In a judgment handed down in August 2014 (Maughan Thiem Auto Sales Pty Ltd v Cooper  FCAFC 94 (1 August 2014)), a Federal Court Full Court has overturned an earlier decision of the South Australian Industrial Court in relation to the interpretation of the long service leave provisions of the National Employment Standards (“NES”) in the Fair Work Act 2009 (Cth) (the Act). The decision clarifies the circumstances in which award provisions of long service leave apply. In particular, it provides guidance on how the terms of an award that pre-dates the Fair Work Act will continue to apply and how this can exclude State and Territory laws that deal with long service leave.
The employee, a motor mechanic, was employed by Maughan Thiem Auto Sales (“the employer”) for eight years before his employment came to an end. For the final three years of his employment, the employee worked an afternoon shift rather than regular business hours. When this new arrangement commenced, the parties entered into a new contract that recorded his annual remuneration and noted that it included an 18 per cent premium for the afternoon shift. The employee’s employment came to an end when the employer decided to no longer have the afternoon shift. The employer told the shift workers that alternative positions would be offered within the day shift but that their salary would be reduced by the removal of the shift allowance. The employee refused to work on this basis and claimed that his position had been made redundant. He claimed redundancy pay pursuant to the Fair Work Act. He also claimed a long service leave payment pursuant to the Long Service Leave Act 1987 (SA) (the State Act).
An industrial magistrate agreed with the employee that his position had been made redundant and that he was entitled to redundancy pay in accordance with the NES. The industrial magistrate also held that the employee was entitled to a pro-rata long service leave payment under the State Act. According to the relevant provisions of the NES, the amount of redundancy pay is worked out according to the employee’s “base rate of pay for his or her ordinary hours of work”. The industrial magistrate held that the employee’s base rate of pay for his ordinary hours of work was his weekly salary, which included the 18 per cent shift premium.
The employer appealed the decision to the Federal Court. The employer challenged the industrial magistrate’s conclusions about the method to be used for calculating the employee’s redundancy entitlement. The employer also contested the industrial magistrate’s finding that the employee was entitled to long service leave. The employer did not contest the industrial magistrate’s finding that the employee’s position had been made redundant.
On the issue of how the redundancy pay was calculated, the Court found that the industrial magistrate was in error in finding that the employee’s base rate of pay was his weekly salary. The Court referred to the statutory definition of “base rate of pay” and confirmed that it did not include penalty rates. The employee’s contract provided for a separately identifiable penalty rate for working the afternoon shift. It was immaterial that the salary was expressed as being inclusive of the 18 per cent premium. The employee’s base rate of pay for the purposes of calculating his redundancy was therefore his weekly salary less the 18 per cent shift premium. The Court noted that if the contract had been silent as to the shift allowance or if it had stated that the remuneration was inclusive of any or all penalties or allowances, the position would be different.
The Court further held that the State Act did not apply to the employee and that he therefore had no entitlement to long service leave. The Court found that the State Act did not apply because there were applicable award-derived long service leave terms that did apply to the employee. The decision turned on the construction of s 113 of the Act, which relevantly provides that if there are applicable award-derived long service leave terms in relation to an employee, the employee is entitled to long service leave in accordance with those terms. The test for whether such award-derived terms apply in relation to an employee is two-fold. Firstly, there must be terms of an award that would have applied to the employee prior to the NES provisions of the Act taking effect (that is, as at 31 December 2009). Secondly, the terms of the award must have entitled the employee to long service leave. If there are no applicable award-derived long service leave terms, State or Territory laws that deal with long service leave will apply.
The industrial magistrate had accepted that the terms of the Vehicle Industry – Repair Services and Retail (Long Service Leave) Award 1977 (the LSL Award) would have applied to the employee prior to the Fair Work Act taking effect. The terms of the LSL Award did not entitle an employee to take long service leave until he or she had completed at least 10 years’ service. The employee only had eight years’ of continuous service with the employer. The industrial magistrate found that because the employee did not have had an actual entitlement to long service leave or pro-rata long service leave under the LSL Award, the second element of the test in s 113 was not satisfied. As a result, the industrial magistrate concluded that there were no applicable award-derived long service leave terms and the State Act therefore applied. This was significant for the employee, because the terms of the State Act provided for a pro-rata long service leave payment after seven years. Consequently, the industrial magistrate’s decision meant that he was entitled to a payment for long service leave because he had eight years’ of continuous service.
The Court rejected the industrial magistrate’s construction of s 113 of the Act. It was not necessary that the employee have an entitlement that had actually accrued under the LSL Award in order for there to be applicable award-derived long service leave terms. All that was required, by s 113 of the Act, was that an award applied to the employee at the relevant time and that the award included terms that provided for an entitlement to long service leave. The Court considered that this interpretation of the Act was in keeping with the context and purpose of this provision, which was to preserve the effect of long service leave terms in pre-modernised awards, such as the LSL Award. The impact of this decision was that the employee was not entitled to receive any payment for long service leave because he had not accrued the 10 years’ service required by the LSL Award to be eligible for it.
The Court upheld the appeal with the result that the employer was ordered to pay a reduced redundancy payment and a reduced pre-judgment interest payment to the employee. The industrial magistrate’s orders as to long service leave were set aside.
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Maughan Thiem Auto Sales Pty Ltd v Cooper  FCAFC 94 (1 August 2014)
Applying long service leave provisions – Article from
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