The way we accrued employees’ personal leave entitlements just got turned on its head by a decision of the Full Federal Court of Australia[1].

Most payroll systems accrue leave entitlements based on a percentage of ordinary hours worked (1/26 x ordinary hours worked per pay period for personal leave and 1/13 for annual leave).  This gave employees who worked a standard 38 hour week 2 weeks of personal leave and 4 weeks of annual leave per year.

Under the old accrual system (capped at 38 hours per week), those employees who worked part-time or shift work might accrue less than 76 hours of personal leave and 152 hours of annual leave each year.  A bank of hours was accrued, to be spent as needed on absences for rostered ordinary hours throughout the year.

Under the old system, on some days part-timers or shift workers might be paid more than 7.6 hours of personal leave (if rostered for, say, a 10 hour shift) or less (if rostered for a four hour shift).  But taking into account their rostered unpaid time away from work, such employees would receive the same amount of ‘permission to be absent from work’ as standard 38 hour per week employees.

It’s just that not all that time away from work would be paid; the payment for those absences would vary depending on whether, and how long, the employee was rostered to work on any given day.

Under the old system, some employees would use up their year’s worth of paid personal leave entitlement in less than 10 days.

Two of three judges in the Federal Court case of Mondelez decided last week that we’ve been getting that calculation wrong.

When the Fair Work Act became law in 2009, the Explanatory Memorandum explained that the introduction of the National Employment Standards was not designed to change the volume of personal leave accruals; just to simplify the complex accrual rules that were contained in the old Workplace Relations Act.

But Bromberg and Rangiah JJ decided that the new words in the Fair Work Act have changed the way that personal leave accrues.

The judges acknowledged that this means we cannot determine the precise monetary value of accrued personal leave until the relevant employee takes the leave (since they might be rostered to work an 8 hour or 12 hour shift on the day they need to take sick/carer’s leave).

This new interpretation will also make the paying out of personal leave accruals more expensive and less attractive to employers of shift workers (because the entitlement needs to be paid out at a rate of at least the full amount that would have been payable had the leave been taken).

But the judges explained that personal leave is first and foremost a right to be absent from work.  The amount of payment for that leave is a secondary matter.  The primary purpose of leave is a form of income protection for employees suffering illness or injury.

Section 96 of the Fair Work Act describes the entitlement as ’10 days of paid personal/carer’s leave’.  So all Australian employees get a minimum of 10 days of paid personal leave whether they work part-time, 5 standard 7.6 hour days per week or shift work.  For 10 days each year, Australian employees get to claim the value of their ordinary hours rostered on the particular day they are unable to work due to illness/injury or carer’s responsibilities.

An employer could end up paying twice as much in carer’s leave entitlements for part-time staff.  Shift workers who work a combination of 4 hour and 12 hour shifts will be entitled to varying payments for personal leave, depending on the hours they are rostered to work on the day they need to take sick/carer’s leave.

One might expect more applications for planned sick/carer’s leave to be made post-publication of the roster from now on.

The judge in the minority, O’Callaghan J, noted that section 96(2) of the Fair Work Act says the entitlement accrues progressively according to the employee’s ‘ordinary hours of work’.  He thought this phrase must have more work to do in calculating personal leave entitlements than the judges in the majority gave it credit for.

He decided that the way we’ve all been calculating personal leave entitlements is still correct under the Fair Work Act.  He thought this would achieve the purpose stated in the Explanatory Memorandum that the amount of leave accrued over a given period would not be affected by differences in the actual spread of an employee’s hours.  But since he was in the minority, that’s not the law.

So what now?

There could be an appeal to the High Court, and there could be legislative change.

In the meantime, failure to pay ‘a day’s pay’ to an employee who takes personal leave exposes a corporate employer to the risk of a $63,000 fine, and individuals involved in that breach to a $12,600 penalty.  So pay ‘a day’s pay’ 10 times per year (provided the employee accesses their personal leave of course).

Record accrual of personal leave entitlements at the rate of 1 day per 5.2 weeks.

When an employee takes a day of paid personal leave, pay them the value of the ordinary hours they were rostered to work.  Reduce their balance by one day (it’s a bank of working days; not dollars or hours).  If the employee takes only a portion of a day, reduce their bank of personal leave days by that portion as per the following example:

Henry was rostered to work a six hour shift but he left two hours early to collect a sick child from school.  His personal leave accrual was reduced by 1/3 of a day.

What about annual leave accruals?

The Mondelez case was about personal leave, but the same question arises as to how ‘four/five weeks of paid annual leave per year’ is to accrue.  Like personal leave, the entitlement accrues progressively according to the employee’s ordinary hours of work.  Section 90 of the Fair Work Act says that an employer must pay an employee at the employee’s base rate of pay for the employee’s ordinary hours of work during the period of paid annual leave[2].  So potentially we have the same problem with accrual of annual leave.

[1] Mondelez v AMWU [2019] FCAFC 138

[2] Note that awards and enterprise agreements can contain more generous terms.