On 13 August 2020, the High Court gave its decision on Mondelez Australia Pty Ltd v Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union [2020] HCA 29.

The majority of the High Court of Australia has upheld the employer's appeal of the Federal Court's decision regarding the calculation of paid personal/carer's leave entitlements under section 96 of the Fair Work Act 2009. The High Court found that the amount of paid personal/carer's leave employees accrue each year is to be based on their ordinary hours, regardless of how those hours are organised and worked over a roster cycle.

What does this mean for employers?

For those who have flexible work arrangements and rosters with non-standard working hours, the High Court's decision removes the uncertainty and complexity in calculating personal/carer's leave accruals for employees. For those who acted to change their payroll practices to comply with the Federal Court's decision, this will mean unwinding those changes and again recalculating personal/carer's leave accruals for employees.

In respect of employees paid at an hourly rate, the decision also relieves employers of the burden of the additional (and unpredictable) contingent liability that would have otherwise accrued to the accounts in respect of personal/carer's leave, had the Federal Court's interpretation been upheld. The decision also removes the potential for underpayment claims in respect of past personal/carer's leave entitlements, where those entitlements had been calculated on the basis of each employee's average ordinary hours of work per day (the 'notional day').

Employers also need to be mindful that the deduction and payment of personal/carer's leave from accrued entitlements is a different issue to the accrual of personal leave: it should not be assumed that personal/carer's leave is deducted at the same rate as it is accrued when an employee accesses the leave.

What happened before the Appeal?

Section 96(1) of the Act provides that for each year of service with his or her employer, an employee is entitled to 10 'days' of paid personal/carer's leave.

According to the majority of the Federal Court, the reference to 'day' in section 96(1) meant a 'working day', so that one day of leave would be equal to the actual number of ordinary hours the employee would have worked if they had not taken the leave.

This could lead to the accrual of personal/carer's leave entitlements being different for employees who were rostered to work the same number of ordinary hours over roster cycle, depending on how each employee's ordinary hours were arranged. As a consequence, a 'day' of personal/carer's leave would have no predictable value, and could only be ascertained by reference to the rostered hours for the particular day on which the leave was taken.

In Mondelez' case, employees are rostered to work 36 ordinary hours per week over a 4 week roster cycle, but either on 8-hour or 12-hour shifts. Employees who are rostered to work 8-hour shifts work an average of 5 shifts per week, whereas employees rostered to work 12-hour shifts work an average of 3 shifts per week.

According to the Federal Court, section 96(1) operates so that employees who work the 8-hour shift roster are entitled to accrue 72 hours of paid personal/carer's leave per year (10 days by 7.2 ordinary hours per day), whereas employees who work the same number of ordinary hours on average over the roster cycle but on the 12-hour shift roster are entitled to 120 hours per year (10 days by 12 ordinary hours per day).

The High Court's decision

The majority of the High Court has disagreed with this interpretation of the meaning of 'day' in section 96(1), and found that the entitlement to paid personal/carer's leave is to be determined in the same way as it was under its predecessor, the Workplace Relations Act 1996, being by reference to a notional number of ordinary hours worked on a day.

A 'notional' day consists of one-tenth of an employee's ordinary hours of work averaged over a two week (or fortnightly) period. To account for the fact that patterns of work do not always follow two-week cycles, the entitlement to paid personal/carer's leave can also be calculated as 1/26th of an employee's ordinary hours of work averaged over a year.

Under Mondelez' specific roster, all full time employees are entitled to accrue 76 hours of paid personal/carer's leave per year (2 weeks of 36 ordinary hours per week), regardless of how those ordinary hours are worked in a shift pattern. Employees who work more but shorter shifts will now not be disadvantaged when compared to employees who work less but longer shifts.

The High Court said the alternate 'working day' construction 'that entitles every employee, regardless of their pattern of work or distribution of hours, to be absent without loss of pay on ten working days per year …. would give rise to absurd results and inequitable outcomes.'

How did the High Court come to its different conclusion?

