Annual Leave Loading - New Backpay Headache

Workforce Guardian

A new approach being taken by the Fair Work Ombudsman (FWO) in relation to leave loading has the potential to leave many businesses facing significant back-pay claims. At the very least, your clients may need to set up a contingency fund in this year's accounts to cover claims from ex-employees.

The new approach being endorsed by the FWO requires annual leave loading on accrued annual leave balances to be paid out when employment ends - even if a Modern Award does not require loading to be paid on termination.  Essentially, the reasoning behind this is that employees should be not disadvantaged for not taking their accrued annual leave before their employment ends. 

This new approach has come about after the Commonwealth Government sought advice from the Australian Government Solicitor. The advice states that the National Employment Standards (NES) - which guarantee minimum work entitlements - provide that upon termination any accrued annual leave entitlements must be paid at the rate they would have been paid had they taken the annual leave whilst still employed.

So while a Modern Award may expressly stipulate that leave loading is not payable on termination, that particular provision is meaningless. The NES overrides terms in Modern Awards and agreements that are less generous. 

Essentially, what this means to your clients is that if their Modern Award provides for leave loading on accrued annual leave, then they must pay leave loading on termination or resignation. To make matters worse, the FWO has indicated that employers should pay out leave loading retrospectively to 1 January 2010. It's this retrospective nature of the ruling that has the potential to hit employers hard.  

You need to ensure that your clients consider the number of employees that have left their business whether via resignation, redundancy or otherwise over the last 15 months.  If they have not paid them leave loading on accrued holiday pay (because the Modern Award provisions indicated otherwise) then they are now exposed to back pay claims from every one of those employees who wants to recover the unpaid annual leave loading.

Of course there's nothing a business owner could have done to prepare for this and while it may be reassuring to know that the FWO is unlikely to penalise businesses for this underpayment, they will still be required to pay the leave loading.

What should you tell your clients?

1. Employers who are required to pay an annual leave loading on accrued annual leave must include the loading when making termination payments to employees - whether the Modern Award stipulates this or not. 
2. It's critical that they understand which Modern Award/s apply to their employees.
3. It's vital that their business is compliant with the10 National Employment Standards. 
4. Any ex-employees who left the business from 1 January 2010 are eligible for any unpaid leave loading so it would be wise to set up a contingency fund to cover these entitlements in this year's accounts.

As this new advice affects employees under 103 Moderns Awards (out of a possible 122), it's highly likely that your clients will need to make provisions for this update.

Expert Help

If they are at all uncertain about which Modern Awards apply to their business or employees' occupations, then clearly they will need expert help.

In the same way that a business turns to their accountant rather than the Australian Tax Office for help with business advice and tax minimisation strategies, those same businesses need to turn to an expert service for help with HR and employment relations issues - and not go alone with the Fair Work Ombudsman.

As specialists in the Fair Work Act, Workforce Guardian provides small and medium-sized businesses with assurance that their everyday employment relations' decisions are both legal and compliant. Simplifying HR in business 24x7, Workforce Guardian provides a comprehensive range of practical HR tools including dynamically generated employment agreements, online employment files, HR processes, policies and documents.

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Disclaimer

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice may be necessary in particular transactions or on matters of interest arising from this article. Workforce Guardian Pty Ltd (www.workforceguardian.com.au) is not responsible for the results of any actions taken on the basis of information in this article, nor for any error or omission in this article.