Notice of termination and leave – can they run concurrently?

31 August 2016

There is a range of scenarios in which the interaction between notice of termination and leave can arise and, unhelpfully for employers, neither the Fair Work Act 2009 (Cth) (FW Act) nor the Long Service Leave Act 1992 (Vic) (LSL Act) specifically address these issues.

The following is designed to provide some guidance on commonly asked questions by employers.

1. If an employee resigns without giving the required notice, can you deduct what they would have received during the notice period from leave entitlements on termination?

Under most modern awards, employees are required to give the same amount of notice as required by the employer under the NES (except for the additional week based on age). If they fail to do so, employers are permitted to deduct (from accrued annual leave and wages payable on termination) what the employee would have been paid under the award during the period of notice not given.

If the employee’s contract requires a longer notice period, awards do not permit a deduction for the additional period. In that case, or if the employee is not award-covered, the deduction would not be permitted under the FW Act unless it is expressly authorised under the employment contract and is considered “reasonable” within the meaning of s326. If it is not a genuine preestimate of the loss the employer would suffer due to the employee’s failure to provide notice, it is unlikely to be reasonable (and would be void as a penalty at common law in any event).

Deductions from LSL entitlements are likely to be unlawful under s79 of the LSL Act which prohibits “contracting out” of LSL obligations.

2. If you terminate an employee’s employment while they are on (or about to go on preapproved) annual leave or LSL, can you have the notice period running concurrently with their leave?

A line of industrial tribunal/court authorities indicate that the answer is no. For example, in CEPU & Anr v Silcar Pty Ltd [2013] FWC 856, the employer gave employees notice on 19 December that their employment would end on 26 January. On 24 December, they went on a mandatory period of annual leave and returned to work on 7 January. The FWC found that their annual leave did not run concurrently with their notice period as the right to take paid annual leave and the right to notice of termination were independent.

This is consistent with previous decisions which have recognised that the purpose of notice is to enable employees to seek alternative work whereas the purpose of annual leave or LSL is to have a break from work. The FWC observed that if they could run concurrently, employees would either lose the benefit of their leave (by needing to seek alternative employment whilst on leave) or lose the benefit of the notice period (as pre-existing leave plans may mean they are not able to seek alternative work during that period).

Employers’ options are therefore to:

terminate employment with immediate effect and pay out the employee’s accrued annual leave/LSL and make payment in lieu of notice;
give notice that the employment will end on the first day after the paid leave ends and then make a payment in lieu of the full period of notice; or
make a payment in lieu of notice in respect of the period the employee is on leave (if they are working out part of their notice period).
If the notice period under an employee’s contract is longer than the NES, arguably an employer could direct the employee to take leave during the non-NES notice period if it is otherwise reasonable to do so eg during a close down or if the employee has excessive leave accrued.

3. If an employee resigns while on (or about to go on) pre-approved annual leave or LSL, can you cancel their leave or require them to extend their notice period?

Any direction to an employee not to proceed on (or a direction to return from) pre-approved leave is unlikely to be reasonable under the NES.

If an employee doesn’t agree to work out the notice period specified in the applicable award or their contract (in addition to the leave period), based on the principles referred to above, arguably they have failed to provide the required notice. However, an employer’s recourse is limited (see Q1 above).

4. If an employee resigns or you terminate his/her employment, can you then direct him/her to take annual leave or LSL (or accrued RDOs/TOIL) during the notice period? If so, can they run concurrently?

In the absence of agreement, under the NES employers may only require:

award/ agreement-free employees to take annual leave if the requirement is reasonable (unlikely unless for example the employee had accrued excessive leave); and
award/ agreement-covered employees to take annual leave in accordance with that instrument eg close down or excessive leave clauses.
Under the Vic LSL Act, in the absence of agreement with the employee, employers can only require employees to take LSL by giving the employee at least 3 months’ written notice. The employee can challenge this in the Magistrates’ Court. Different rules may apply if the LSL entitlement is based on an award or agreement.

Even if you could issue the direction, see Q2 above re leave running concurrently with the notice period which means you would be required to make a payment in lieu of notice for any period the employee was on leave.

Your ability to direct employees to take accrued RDOs and/or TOIL during the notice period will depend on the terms of any applicable enterprise agreement or employment contract.

5. If during the notice period an employee applies for leave, can you refuse?

If the reason for the refusal is because you require the employee to complete a handover or other operational reasons, it would not be unreasonable to refuse the request. If you approve the leave, this will not extend the notice period (unless mutually agreed) or oblige you to pay in lieu as the leave is at the employee’s request (you should confirm this in writing).

6. If an employee is on unpaid sick or parental leave, are they entitled to be paid during the notice period or paid in lieu?

If the termination is effective immediately, the employee is entitled to payment in lieu of notice based on what the employee would have received for the ordinary hours s/he would have worked during the notice period. If the employee had indicated they would be unfit for this whole period (eg in a medical certificate provided before the termination), strictly speaking this would be nil. However, if the employee can establish they would have been fit to work during part or all of the notice period, they would be entitled to be paid for that period. In either situation (or where the employee is only fit for light duties), from a risk-management perspective we recommend taking a case by case approach to this issue.

In LHMU v Cuddles, Lucev FM held that an employer did not have the right to terminate an employee’s employment whilst they are on unpaid parental leave. In our view this decision is wrong and could be distinguished (it was decided prior to the introduction of the NES) and/or would not be followed by a superior Court.

7. Can unpaid time off be counted as part of a notice period?

In the recent decision of Kentz (Australia) Pty Ltd v CEPU, a Full Bench of the FWC found that an employer could count unpaid rest and recreation (“R&R”) time at the end of a FIFO roster as part of the notice period (and not make any payment for this period). This is because under the NES an employer is only required to pay the employee the amount it would have been liable to pay for hours s/he would have worked had the employment continued during the notice period, and the R&R time was not time worked.

This overturned the initial decision of Commissioner Bissett that R&R was a form of authorised unpaid leave and therefore could not run concurrently with the notice period.

Please contact us if you have any questions or would like to discuss the interaction between notice of termination and leave further.