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Workplace Bulletin
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Why calculating pay rates isn’t as simple as 

you think

Monday, 11th August 2014, by Loran McDougall

In today's Workplace Bulletin:
  • Case study: Calculating payments for leave and redundancy under the Fair Work Act
Dear Reader,

As you may know, the Fair Work Act 2009 (Cth) (FW Act) requires you to calculate payments for annual leave, personal/carer’s leave and redundancy using the employee’s base rate of pay.
This is the rate of pay payable to the employee for their ordinary hours of work.
The base rate of pay excludes:
  • incentive-based payments and bonuses;
  • loadings;
  • monetary allowances;
  • overtime or penalty rates; and
  • any other separately identifiable amounts.
The above payments are included in the ‘full rate of pay’, which the FW Act requires you to use when calculating payments in lieu of notice.
It sounds relatively straightforward, but a recent case shows us that sometimes there are factors that complicate how payments should be calculated. In Maughan Thiem Auto Sales Pty Ltd v Cooper (2014), an employee challenged the method used to calculate his redundancy entitlement.
Read on for Charles Power’s summary of the case, and what you can learn from the ruling.
Until next time,
Jessica Oldfield
Loran McDougall
Workplace Bulletin
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Case study: Calculating payments for leave 

and redundancy under the Fair Work Act

by Charles PowerEditor-in-Chief, Employment Law Practical Handbook
In Maughan Thiem Auto Sales Pty Ltd v Cooper (2014), the court considered whether a motor mechanic’s base rate of pay included an 18% loading.
The 18% loading was introduced to the employee’s salary when he agreed to permanently work an afternoon shift. The loading was:
  • described in the employment contract as a ‘penalty rate’ for the afternoon shift the employee worked; and
  • provided for in the applicable modern award as a shift loading.
The employee argued the 18% referred to in his contract was not a premium or penalty rate, but part of the agreed variation to the contract to provide for a pay increase “for all purposes”.
The court rejected this argument. The contract provided for a separately identifiable 18% ‘penalty rate’ for working the afternoon shift, which reflected the terms of the award. Therefore, it was to be excluded from the employee’s base rate of pay.
The court observed that the FW Act definition of base rate of pay does not just exclude award-derived penalty rates. This is shown by the fact that bonus payments are excluded, even though they are not typically the subject of award entitlements.
What can you learn from this ruling?
This case led me to consider a few aspects surrounding the calculation of an employee’s leave and redundancy entitlements, including:
  • the pros and cons of ‘all-in’ rates, including the complexities of a motor vehicle allowance; and
  • how an employee’s annual leave entitlements can affect redundancy pay.
The pros and cons of all-in rates
The court’s position would have been different if the employee’s contract had stated that the remuneration was inclusive of any or all penalties or allowances. This is because the loading would not have been separately identified, and would therefore not have been excluded from the employee’s base rate of pay.
This is something to consider when proposing all-in rates to deal with non-wage monetary entitlements arising under modern awards, e.g. a car allowance. All-in rates are a convenient way to deal with additional monetary entitlements, but they might result in you paying more than you have to for annual leave, personal/carer’s leave and redundancy entitlements.
If you want to use an all-in rate of pay, you might want to negotiate a 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 complicated when a motor vehicle is part of the employee’s remuneration package and the employee elects to receive an allowance in lieu of a vehicle.
While this vehicle allowance is a separately identifiable monetary amount, it is also part of the employee’s agreed pay for their ordinary hours of work. You could not exclude the allowance during leave because it would, in effect, result in a reduction in the employee’s agreed wage.
Therefore, my view is that the calculation of paid leave and redundancy pay under the FW Act would require the inclusion of a vehicle allowance when it is part of an employee’s salary package for their ordinary hours of work.
How an employee’s annual leave entitlements can affect redundancy pay
When an employee’s employment ceases, the FW Act requires you to pay the employee their unused accrued annual leave equal to the amount payable to the employee if they had taken the period of leave.
If the employment terms provide that amounts in addition to wages (e.g. vehicle allowance, leave loading, commissions on completed sales, etc.) must be paid during annual leave, then the FW Act would probably require these items to be included in a redundancy payment.
Charles Power
Charles Power

Employment Law Practical Handbook

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