The Case

Centennial Northern Mining Services Pty Ltd v Construction, Forestry, Mining & Energy Union (No. 2) (2015)

The Centennial Northern Mining Services enterprise agreement provided for annual leave to be paid at a rate higher than the ordinary weekly rate of pay, allowing for penalty payments or a 20% leave loading.

However, the enterprise agreement also provided that when annual leave is paid out on termination, it will be paid at the employee’s base rate of pay, i.e. not including penalty rates and annual leave loading.

The union argued that this wasn’t legal and that the annual leave on termination had to be paid out at the same rate the employee would have received had they taken the leave during their employment.

Centennial applied to the Federal Court seeking a declaration that it was legal.

The Verdict

Section 90 of the Fair Work Act 2009 (Cth) provides that:

1. If … an employee takes a period of paid annual leave, the employer must pay the employee at the employee’s base rate of pay for the employee’s ordinary hours of work in the period.
2. If, when the employment of an employee ends, the employee has a period of untaken paid annual leave, 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 Federal Court held that section 90(2) means that the annual leave payable to an employee on termination of their employment must be paid at the same rate the employee would have been paid if they had taken their annual leave during the course of their employment. As such, if an employee would have received annual leave loading had they taken the leave during their employment, this must be included in the amount paid to them on termination of their employment.

Justice Buchanan found that: “ ... section 90(2) (unlike section 90(1)) is not confined to a statement of minimal obligation, but is a statement to the effect that an employee should not suffer a reduction in the value of unpaid annual leave if employment comes to an end while paid annual leave remains untaken.”

The Court found that, despite the wording of Centennial’s enterprise agreement, the employer must pay its employees annual leave on termination at the higher rate of pay.

The Lesson

The Federal Government’s Fair Work Amendment Bill 2014 proposes to allow annual leave to be paid out at the employee’s base rate of pay on termination of employment, except when a relevant award or enterprise agreement provides otherwise.

Until such legislation is enacted, this Federal Court decision is likely to significantly increase the cost of terminating an employee’s employment in the many industries where employees receive their annual leave at a rate above their base rate of pay.

In light of this decision, you should ensure that employees whose employment is terminated are paid out their annual leave at the same rate they would have been paid had they taken the leave.

Please note: Case law is reported as correct and current at time of publishing. Be aware that cases in lower courts may be appealed and decisions subsequently overturned.