Understanding annual leave terms in modern awards

Analysis

Understanding annual leave terms in modern awards

The FWC's Modern Award Review has raised issues relating to annual leave. This article summarises the current situation for employers.

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Recent media coverage has reported on employer submissions to the Fair Work Commission (FWC) under the four-yearly Modern Award Review, with respect to a model clause regarding annual leave.

The reports have concentrated on the issue of annual close-down at Christmas and an employer’s right to send employees on annual leave in this circumstance. This gives the impression such an arrangement is not currently available to employers.

This is not necessarily the case. So it would seem appropriate to summarise the current situation with respect to annual leave terms in modern awards.

Employer groups that have presented written submissions to the FWC include the Australian Chamber of Commerce and Industry, Australia Industry Group, Australian Meat Industry Council, Master Builders Association, and local council associations.

Employer submissions


Generally, the submissions relating to annual leave terms in modern awards are:
  • Direct staff to take annual leave during close-down periods at Christmas;
  • Direct workers with excessive annual leave to take time off;
  • The right to agree to cash out annual leave entitlements;
  • Allowing annual leave to be granted in advance by agreement, with the employer having the ability to deduct payment for any leave granted in advance from monies due on termination; and
  • Giving the employer the right to pay annual leave as part of the normal pay cycle, rather than in advance of leave being taken.

Current award provisions


The submissions from employer groups relate to the following:
  • The right to send employees on annual leave during close-down periods at Christmas – this provision already exists in the majority of modern awards. Generally, an award will provide that an employer may require an employee to take annual leave by giving at least four weeks’ notice as part of a close-down of its operations. Some awards may require a greater period of notice. Modern awards with this provision include Clerks – Private Sector Award 2010; General Retail Industry Award 2010, and Manufacturing and Associated Industries and Occupations Award 2010;
  • Direct workers with excessive annual leave to take time off – this provision already exists in the majority of modern awards. Usually, the provision allows an employer to direct an employee to take annual leave where more than eight weeks’ leave is accrued (employer submissions are requesting the employer can direct where more than six weeks’ leave is accrued). Modern awards that contain this provision include Clerks – Private Sector Award 2010; General Retail Industry Award 2010, and Manufacturing and Associated Industries and Occupations Award;
  • The right to agree to cash out annual leave entitlements – this provision is rare in modern awards and was deliberately excluded from the ‘standard’ annual leave clause by the (then) Australian Industrial Relations Commission) in the Award Modernisation decision in 2008. Cashing out of annual leave terms are prescribed only in the Seafood Processing Award 2010. It should be noted the Fair Work Act (s93) provides that modern awards may contain terms relating to cashing out of paid annual leave;
  • Allowing annual leave to be granted in advance – a provision in many modern awards. Some, such as the Manufacturing and Associated Industries and Occupations Award 2010 provide that if an employee leaves before the entitlement has accrued, the employer can make a corresponding deduction from the employee’s termination pay. However, because of the Fair Work Act (s90(2)), any accrued annual leave due on termination cannot be included in the pool of monies from which the corresponding amount can be deducted, regardless of the terms of the applicable modern award;
  • The right to pay annual leave as part of the normal pay cycle, rather than in advance of leave being taken – the Fair Work Act is silent on when an employee’s annual leave is to be paid. A modern award may contain a term which requires an employer to pay an employee annual leave pay at the start of the period of leave. An example is the Quarrying Industry Award 2010. However, in the absence of a specific term in the applicable modern award providing otherwise, it would appear the majority of employers pay annual leave as part of the normal pay cycle, rather than in advance.

Other annual leave-related issues


Annual leave loading

Complying with the annual leave terms of a modern award may result in the employer breaching the Fair Work Act. This has happened with payment of annual leave loading on termination of employment. For example, many modern awards provide that an employee receives an additional 17 ½% annual leave loading when taking annual leave – but no provision regarding payment on termination.

The Fair Work Act (s90(2)) provides that a terminated employee with a period of untaken annual leave must be paid what they would have been paid if they had taken that period of leave, ie. their ordinary rate plus the annual leave loading.

This provision is under the National Employment Standards (NES); consequently it cannot be excluded by any term in a modern award, agreement, or other instrument that may provide for a lesser benefit.

Deduction of notice from all monies due on termination

A modern award may provide that where an employee fails to give the proper period of notice of termination, the employer can deduct the equivalent amount from all monies due on termination, including annual leave termination pay.

This implies that annual leave pay on termination is included in ‘all monies due’. However, such a term is unenforceable as the Fair Work Act (s90(2)) states that accrued annual leave is paid to the employee when the employment ends. The terms of the NES override the terms of the applicable modern award.
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