Clear as day: High Court reverses Federal Court decision in Mondelez

The High Court of Australia has provided welcome clarity on the meaning of ‘10 days’ personal leave and the correct method for calculating that entitlement. This aligns with the widely accepted method of accruing and deducting the 10 days according to ordinary hours of work, and standardises the calculation of personal leave for an employee as 1/26th of the employee’s ordinary hours each year, irrespective of shift patterns or part-time arrangements.

The decision

On 13 August 2020 the High Court handed down its decision in Mondelez Australia Pty Ltd v Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union Known as the Australian Manufacturing Workers Union (AMWU) [2020] HCA 29. 

By a 4:1 majority it reversed the earlier decision of the Full Court of the Federal Court and, in doing so, provided much-needed clarification as to what is meant by ‘a day’ in section 96 of the Fair Work Act 2009 (Cth) (FW Act) for the purpose of calculating employee entitlements to paid personal/carer’s leave (personal leave).  

The Court held that one ’day’ refers to a notional day consisting of one-tenth of the equivalent of an employee's ordinary hours of work in a two-week period. An employee’s entitlement to ’10 days of paid personal leave’, regardless of their roster arrangement, is therefore to be calculated and paid at the rate of 1/26 of that employee’s ordinary hours of work in a year. 

A necessary consequence of this interpretation is that some employees who work their ordinary hours on a compressed roster (e.g. a nine day fortnight) may exhaust their entitlement to ‘10 days’ of personal leave in a year before they can take ten separate calendar days of leave without loss of pay, and that part time employees will receive personal leave on a pro-rata basis.  

In arriving at this conclusion, the High Court overturned a majority decision of the Full Court of the Federal Court just under a year ago which determined that an employee’s entitlement to 10 days of personal leave in the FW Act is an entitlement to be paid for 10 separate 24 hour periods, where the employee is not able to attend for scheduled work because they are ill, injured or face an unexpected emergency.  

Mondelez provided all employees at its Claremont Cadbury chocolate plant with a fixed pool of hours of personal leave each calendar year but then deducted personal/carer’s leave based on the hours actually ‘worked’ in respect of each period of absence.  

For some employees, who were rostered on longer shifts, this system meant that they could potentially exhaust their allocation of paid personal leave before they had the benefit of 10 separate calendar days of leave (and have to access any additional leave as unpaid leave). 

The High Court decision requires employers to ensure all full-time employees accrue and deduct personal leave at the rate of 1/26 of ordinary hours worked, regardless of how long a shift on a particular day might be when personal leave is taken. 

Mondelez’s arrangements

In accordance with its Enterprise Agreement, Mondelez employees were: 

• employed to work 36 ordinary hours per week, averaged over a four-week cycle. They worked these ordinary hours in 12-hour shifts on an average of three shifts per week (with the effect that each shift comprised 12 ordinary hours).
  
  
• credited with 96 hours of paid personal leave per year of service.  

When employees took paid personal leave for single 12-hour shifts, Mondelez would deduct 12 hours from their accrued personal/carer’s leave balance. Over the course of a year, the leave accrued by the employees was sufficient to cover absences from work for only eight 12-hour shifts. 

The High Court confirmed that this approach is correct. 

The legislation

Section 96 of the FW Act is part of the National Employment Standards (NES) set out in Part 2-2 of the FW Act. Relevantly, it provides that:

(1) For each year of service with his or her employer, an employee is entitled to 10 days of paid personal/carer’s leave.

(2) An employee’s entitlement to paid personal/carer’s leave accrues progressively during a year of service according to the employee’s ordinary hours of work, and accumulates from year to year.

What did the parties argue? 

Mondelez, supported by the Commonwealth as intervener, argued that the word ‘day’ in section 96(1) does not refer to a calendar day or working day but rather to its ‘industrial meaning’ of a ‘notional day’, calculated by reference to the individual employee’s average weekly ordinary hours divided by five. 

On this basis, a hypothetical employee who works 36 ordinary hours at an average of 7.2 hours per day over a 5-day working week has a ‘notional day’ of 7.2 hours. This means that the employee is entitled to 10 such days (or 72 hours) of paid personal leave for each year of service. If the employee took a day of personal leave, the employee would be paid 7.2 hours’ wages, and 7.2 hours would be deducted from the employee’s accrued leave balance. 

According to Mondelez this meant that the employees’ entitlement to 96 hours of leave per year under their enterprise agreement was in excess of their minimum entitlement under the NES. This was accepted by the High Court. 

The AMWU, on the other hand, argued for the Full Court’s interpretation of a ‘day’ was a ‘’working day’. On this basis, it said, section 96(1) allows employees to be absent from work without loss of pay on “the portion of 10, 24-hour periods that would otherwise be allocated to work”. On this construction, the employees were entitled to 120 hours (10 x 12 hour shifts) personal leave each year, rather than the 96 hours provided by the enterprise agreement.

