How is annual leave loading calculated?

How is annual leave loading calculated?

By Paul Munro on 12 December 2017 Should an annual leave loading be calculated on an employee's award rate of pay, or his/her actual over-award rate of pay?

This question was recently sent to our Ask an Expert service.

Q We employ several employees under the Health Professionals & Support Services Award 2010. All of these employees receive an over-award payment. The award prescribes a 17 ½% annual leave loading when an employee takes annual leave. The company has been calculating the loading on the employees' award rate of pay, however, an employee has questioned whether the loading should be calculated on their actual (over-award) rate of pay.

The award seems ambiguous on this point. We also have a number of employees under the Clerks – Private Sector Award 2010.

As the employees are currently receiving an over-award payment, is the annual leave loading calculated on the award rate or their over-award payment?

A The method of calculating the annual leave loading is determined by the terms of the applicable modern award.

Health Professionals Award

The Health Professional & Support Services Award 2010 (cl 31.2) provides that “in addition to their ordinary pay, an employee, other than a shift worker, will be paid an annual leave loading of 17 ½% of their ordinary rate of pay. It also provides that these provisions are in addition to annual leave provided for in the National Employment Standards. This would mean the loading is calculated on the ordinary pay for annual leave as defined by the National Employment Standards, i.e. the employee’s base rate of pay.

The Fair Work Act defines ‘base rate of pay’ to mean the rate payable to an employee for his or her ordinary hours of work, excluding allowances, bonuses, loadings, overtime and penalty rates, and any other separately identifiable amounts.

This means that the award would require the annual leave loading to be calculated on the employees’ ordinary rate of pay (which would include the over-award payment), not the relevant award rate of pay.

Clerks – Private Sector Award

Conversely, the Clerks – Private Sector Award 2010 (cl 29.3) provides that the annual leave loading is calculated on the rate of pay prescribed by the relevant wage for the classification under the award. This means the loading is calculated on the award rate of pay, not the over-award payment.

Absorption of award entitlements

In many instances, an employer pays an over-award payment to avoid the hassle of having to calculate various payments prescribed by the relevant award, e.g., annual leave loading, allowances, rostered overtime, etc. Compensating for an entitlement under an industrial instrument may not necessarily achieve the purpose the employer had originally intended. For example, annual leave loading is payable under a specific circumstance, i.e. in addition to an employee’s ordinary pay when taking annual leave.

Many employers have incorporated this entitlement into an employee’s total wage or salary, meaning it is no longer an ‘annual leave loading’ because it is now payable each week, regardless of an employee’s absence on paid annual leave. In the absence of a written contract of employment stating that the over-award payment compensates for it, an employer would be liable to pay annual leave loading when an employee takes annual leave. Employers in this situation may be exposed to a ‘double-dip’ by their employees.

Unless specific reference is made in an employee’s contract of employment, ordinary pay includes annual leave loading, the nature of the loading changes and, subsequently, could form part of the employee’s ordinary pay.

The bottom line: The method of calculating annual leave loading is determined by the terms of the relevant modern award.

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