Annual Leave Payments – Are You Underpaying Your Employees?


Annual Leave Payments – Are You Underpaying Your Employees?


Two decisions handed down by the Federal Courts in the last few months could mean employers are underpaying their staff when it comes to annual leave.  The decisions sought to clarify confusion set out in the 2009 Fair Work Act regarding annual leave payments on termination and annual leave accrual during compensation periods.



Earlier this year the Federal Court ruled that upon termination of employment, an employee is entitled to be paid any untaken annual leave at the same rate had they taken the leave while still at work.  This essentially means that annual leave loading must be included on annual leave termination payments.


Consequently employers could be subject to claims of underpayment by past employees who were not paid the full amount on termination.  This is the case regardless of whether an award or enterprise agreement specifies leave to be paid out at the lower rate.  As employees are eligible to claim underpayments for up to six years, this could open the floodgates for numerous claims of underpayment.



In a similar case before the Federal Circuit Court late last year, it was established that NSW employees should continue to accrue annual leave while receiving workers compensation payments.  Previously, employers could reasonably disallow employees from taking or accruing leave during a compensation period under the Fair Work Act.


However, the decision was made in respect of the NSW Workers Compensation Act 1987, which enables workers to continue to receive workers compensation during periods in which they are entitled to receive annual leave payments.  While this case specifically related to provisions in New South Wales legislation, it is possible that the decision could be applied to other states where there is uncertainty on the issue.



Both rulings are up for debate in the Abbott Government’s Fair Work Amendment Bill 2014, which is currently stalled in Parliament.  If the Bill is passed, employees will be prohibited from taking or accruing leave during a workers compensation period. 


The Bill also includes a recommendation made by the 2012 Fair Work Review panel to amend the Fair Work Act so that annual leave loading is only payable on termination if specified by the relevant award or enterprise agreement.


In the mean time, businesses could be exposed to claims of underpayment by both present and past employees.  While the fate of these decisions remains unknown, for the time being businesses should be aware of the consequences and review their annual leave payment calculations accordingly.


If you have any uncertainty as to how these changes will affect your business, please contact your ESV Engagement Partner on 9283 1666.


Article by Edwina Ring