Federal Court delivers landmark judgment on leave entitlements

The Full Federal Court has handed down its judgment in Mondelez v AMWU [2019] FCAFC 138, rejecting the position put forward by Mondelez and the Commonwealth that employees are entitled to personal leave based on an average of their ordinary hours worked, and only up to a maximum of 76 hours per year.

By majority, the Court confirmed that personal leave is required by the Fair Work Act to be accrued and taken by reference to "days" rather than a notional number of average hours, meaning that an employee working three 12 hour shifts of ordinary hours per week is entitled to be paid for 12 hours per day of personal leave taken (rather than only 7.2 hours per day as was argued by Mondelez).

The issue over leave entitlements

Employers across a range of industries provide for leave entitlements in enterprise agreements and payroll systems as a set number of hours per year, rather than days. While that approach was consistent with the former Workplace Relations Act, in the Fair Work Act leave entitlements are not expressed in terms of a number of hours. This difference between employer practices and the language of the Fair Work Act has led to a number of disputes over the past 10 years, primarily dealt with by the Fair Work Commission.

In 2017 Mondelez submitted a new enterprise agreement to the Commission for approval, to cover employees working at its Cadbury plant in Tasmania. The agreement as approved provided an entitlement to personal leave of 96 hours per year for employees working 12 hour shifts and 80 hours per year for other employees. In the course of approval, a dispute arose about whether the leave entitlements met the minimum "10 day" requirement in the Fair Work Act. 

As a result, Mondelez, supported by Ai Group, commenced proceedings in the Federal Court seeking to clarify the  leave entitlements of two employees. Both employees worked  three 12 hour shifts of ordinary hours per week, making them subject to the 96 hour personal leave provisions of the agreement.

The competing arguments – and why the Court found against Mondelez and the Commonwealth

• Mondelez argued that the employees' personal leave entitlements under the agreement were more generous than required under the Fair Work Act, on the basis that the maximum amount of paid personal leave accrued per year under the Act is 76 hours (ie. 7.6 hours per day).
• The Commonwealth Government subsequently intervened in the proceedings, making submissions consistent with those made by Mondelez.
• The union argued that the employees' entitlements were less than those required under the Fair Work Act, on the basis that all of their 12 daily ordinary hours should be counted when determining their personal leave entitlement.

The majority (Justices Bromberg and Rangiah) rejected the arguments put forward by Mondelez and the Commonwealth and substantially accepted the arguments put forward by the union, finding that the employees were entitled to paid personal leave of 10, 12 hour shifts per year as a result of their ordinary hours of work.  The key points from the majority decision include:

• A "day" of leave is not based on an employee's average daily ordinary hours worked in a week, capped at a maximum of 38 ordinary hours per week (or an average of 7.6 hours per day).
• Instead, personal leave accrues in "days" over a year of service, and a "day" is the portion of a 24 hour period that would be allotted to work.
• For every day of personal/carer's leave taken, a day is deducted from the employee's accrued leave balance.
• If only a part of a day is taken, then the number of days in the employee's leave balance is reduced proportionally.
• While a day of leave could be converted into hours at any time, how many hours of leave a "day" will convert into will depend on how many hours are worked on the day the leave is taken.

One argument put forward by Mondelez was that on the union's interpretation, an employee who works a 36 hour week (across three, 12 ordinary hour shifts) has a theoretically greater entitlement to personal leave in hours than a person who works a 38 hour week (across five, 7.6 ordinary hours shifts). The majority held that this was not an unreasonable or inequitable result, but was instead consistent with the purpose of personal leave as providing for "income protection for employees during the periods of illness, injury or unexpected emergency". The majority's interpretation therefore seeks to ensure that employees are to be compensated for all of the ordinary hours that would have been worked on the day of the absence.

While those aspects of the judgment will be of concern to many employers, the majority's reasons do not suggest that regularly rostered overtime will be counted as part of ordinary hours of work for the purpose of payment for personal leave. Instead, the judgment appears to reinforce that payment for personal leave is only in respect of ordinary hours (not overtime) that would have been worked, although that issue was not the focus of the judgment.

In his dissenting judgment, Justice O'Callaghan substantially accepted the approach suggested by Mondelez and the Minister, finding that the NES only requires a maximum of up to 76 hours of personal leave to be provided per year, and placed particular reliance on comments in the Explanatory Memorandum to the Fair Work Act which appear to support that view.

Mondelez and the Commonwealth have not yet indicated whether they will seek to appeal the judgment or take other steps in response, however the decision and the issues addressed have continued to receive significant attention from employer groups and the media. In addition, similar proceedings involving pharmaceutical manufacturer AstraZeneca are also pending in the Federal Court, which may now proceed in light of the Mondelez decision.

What this means for you

• As matters currently stand, employers should review their systems for the accrual, taking and payment of leave, as well as obligations in relevant awards, enterprise agreements and contracts in light of the decision.
• Where entitlements are currently accrued and deducted in hours, employers will need to consider whether this is consistent with the number of days required under the Fair Work Act having regard to the pattern of hours worked by the relevant employees.
• There are also risks of claims for backpay and contraventions of the Fair Work Act which employers will need to consider.
• In considering the financial impact the decision may have, employers should also consider their systems for allocation of ordinary and overtime hours and rostering. The judgment suggests that the distinction between ordinary and overtime hours will continue to be determinative of the payments received for personal leave. That distinction is something that employers can generally control through how they roster their staff - as was reinforced by the decision earlier this year in United Voice v Wilson Security Pty Ltd [2019] FCAFC 66.

Written by Matt Cameron