What did the Court decide?

The plurality comprised of Chief Justice Kiefel and Justices Nettle and Gordon accepted Mondelez’s ‘construction’, finding that the concept of an employee’s ‘ordinary hours of work’ was the touchstone for conferring leave under the personal leave scheme, including the meaning of a ‘day’ under section 96(1) of the FW Act.  

In an employment context, the plurality said it is expected that ‘10 days’ might refer to two standard five-day working weeks.   On this basis the Court decided that the relevant unit of a ‘day’ in section 96 was 1/10 of the ordinary hours worked in a two-week period or 1/26 of an employee’s ordinary hours of work in a year (the notional day).  

This was supported by the language of the surrounding provisions which rely on the unit of ordinary hours (sections 96(2), 99 and 101) which can readily be applied to different patterns of work. The approach was also supported by the Explanatory Memorandum to the FW Act and the predecessor statutory provisions.  

Essentially, the plurality took the view that the scheme of the FW Act necessitates a focus on the concept of ordinary hours of work. 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 payment for the same number of ordinary hours, regardless of the roster pattern. For each ordinary hour of personal/carer's leave taken, the accrued entitlement is reduced by that number, regardless of the employee's pattern of work. Payment is by reference to an employee’s ordinary hours of work.

Taking into account the FW Act’s object of ‘fairness’, particularly fairness between employees, the plurality rejected the Federal Court majority’s interpretation on the basis that it produced outcomes that would “give rise to absurd results and inequitable outcomes”.  

In doing so, their Honours noted that under the ‘working day’ approach observed that an employee working one day a week for 7.6 hours would accrue personal leave at five times the rate of a full-time employee. In a separate opinion, Justice Edelman pointed to a further extreme outcome where  employees ”who work part-time for one day a week [could] be absent for up to two-and-a-half months annually on paid personal/carer's leave”. 

These observations led the plurality to the conclusion that adopting the ‘working day’ construction would be contrary to the purpose of the FW Act to promote flexibility, and that ‘it would discourage an employer from employing anyone other than one person working a five-day working week, rather than employing a number of people over the course of that week, thereby avoiding employing a number of employees each being entitled to ten days of paid personal/carer's leave per annum.’ 

The plurality also said that the Full Court majority’s ‘working day’ approach produced unfairness between employers and employees as it was not possible to know, at any point in time, precisely how much paid personal/carer's leave an employee had accrued. 

In his separate opinion, Justice Edelman reached the same conclusion as his colleagues - albeit through a different lens of statutory interpretation. Though conceding the notional day to be ”counter-intuitive” when section 96(1) is read in isolation, his Honour accepted that it was necessary to apply for the harmonious operation of the personal leave scheme as set out across the FW Act.

In his dissenting opinion, Justice Gageler accepted the interpretation of section 96 contended by the AMWU, stating that 10 days ”in my opinion, means 10 periods each of 24 hours where an employee should be entitled to a period of leave”. His Honour observed that the Explanatory Memorandum to the FW Act referred to replacing “complex rules about the accrual and crediting of paid personal/carer's leave with a single, simple rule”, and added that this “single, simple rule” was the annual entitlement to 10 days without needing to have regard to obscure and debatable references to 76 hours. Justice Gageler, like the majority in the Full Court of the Federal Court, considered that the purpose of paid personal leave was to provide income security, and that “to focus on the relative number of hours of paid leave is to miss the point of the entitlement”.  

Next steps

Employers who may have adjusted their method of accruals and deductions in the wake of the Full Court decision in 2019 should readjust their payroll practices to ensure they are aligned with the law as stated by the High Court.   

Implications of the decision

The effect of the decision in Mondelez is that from now on, personal leave accrues progressively according to ordinary hours worked at a rate of 1/26 for all full-time and part-time employees, with leave being deducted progressively on the basis of ordinary hours taken as leave. 

It should be noted, however, that it is still permissible to agree to more beneficial arrangements than those set out in the FW Act through a contract or industrial instrument – as indeed was the case in Mondelez. The point is that payment is limited to payment for ordinary hours and at the rate payable for those ordinary hours. 

This means, for example, that employees who work 38 ordinary hours a week will receive 76 ordinary hours of personal leave per annum, and an employee who works 16 ordinary hours a week will receive 32 ordinary hours of personal leave. In either case, the employee has available two weeks of personal/carer’s leave.

The decision provides important clarity and certainty for employers. However, at a time when the protections available to employees are in sharp focus, the decision will continue the pressure on the Federal Government to enhance personal leave benefits or consider other forms of paid leave.