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Annual Leave Loading

Annual Leave Loading on Termination

A new approach being taken by the Fair Work Ombudsman (FWO) in relation to leave loading has the potential to leave many businesses facing back-pay claims.

The new approach being endorsed by the FWO requires annual leave loading on accrued annual leave balances be paid out when employment ends - even if a Modern Award does not require the loading to be paid. 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.

As you may have multiple Modern Awards applying to employees within your business or industry, it's vital that you understand which Modern Awards apply to your employees. As a Workforce Guardian subscriber, we can help you determine which Modern Awards may apply to your employees. If you're not a subscriber, why not book a demo today.

You also need to be careful if you have implemented an annualised salary letter, agreed to an Individual Flexibility Agreement (IFA) or are paying an 'over-Award' wage or salary that includes annual leave loading.

Pay careful attention to the following scenarios:

1.   I am paying an 'over-Award' wage or salary but I have not expressly stated that this payment includes the applicable leave loading amount

As the annual leave loading has not been expressly detailed it may need to be paid all over again upon termination or, alternatively, a Deed of Settlement will need to be signed to prevent future claims.

2.   I am paying an 'over-Award' wage or salary and I have expressly stated that this payment includes the applicable leave loading amount

The final payment will already include an amount equal to the annual leave loading payable and no further payment should be required. However, the employer must maintain accurate records that show the over-Award payment is sufficient to off-set all otherwise applicable annual leave loading amounts.

3.   I have introduced IFAs since 1 January 2010 that affect my obligations to pay annual leave loading

Where an IFA removes the obligation to pay leave loading then no additional amount should be payable upon termination in respect of accrued but unused annual leave balances, provided the alternative benefit created by the IFA has been provided and the employee is better off overall. If the alternative benefit created by the IFA cannot be provided as a direct result of the employee's resignation or dismissal, payment of applicable leave loading will need to be carefully calculated and paid to the employee as part of their final payment.

Where an IFA amends, but does not entirely remove the obligation to pay leave loading, a calculation will need to be performed on a case-by-case basis to determine where any leave loading is payable in respect of accrued but unused annual leave balances upon termination.

4.   I have elected to pay annualised salaries that expressly include annual leave loading

 As with over-Award wage payments that expressly include leave loadings, the final payment will already include an amount equal to the leave loading payable and no further payment should be required. However, the employer must maintain accurate records that show the over-Award payment is sufficient to off-set all otherwise applicable leave loading amounts.

5.   I have elected to pay annualised salaries that do not expressly include annual leave loading

As it has not been expressly detailed it will need to be paid all over again upon termination or a Deed of Settlement will need to be signed. Importantly, not all Modern Awards expressly permit the creation of annualised salaries so the risk in this instance is higher than in those cases where leave loading has been expressly included within the calculation of the annualised salary.

 

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