Australia: Annual Leave And Commission Payments - What Is Your Liability?

Last Updated: 28 November 2007
Article by Pamela Flynn and Sheila Barry

A recent case has found that payments in lieu of accrued but untaken annual leave made to an award-free employee earning regular commission in New South Wales, and who was employed immediately prior to Work Choices, must include commission, and not be calculated on base pay alone (Brad Mason v Citigroup Pty Limited 5509/06).

Key Facts

  • Mr Mason was employed in November 2001. His contract of employment stated "You are entitled to annual leave and long service leave in accordance with the legislation." The relevant legislation when Mr Mason commenced employment was the Annual Holidays Act 1944 (NSW) (AH Act).
  • T he AH Act provides for calculation of annual leave payments based on "ordinary pay". Ordinary pay includes bonus and incentive payments for employees with a base salary of $144,000 or less.
  • Mr Mason received a base salary of $50,000 per annum and his average weekly commission was over $5,000 per week.
  • When Mr Mason’s employment ended in July 2006, Citigroup paid his accrued but untaken annual leave entitlement using base salary only, in accordance with the Australian Fair Pay and Conditions Standard (AFPCS) under the Workplace Relations Act 1996 (Cth) (WR Act).
  • Mr Mason claimed that he was entitled to an additional sum of almost $60,000, which was the additional value of his annual leave under the AH Act when his commission payments were taken into account.

Two arguments were put forward on behalf of Mr Mason and both were accepted by Judge Bob Toner SC of the District Court.

  1. Annual Leave Entitlements Under The AH Act Were Preserved As A Napsa

Mr Mason’s entitlements to annual leave under the AH Act continued to apply as a notional agreement preserving State awards (NAPSA). Under the WR Act, if an entitlement to annual leave under the terms of a NAPSA (preserved annual leave term) is "more generous" than the entitlement under the AFPCS, the preserved annual leave term will apply.

Mr Mason was entitled to four weeks annual leave under the AH Act. The AFPCS also provides for four weeks annual leave. The quantum of leave is therefore the same. However, Judge Toner found that when determining if the preserved annual leave term was "more generous", the assessment was not limited to the number of days of annual leave. Rather, it also included the dollar value of that leave. On that basis, he found the provisions of the AH Act (preserved as a NAPSA) were more generous than the AFPCS, as the definition of "ordinary pay" also required Mr Mason’s commission payments to be taken into account.

In our view this conclusion is incorrect. The meaning of "more generous", in respect of annual leave, is defined in regulation 5.3.2 of the Workplace Relations Regulations 2006 to mean a greater total annual quantum of leave, and not the dollar value. As the only relevant measure is the quantum of leave, the AFPCS should apply to Mr Mason and his commission payments should be excluded.

  • The AH Act Was Incorporated As A Term Of The Contract Of Employment
  • Judge Toner also found that the reference to "the legislation" incorporated the AH Act into Mr Mason’s contract of employment, since that was the applicable legislation at the start of Mr Mason’s employment. As a result, Mr Mason continued to benefit from the entitlements under the AH Act because of the wording in his contract, in circumstances where new legislation governing annual leave dramatically reduced the payment for annual leave.

    Appeal Lodged

    Fortunately, Citigroup has lodged an appeal with the Federal Court. We will let you know the outcome of the appeal as soon as the decision is available.

    Implications For Business

  • All NAPSAs will expire on 26 March 2009, unless they are replaced prior to that date by workplace agreements. Until then, and unless Citigroup’s appeal is upheld, companies who employ individuals in New South Wales whose employment commenced before 27 March 2006, must include commission and bonus payments in the calculation of annual leave payments on termination (unless the employee’s base pay exceeds $144,000).
  • The wording of any relevant contract of employment will be key. It is therefore advisable to seek specific advice prior to making termination payments which include payment for untaken annual leave.
  • Consider amending employment contracts to ensure that references to legislation include the words "as applies from time to time", so that current legislation will always apply.
  • The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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