Leave entitlements on termination

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Leave entitlements on termination

In a decision which has caused no small amount of concern among employers, a Victorian County Court Judge has held that the super contribution, car and health insurance components of two employees’ salary packages constituted their ‘ordinary pay’ for the purposes of calculating annual leave and long service leave entitlements on termination.

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In a decision which has caused no small amount of concern among employers, a Victorian County Court Judge has held that the super contribution, car and health insurance components of two employees’ salary packages constituted their ‘ordinary pay’ for the purposes of calculating annual leave and long service leave entitlements on termination.

The two employees had been employed for 20 years and 16 years respectively when they were both terminated following their positions being made redundant. Both employees were in managerial positions and their incomes were subject to the following ‘salary packaging’:

  EMPLOYEE 1 EMPLOYEE 2
Base or cash salary $85,382 $68,814
Super contribution $11,953 $7,570
Fully maintained car $12,400 $14,986
Health insurance cover $1,594 $3,657
Annual leave loading $1,149 $926
Total package $112,478 $95,953

The issue before the Court was what was the two employees’ ‘ordinary pay’ for the purposes of the Industrial Relations (Annual Holidays) Order 1992 and the Employee Relations Act 1992 (Vic) (which granted the entitlement to long service leave).

These two pieces of legislation correspond closely for present purposes with provisions in the NSW Annual Holidays Act 1944and Long Service Leave Act 1955.

The employees’ argued that a broad view of ‘ordinary pay’ should be taken where the employee has the option of converting non-base salary or non pecuniary items into cash payments, as was the case here excepting the compulsory super payments.

The employees’ accordingly sought to distinguish the superannuation, car and health insurance cover entitlements (which were capable of being converted into cash), from items such as overtime, bonuses or special allowances which have been held in previous cases not to constitute ‘ordinary pay’. The employer argued that the word ‘pay’ is narrower that the word ‘package’ thereby excluding the claimed items.

His Honour, Judge Shelton, drew support from a decision of Parsons IM of the Industrial Court of South Australia in Jongewaard v Dall & Ors (20 February 1992) in upholding the arguments of the employees (Lyon & Anor v IOOF Victorian Friendly Society, 21/11/96). It is understood that the employer has appealed this decision and that the appeal will be heard some time in July.

Consequence for NSW employers

There is no authority in New South Wales for the proposition that non-salary components of an overall package should be included with the expression ‘ordinary rate of pay’, and hence within an employee’s remuneration for the purposes of the Annual Holidays Actand the Long Service Leave Act. Clearly, however, any tribunal deciding on this question in the future will have to pay some heed to this decision.

It may be possible for employers to prevent this decision applying to their operations by making contracts which state the matters which are intended by the parties to be understood by the term ‘ordinary pay’.

Alternatively, in light of the significance of the fact that the relevant package components were convertible to cash, employers may look to structure their employees salary packages so that package items are not convertible to cash.

 

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