The Fair Work 2009 (Cth) (FW Act) requires employers to calculate payments for annual leave, personal carer’s leave and redundancy using the employee’s ‘base rate of pay’.
The base rate of pay is the rate of pay payable to the employee for his or her ordinary hours of work. It excludes incentive-based payments and bonuses, loadings, monetary allowances, overtime or penalty rates, and any other separately identifiable amounts.
The FW Act requires payments in lieu of notice to be calculated using the ‘full rate of pay’, which includes all those separately identifiable amounts excluded from the base rate of pay.
In Maughan Thiem Auto Sales Pty Ltd v Cooper  FCAFC 94, the Court considered whether a motor mechanic’s base rate of pay included an 18% loading. The employee’s employment contract described the loading as a “penalty rate” for the afternoon shift he worked.
The applicable modern award provided for an 18% shift loading. The employee argued the 18% referred to in his contract was not a premium or penalty. Rather, it was part of the agreed variation to the contract to provide for a pay increase “for all purposes”.
The Court rejected this argument. The Court found the contract provided for a separately identifiable “penalty rate” for working the afternoon shift reflecting the terms of the award, and therefore it was to be excluded from the employee’s base rate of pay.
The Court observed the FW Act definition of base rate of pay does not just exclude award-derived penalty rates. This is shown by the fact bonus payments are excluded, even though they are not typically the subject of award entitlements.
Implications for employers
• The position in Mr Cooper’s case would have been different if his employee’s contract had been silent as to a shift allowance or had simply stated the remuneration was inclusive of any or all penalties or allowances. Employers should consider this when proposing ‘all-in’ rates to deal with non-wage monetary entitlements arising under modern awards. All-in rates are a convenient way to deal with additional monetary entitlements, but they might in fact result in an obligation to make payments for annual leave, personal carer’s leave and redundancy at a level which exceeds the FW Act safety net. If an employer wishes to use an all-in rate of pay it might want to negotiate provision in the employment contract to use the base rate of pay when calculating annual leave, personal carer’s leave and redundancy pay.
• The situation is more complex where a motor vehicle is part of the employee’s remuneration package and the employee elects to receive an allowance in lieu of the provision of a vehicle. While this vehicle allowance is a separately identifiable monetary allowance, it is also part of the agreed pay to the employee for ordinary hours of work. An employer could not avoid paying the allowance during leave taken by the employee because it is part of the employee’s agreed salary. Therefore, it is likely the calculation of paid leave and redundancy pay under the FW Act would require the inclusion of vehicle allowance when it is part of an employee’s salary package for ordinary hours of work.
• When the employment of an employee ceases, the FW Act requires payment of unused accrued annual leave equal to the amount payable to the employee if she/he had taken the period of leave. If the terms of an employee’s employment provide for payment during annual leave of amounts in addition to wages (e.g. vehicle allowance, leave loading, commissions on completed sales), then it is likely the FW Act requires these items to be included in the measure of pay to be used by the employer to calculate annual leave payments on termination of employment.
Author: Charles Power
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