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13 Aug 2020

High Court gives employers some relief by fixing unreasonable view of personal leave accruals

Employers can now accrue and provide all employees personal leave based on a proportion of the employee's ordinary hours of work rather than accruing 10 days personal leave per annum regardless of ordinary hours, following the High Court's decision this morning in Mondelez v AMWU [2020] HCA 29.

The High Court's decision overturned a Full Federal Court decision which had raised significant practical problems for employers seeking to comply with their obligations under the Fair Work Act 2009 (Cth) and National Employment Standards (NES).

Why the Mondelez approach to leave accrual was a problem

The decision of the Full Federal Court in Mondelez v AMWU [2019] FCAFC 138, and a number of earlier decisions of the Fair Work Commission and the Federal Court, have been problematic for employers.

This is because the Court in Mondelez had held the introduction of the NES from 1 January 2010 changed the method of calculating how personal leave accrued from the previous system under the Workplace Relations Act 1996 (Cth) (WR Act). Under the WR Act accrual of personal leave had been based on a proportion of ordinary hours worked. This was consistent with the long standing approach of most employers, other legislation (for example the Annual Holidays Act 1944 (NSW) and the way most automated payroll systems accrue personal leave. The Full Federal Court held however that under the NES, accrual of personal leave must be based on 10 days per year.

In doing so the Full Federal Court had acknowledged that the explanatory memorandum stated there was no intended change to the substantive entitlement; nonetheless the Court determined that this change had occurred. In effect, it focused on the use of the word "day" in the National Employments Standards rather than the obvious intent of Parliament, identified in the explanatory memorandum, which was that the entitlement would not change between the WR Act and the NES.

This view generated three problems for employers.

Keeping track of employees' hours

The first problem for employers was that it took no account of the fact that most employers operate automated payroll systems which accrue personal leave on an hourly basis as a proportion or percentage of ordinary hours worked (as was the case under the WR Act). To comply with this view, employers would have to conduct a manual reconciliation of accruals for any employees who did not work a 7.6 hour standard working day (in parallel to any automated payroll system) to ensure that the correct number of days was accrued.

Unfair and unreasonable outcomes

A second problem for employers was that the decision led to unfair and unreasonable outcomes. For example, under the WR Act a part-time employee working 19 hours per week (0.5 FTE) would have accrued 38 hours personal leave per year. This would equate to two weeks' personal leave entitlement. The explanatory memorandum made it clear, using this very example, that this was intended to continue under the NES in the Act.

If however the employee worked those 19 hours across two days of the week only (for example 9.5 hours per day on each of Monday and Tuesday each week) the Federal Court's interpretation meant that that the employer would need to accrue 95 hours of personal leave for that employee in order to give them 10 days entitlement. This means that a 0.5 FTE employee who works those hours across two days of the week would accrue more personal leave each year (95 hours) than a full-time employee working 5 days per week (who would only accrue 76 personal leave per year).

Even more unfairly, if on the other hand the 0.5 FTE employee worked their hours evenly spread across 5 days per week, that part-time employee would only accrue 38 hours of personal leave per year (10 days at 3.8 hours per day). Accordingly, two 0.5 FTE employees would accrue considerably different hours of personal leave depending on their working pattern.

Accruing leave when there are no set hours

The other considerable difficulty with the Federal Court's interpretation was that it gave no sensible way for an employer to accrue, in hours, personal leave for employees whose working days do not have set hours. Employees who work variable shift lengths would have to accrue 10 days of personal leave which could not be calculated and accrued in hours until the actual day on which the leave was taken.

What did the High Court say?

Overturning a clearly unworkable and problematic interpretation of the NES by the Full Federal Court, the High Court held that the substantive entitlement to accrual of personal leave under the Act was no different to that under the WR Act, and accordingly accrual of personal leave in hours based on a proportion of the ordinary hours worked was permissible. The Court rejected the proposition that the introduction of the NES in the Act was intended to and did operate as an increased entitlement to 10 full days of personal leave irrespective of, and unrelated to, the hours worked by the employee.  The majority of the Court noted that this interpretation would give rise to "absurd results and inequitable outcomes".

The decision of the High Court is welcomed in that it provides a reasonable outcome and will not require the employers to operate additional manual payroll systems accruing personal leave in days. The decision fixes what were unreasonable and unworkable outcomes created by the Federal Court's interpretation – which had, despite the clear intent of Parliament, significantly increased the amount of hours of personal leave that accrued to many employees.

What employers should do now to ensure employee leave accruals are legal

Employers who had been operating manual personal leave accruals to ensure the 10 day accrual consistent with the Federal Court's interpretation can now revert to the longstanding accrual in hours method in most automated payroll systems.

Where significant additional personal leave accruals have been made for employees, employers may also consider winding back those accruals to the correct level. If those accruals have been used by employees, employers may be entitled to seek repayment of overpayments made, or come to an arrangement with those employees to offset amounts overpaid.  Both recovery of overpayments and offsetting arrangements can have complex issues of enforceability, so employers should act carefully and take advice where appropriate.

We can advise and assist employers with these issues and with ensuring that rates of accrual are being properly applied.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.