and cost to employers) without any argument or discussion – but merely by dint of the words chosen to express the entitlement to pro-rata leave payments on termination as part of the specific NES.  

There is a draft Bill, held up in the Senate, to fix this inconsistency. Passage of the legislation is doubtful. This ruling in the meantime, stands, and probably means many employers face substantial back-pay claims to the beginning of the legislation in 2009. 

One way to minimise the impact of this legislative ‘windfall’ is to ensure agreement or employment contract clauses make it obvious bonuses and the like apply only when actual work is being performed.   

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