Unknown to many, over the last few years there has been a hotly contested debate regarding how annual leave loading is treated in termination payments in respect of accrued but unused annual leave. But, before you get too excited about joining this thrilling contest, the Federal Court has recently put an end to the long standing argument. And, as the dust settles, employers have come out with the burden of paying applicable annual leave loading as part of termination payments.

The controversy over annual leave loading and termination payments starts with section 90 of the Fair Work Act 2009. Section 90(1) provides that when an employee takes annual leave, he/she must be paid at the “base rate of pay”. However, section 90(2) goes on to say that, when a payment in lieu of accrued annual leave is made on termination, it must be equivalent to the amount that the employee “would have been paid” if he/she had taken the annual leave. These two provisions, the former of which cites minimum payment obligations, while the latter appears to open the door to more generous payments, caused a lot of confusion and debate, particularly when you introduce annual leave loading to the equation. The water was further muddied by the fact that a number of modern awards and enterprise agreements, which are the source of annual leave loading entitlements, state that the loading is not payable on termination, while others remained silent on the issue.

So the question became: do employers have to pay annual leave loading on termination, particularly if the applicable modern award or enterprise agreement says they don’t? The simple answer – Yes.

The Court held that the words “would have been paid” in section 90(2) have a clear meaning. On termination, employees must receive the same payment they would have received had they taken the annual leave. That includes annual leave loading. Further, because modern awards or enterprise agreements cannot undermine or exclude the National Employment Standards (annual leave entitlements form part of the NES), a clause which excludes payment of annual leave loading on termination has no effect.

And with that, issue settled. Unless appealed.