Leave Entitlements Must Be Paid Out On Final Day of Employment
An employer faces a $17K penalty for failing to promptly pay out accrued annual leave to a terminated employee, along with additional damages. This legal ruling establishes a significant precedent for employers to observe.
A recent decision from the Federal Court has clarified uncertainties regarding the timing of when employers must fulfill specific entitlements to employees post-termination. This includes payment in lieu of notice, accrued annual leave, and redundancy pay.
The Fair Work Act (FW Act) does not stipulate a specific deadline or timeframe, except for the general requirement outlined in section 323(1) regarding payments and salary frequency. This provision mandates that all amounts owed to an employee must be paid in full and at least monthly.
Nevertheless, the Federal Court has recently reviewed the FW Act section concerning the payment of accrued but unused annual leave and determined that it must be paid on the day of termination.
The case involved an employee who received payment for their accrued but unused annual leave three months after their termination. The Federal Court ruled that this payment, being three months overdue, breached section 90(2) of the FW Act. Consequently, the Court imposed a penalty of $17,000, representing about 25 percent of the maximum penalty allowable.
In an unexpected turn, the Court additionally granted $10,000 in general damages to the Applicant, acknowledging the significant impact the delay had on them. The Court noted the delay caused distress, attributed to the financial hardship he endured.
“All employers have an obligation to know and understand their obligations under the FW Act” – “lack of care and ignorance of the law is no excuse”
Regardless of whether an employee leaves voluntarily or is terminated, including due to redundancy, employers are obligated to compensate them for any remaining annual leave.
In this case, the employer submitted that the delay in payment stemmed from a lack of familiarity with Australian employment law and apprehensions regarding the accuracy of the leave records.
The payment was made once the employer became aware of their obligation to compensate for the accrued annual leave, as they lacked explicit evidence to suggest inaccuracies in the annual leave records.
The Court emphasised the importance of sending a clear message to the Australian community for general deterrence, indicating that all employers must be well-versed in and adhere to their obligations under the FW Act. It underscored that negligence and ignorance of the law cannot serve as excuses. “It is not sufficient that one can have a mistaken belief and then take no steps to verify the circumstances.”
If uncertain about whether an entitlement is payable, take adequate steps to investigate or seek expert advice.
Legal implications
Employers are now on notice that any accrued unused entitlements must be paid to the employee on the day employment ends.
Ensuring compliance
Prior to initiating termination procedures, it is crucial to understand your obligations within in the FW Act and relevant awards or agreements. Failure to comply with these obligations will constitute a breach of the FW Act and could result in financial penalties for your organisation.
Employers should ensure there is a valid and lawful reason when contemplating the termination of an employment contract (and where they are protected from unfair dismissal, that they have been provided with procedural fairness).
The terminated employee should be provided with written notice specifying the effective date of dismissal, along with the settlement of any due entitlements upon termination. This encompasses outstanding wages, pay in lieu of notice, accrued annual leave, long service leave, remaining compensatory time off, and any applicable redundancy pay.