The three justices who wrote the majority decision started with a holistic look at the intent and purpose of the Fair Work Act, and in particular what it means to be 'fair'. The object of the Act of providing a balanced framework for cooperative and productive workplace relations includes laws that are fair to workers while still being flexible for businesses. Fairness is also important for employees to be able to balance their work and family responsibilities through flexible working arrangements, without then disadvantaging certain groups of employees or creating uncertainty:

'The notion of fairness encompasses fair treatment as between employees according to their ordinary hours of work, regardless of the pattern in which those hours are worked. Fairness and enforceability may both be served by employers and employees both being able to know, at any point in time, precisely how much paid personal/carer's leave an employee has accrued'.

Through this lens, the High Court considered how the relevant provisions of the Act should be interpreted. The Court took into account other provisions of the Act that recognise employees can have different patterns of work, and that 'ordinary hours of work' is a fundamental concept of the National Employment Standards that can, and should, be applied to different patterns of work in a way that ensures employees are treated fairly.

The High Court considered that the 'notional' day construction is more consistent with the purpose of paid personal/carer's leave, being to protect employees against loss of earnings when they are unable to work because of an illness or injury, or to provide care. The employee's ordinary hours of work is the 'mechanism for determining the loss of earnings that the employee is protected against', regardless of the pattern of working hours.

The High Court also looked at the history of the legislation leading to the drafting of section 96 of the Fair Work Act, and what was said by the Parliament at the time the Fair Work Bill 2008 was introduced. The commentary in the Explanatory Memorandum to the Bill is compelling: the Court excerpted the following passage (applying its own emphasis), which describes the general principles relating to paid personal/carer's leave:

'Although [personal leave] is expressed as an entitlement to 10 days (reflecting a 'standard' 5 day work pattern), by relying on an employee's ordinary hours of work, the Bill ensures that the amount of leave accrued over a period is not affected by differences in the actual spread of an employee's ordinary hours of work in a week.

Therefore, a full-time employee who works 38 hours a week over five days (Monday to Friday) will accrue the same amount of leave as a full-time employee who works 38 ordinary hours over four days per week. Over a year of service both employees would accrue 76 hours of paid personal/carer's leave[.]

Similarly, the requirement to pay an employee for their absence on the basis of their ordinary hours of work for the period of the absence means that the employee is entitled to be paid for his or her ordinary hours of work on the days in the week they would have worked but for being absent from work on paid personal/carer's leave (ie, excluding overtime).'

The High Court's conclusion was that section 96(1) of the Fair Work Act was intended to operate the same as its predecessor in the Workplace Relations Act; and despite the difference in the drafting, section 96(1) is a restatement of the previous law, only 'in simpler terms'.

The High Court majority was alive to the inequalities that could arise from the alternate 'working day' construction, the application of which it regarded as being 'unfair'. The Court set out a number of hypothetical examples to demonstrate the unfairness:

• a part-time employee working one day per week for 7.6 hours would be entitled to ten days of paid personal/carer's leave per year (the same as an employee working 7.6 hours five days a week) and would accrue the leave at five times the rate of a full-time employee;
• a part-time employee who works 12 ordinary hours per week as a single shift would accrue 120 hours of leave (ten absences of 12 hours) – almost double the 72 hours of leave a full-time employee working 36 ordinary hours per week over five 7.2-hour days would accrue in a year;
• a person who was employed one day per week by a number of employers would be entitled to ten days of paid personal/carer's leave from each employer. 

That potential for unfairness, along with the consequent uncertainty for employees and the disincentive for employers to provide flexible working arrangements for its employees, was held to be inconsistent with the stated objects of the Act of 'fairness, flexibility, certainty and stability'.

The outcome of the decision is that under the Fair Work Act:

• the entitlement to paid personal/carer's leave accrues progressively in the course of a year of service, for all employees, by reference to ordinary hours worked and not by reference to days or working patterns; and
• all employees working the same number of ordinary hours accrue paid personal/carer's leave at the same rate and, after working the same number of ordinary hours, are entitled to be paid for the same number of ordinary hours regardless of whether their ordinary hours over a two-week period are worked across ten, six, or five days in that period.

For more information about this important decision or how it may impact on your organisation, please contact a member of our team below.