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No pay while on holiday - is that legal?

No pay while on holiday – is that legal?

Published on March 1, 2012

 First published by Human Capital

The topic of paid annual leave was recently covered by my colleague, Janine Smith, in Issue 9.05 of Human Capital Magazine. However, the recent majority decision of the Full Bench of Fair Work Australia, in Hull-Moody Finishes Pty Limited Enterprise Agreement 2011 [2011] FWAFB6709, makes this topic worthy of further comment.
Paid annual leave has been an attribute of Australia’s workplace relations system for over 60 years. It has long been recognised that leave from work is important for health and other reasons.  Employers well know, that employing someone as a regular employee (as distinct from a casual), automatically brings with it an entitlement to a minimum of four weeks paid leave.
However, as noted in issue 9.05, despite the four week leave entitlement a significant number of employees do not take it. Approximately 25% of full-time employees in Australia have at least five weeks annual leave accrued. It may be that the employees’ workload prevents them taking the leave, but often employees actively accumulate leave as a ‘buffer’. Whilst this means employees are not as well rested as they could be it also means employers are accruing costs on a year on year basis.
In our experience some employers would prefer to have some way of avoiding the problems which flow from accrual of holiday pay and in this context the Hull-Moody Finishes decision – provides an alternative.
In the decision, the majority (Vice President Watson and Senior Deputy President Hamburger) held that provisions whereby employees were paid a specific identified “annual leave” component with their regular wages and then were required to take a minimum of two weeks leave per year (without being paid), was not contrary to the provisions in the National Employment Standards (NES), relating to paid annual leave, as contained within Part 2 of the Fair Work Act 2009 (the ‘FW Act’). As a result, they held this arrangement was permissible in the proposed agreement.  Commissioner Cambridge dissented.  The main thrust of his opinion was that the proposed scheme had the effect of “cashing out” and was both contrary to the “cashing out” provisions and the overall intention of the NES.
When looking at the most relevant sections of the NES (sections 90 and 92 of the FW Act) in isolation, one would have to agree with the majority, that there is nothing in those sections that requires payment for annual leave to be made at the time when the leave is actually taken. It is also not “cashing out” because the leave still has to be taken (although unpaid).
The majority decision is based on a logical, although perhaps rather literal, reading of the relevant provisions. The consequence of the interpretation of Section 90 adopted by the majority, is that there is apparently nothing to stop an employer simply contracting with an employee to pay all that employee’s annual leave pay as an identified “annual leave part payment” component with their weekly pay. Employers adopting that same initiative by common law agreement would immediately eliminate the difficulties associated with managing a huge annual leave liability from that point on.
The decision, which will not be subject to further appeal or review, is a significant one for all. Employers (with employees’ agreement) have a significant alternative option in managing annual leave hoarding and employees will undoubtedly lose the desire to take annual leave.
This decision comes at an interesting time bearing in mind the recently announced review of the FW Act. Undoubtedly this decision will receive consideration in the review bearing in mind the long standing entitlement to paid annual leave. The attitude of ‘use it or lose it’ in relation to annual leave is something that may help with leave “hoarding” but would also hopefully assist with employee rest and recuperation. The Hull Moody Finishes decision is a sign that more exotic methods to deal with annual leave are now being pursued.
Our Workplace Solutions team frequently provide advice in relation to employment entitlements and contractual provisions and are happy to receive enquiries regarding same.

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