This employment update examines a recent decision which confirmed the inherent danger in an employer delaying payment of final entitlements (such as untaken annual leave entitlements) to a departing employee whose employment is at an end.

Employers are often tempted to withhold payment of final entitlements to ensure the safe return of company property after termination, or where there is uncertainty about what an employee is actually owed (due to poor record keeping practices).  This case demonstrates that where there is a delay in paying final entitlements, an employee will have the ability to make claim for damages, and the Court could impose a civil penalty on the employer due to the delay constituting a breach of the Fair Work Act 2009.

This decision will not impact employers who have employees covered under an enterprise agreement or modern award which already contain provisions which expressly provide obligations and timeframes regarding the payment of employee entitlements (such as untaken accrued annual leave) following the termination of employment.

Dorsch v HEAD Oceania Pty Ltd [2024] FCA 162 & Dorsch v HEAD Oceania Pty Ltd (Penalty) [2024] FCA 162

Facts

The applicant was a former employee of Head Oceania Pty Ltd.  He was dismissed from his employment due to misconduct.

At the time of termination, the employee had an accrued annual leave balance amounting to $8,022.22.

On termination of the applicant’s employment, the employer did not immediately make a payment in lieu of the applicant’s accrued untaken annual leave entitlements.  This was because the employer mistakenly believed that the outstanding annual leave entitlements were able to be offset against allegedly unapproved days of absence taken by the employee during his employment.

The employer eventually made a payment in lieu of the accrued annual leave entitlement but the payment was not made until three months after the applicant had been terminated.

As part of these proceedings, the employee made a number of claims related to the termination, including a claim that the employer had breached section 90(2) of the Fair Work Act 2009 (‘Act’), and his employment contract, by failing to pay his annual leave entitlements in full at the time of termination.

The employee sought general damages for the breach of section 90(2) and the breach of contract, and also applied for a civil penalty order under section 546(1) of the Act.

Decision

As noted above, section 90(2) was central to the only claim the employee was able to successfully establish in this case. Section 90(2) provides:

If, when the employment of an employee ends, the employee has a period of untaken paid annual leave, the employer must pay the employee the amount that would have been payable to the employee had the employee taken that period of leave.

The employer accepted that it did not pay the outstanding annual leave at the time the applicant’s employment ended.  Accordingly, Judge Raper found that the employer had breached section 90(2) and the employment contract by failing to pay the applicant’s annual leave entitlements upon termination.

The Federal Court imposed a $17,000 civil penalty on the employer for breaching section 90(2). The quantum of the penalty awarded by the Court was influenced by factors such as:

• the size and wealth of the employer and the need for specific and general deterrence; and
• the Court’s acceptance that the employer did not intentionally contravene section 90(2) (because of its belief that it was entitled to offset the employee’s unapproved days of absence).

The Federal Court also awarded the applicant $10,000 in general damages.  In doing so, the Court commented that the delayed payment caused the applicant to “suffer some distress” and that the employer should be “ordered to pay [the applicant] a modest amount of general damages to compensate him for the unlawful delay in paying his accrued annual leave entitlement”.

Key takeaways for employers

Interestingly, in some quarters, this case has been interpreted as supporting an interpretation of section 90(2) to the effect that an employer must pay a departing employee a payment in lieu of their accrued untaken annual leave entitlements on the day of termination.

This interpretation cannot apply to those employers who employ employees covered by a modern award or enterprise agreement that provides for specific timeframes within which to make payment of final entitlements on termination.

In our view, it was the significant delay (of three months) in paying that ultimately compromised the employer’s position in this case.  From a practical perspective, and noting what we say about payments in lieu of notice of termination below, employers must realise that the longer you delay making a final payment owing to an employee, the greater the risk of a claim for damages and/or penalty relevant to that delay.

Of course there are operational factors that can influence timing of final payments.  Our view is that, subject to their being a particular modern award or enterprise agreement providing otherwise, the ‘gold standard’ for paying final entitlements is to pay on the day of termination, or the next business day following termination.  We consider that any employer delaying payment by more than one week is placing themselves at serious and unnecessary risk of a claim such as this one.

Note regarding payments in lieu of notice.  We also take this opportunity to remind employers that there was a recent Federal Court decision which confirmed that where an employer does not require an employee to work out their termination notice period, and wishes the employee to finish their employment immediately, the employer is required to pay a payment in lieu of notice on the final day of employment (not in the days after the final day of employment).  The final day of employment cannot be a day earlier than the payment in lieu of notice is given.