Important Development Regarding Annual Leave Loading

Does your business or organisation make annual leave loading payments to employees? If so, the business or organisation may have a legal obligation to make superannuation contributions in respect of those payments if it has not already been making such contributions. This follows a recent important update from the ATO regarding its position with respect to whether superannuation contributions are payable on annual leave loading payments.

New Development

Under the applicable superannuation legislation, employers have a legal obligation to make superannuation contributions on behalf of their eligible employees calculated as a specified rate (currently 9.5%) of their “ordinary time earnings” (OTE). Put simply, OTE is defined as an employee’s total earnings in respect of ordinary hours of work. It includes, but is not limited to, an employee’s salary or wages, annual leave, sick/personal leave, commissions, and payments in lieu of notice, but excludes overtime payments.

Until relatively recently, there has been a level of uncertainty around whether annual leave loading falls within the definition of OTE. However, earlier this year the ATO clarified its position. In particular, the ATO advised that annual leave loading will constitute OTE, unless an employer can provide evidence that the entitlement to annual leave loading is referrable to an employee’s lost opportunity to work overtime. The evidence can include specific wording in a modern award, enterprise agreement, employment agreement or company policy, which clarifies the reason for the entitlement to annual leave loading.

Employers who simply assume that annual leave loading is paid to compensate employees for loss of overtime whilst on leave and do not have evidence supporting this assumption are at risk of having superannuation guarantee shortfalls and may be liable to pay a superannuation guarantee charge.

Implications for Employers

If your business or organisation pays annual leave loading to employees but does not make superannuation contributions in respect of those payments, a prompt assessment should be made as to whether this reflects the legal requirements. In particular, employers should review any applicable modern award, enterprise agreement, employment agreement or company policy to determine whether annual leave loading is referrable to a lost opportunity to earn overtime. If the finding is reached that superannuation contributions are payable, employers should take swift action to rectify the situation.

Disclaimer

This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.

Queries

For further information please contact the author, Martin Alden, Partner – Employment, Workplace Relations & Safety, m.alden@cornwalls.com.au or telephone +61 3 9608 2273 or Robert King, Partner – Employment, Workplace Relations & Safety, r.king@cornwallsqld.com.au or telephone +61 7 32235956

The Author

Martin Alden

PARTNER, MELBOURNE