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New role, lower pay: are annual leave payments affected?

Should any accrued leave be paid based on the worker's former salary?
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New role, lower pay: are annual leave payments affected?

New role, lower pay: are annual leave payments affected?

15 April 2021

If an employee takes a pay cut, will any accrued leave be paid at his former higher salary?

Q One of our managers wants to relinquish his role due to family responsibilities and revert to a position with fewer responsibilities. The company has identified a position for the employee and he has accepted the offered position.

The new job involves a salary which is considerably less than his previous managerial salary. The employee has about 10 weeks’ annual leave which was accrued while on the higher salary.

Is the annual leave accrued while the employee was a manager paid at the managerial salary if taken in the future? Or is it payable at the salary at the time the annual leave is taken? Should the company pay out the difference when the employee starts the new job next year?

A The accrual of annual leave is based on an employee’s ordinary hours of work. An employee is to be paid at their ‘base rate of pay’ for a period of annual leave at the time annual leave is taken.

The Fair Work Act (s16) defines this term to mean an employee’s pay for their ordinary working hours but excluding incentive-based payments and bonuses, loadings, monetary allowances, overtime or penalty rates or any other separately identifiable amounts.

Any annual leave taken after the employee’s salary has been adjusted for the new position would be payable at the lower base rate of pay.

Paying out the difference would be more beneficial than the requirement under the Fair Work Act however the employer is not legally obliged to do so.


Change in employment category

An employee’s ordinary hours determine the rate at which an entitlement to annual leave accrues and also the entitlement to payment when annual leave is taken. For example, a full-time employee whose ordinary hours each week are 38 will accrue two weeks’ leave (76 hours) over a six-month period. A part-time employee whose ordinary hours each week are 12 hours will also accrue two weeks’ leave (24 hours) over the same six-month period.

The leave is payable at an employee’s ‘base rate of pay’. If an employee changes the basis of their employment, such as full-time to part-time, there is no loss of accrued annual leave, although the future rate of accrual will be different, based on the employee’s new fewer ordinary hours of work.

The bottom line: Annual leave is paid at an employee's base rate of pay at the time the leave is taken. There is no adjustment required if an employee’s salary was higher at any time prior to the taking of the leave.

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