What’s emerging? Federal Court decision details the normal meaning of the term “ordinary time earnings”

Will it influence the ATO’s interpretative guidance for superannuation purposes?

The interpretation of the term “ordinary time earnings” (OTE) in a Superannuation Guarantee (SG) context has become a point of conjecture in recent times, particularly following the decision in Finance Sector Union of Australia v Commonwealth Bank of Australia [2022] FedCFamC2G 409 (CBA) and more recently, in the matter of in Target Australia Pty Ltd v Shop, Distributive and Allied Employees’ Association [2023] FCAFC 66 (Target).

In the CBA case, in determining that the taxpayer’s annual leave loading payment did not constitute OTE, Judge Driver did not make reference to the Australian Taxation Office’s (ATO) guidance in Superannuation Guarantee Ruling - SGR 2009/2 - Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' (SGR 2009/2), nor did he apply consistent principles. Instead, he sought to apply principles from Bluescope Steel (AIS) Pty Ltd v Australian Workers' Union [2019] FCAFC 84 (Bluescope), concluding that annual leave loading payments were not OTE, as the loading was not paid at the ordinary rate of pay (i.e., it was an additional loading on top thereof) and also, it was not paid by reference to ordinary hours worked (rather, it was paid on annual leave).

By contrast, SGR 2009/2 provides that annual leave loading constitutes OTE unless it is demonstrably referable to a notional loss of opportunity to earn overtime payments during periods of leave. Furthermore, website guidance provided by the ATO augments this approach, requiring employers to identify evidence of a nexus to lost overtime.

Judge Driver’s approach, and in particular the focus on the ordinary rate of pay, created doubt in relation to the application of SGR 2009/2, potentially with respect to any above-base payments, but certainly in relation to annual leave loading payments. 

However, the Federal Court’s Decision in Target offers further perspective on the interpretation of OTE, which arguably, aligns more closely to the principles set out in SGR 2009/2.

Overview of Target

Firstly, it should be clarified that the Target case was not a superannuation decision – rather, it’s commentary on the meaning of OTE was for the purpose of establishing annual leave entitlements, with the context of the employer’s relevant industrial instrument providing that during periods of annual leave, an employee “shall be paid … their ordinary time earnings for the period”. The term OTE, in this context, was not defined in the industrial instrument, therefore taking its ordinary meaning; relevantly, the employer argued that the term should be confined to the base rate calculated on ordinary hours, where the opposing party argued that the term should include penalties relevant to ordinary hours. 

The Court unanimously held that the meaning of OTE for the purposes of calculating annual leave payments should include penalties that an employee would have earned for working their ordinary hours, rather than just amounts paid at an ordinary rate of pay.

The Court affirmed long-standing doctrine that, in an industrial context, the meaning of the term “ordinary hours” generally refers to the span of hours described as “ordinary” (i.e., rather than overtime) as per the underlying industrial instrument. Whereas the parties’ submissions (Target’s, specifically) sought to argue OTE should be reflective of the ‘ordinary rate’, which was equated to the more limited ‘base rate’ (i.e. a rate which is absent penalties or other applicable payments), the Court found that this approach would amount to a conflation of concepts.

Relevantly, Bromberg J provided that “the natural meaning of “ordinary time earnings”, in relation to a period of work provided by an employee in exchange for remuneration, is the total remuneration earned by the employee when working ordinary time.” It was observed that such remuneration should not necessarily be constrained to amounts resulting from ordinary (or base) rates of pay.

Additionally, and noting the ATO’s emphasis throughout SGR 2009/2 on the need to identify the purpose of annual leave loading payments, the Court made some interesting observations in this regard. Specifically, it was noted that whilst the historical genesis of the payment was to compensate for notional overtime lost, in the current industrial environment, circumstances may exist where any historical purpose should be disregarded. In making this observation, Bromberg J reasoned that circumstances may be such that payments of this kind should now be considered as essentially being of an agnostic purpose, due to a propensity for annual leave loading to be used as a payment type that can be negotiated and traded as an additional entitlement. 

What does this mean for employers?

Whilst Target did not directly deal with the statutory meaning of OTE under the Superannuation Guarantee (Administration) Act 1992, the approach adopted by Bromberg J, in our view, offers some further assistance in understanding how the courts may approach the interpretation of OTE in an SG context.

If the approach adopted in Target were translated to an SG context, it may suggest that the term OTE, per its ordinary meaning, would not be confined to payments at a base rate; rather, it may be a function of remuneration in relation to ordinary hours, as established under the applicable industrial instrument, and as distinct from payments relating to non-ordinary (overtime) hours of work. Of course, regard would be required to be had to any modifications resulting from the SGAA itself (such as the express exclusion of certain lump sum payments on termination).

Arguably, this approach is more aligned to the ATO’s governing principles in SGR 2009/2, relative to the approach from CBA. The decision also potentially raises questions on the ATO’s guidance in relation to annual leave loading payments, namely to identify the purpose of payment; this is on the basis of Justice Bromberg’s assessment that, in the current industrial landscape, annual leave loading may well have no defined purpose, but instead, may simply be viewed as a bargainable additional payment. Of course, it may be the case that this assessment is subject to any clear purpose established by the facts of each case – time will tell.

In this regard, it will be interesting to see how this decision may influence any future SG related disputes regarding the interpretation of OTE and above-base payments types (including annual leave loading payments), and/or what impact the decision will have on ATO views and commentary. Whilst we understand that the ATO was drafting a Decision Impact Statement for the CBA decision, it may be the case that the Target decision delays its release.

Notwithstanding, given this recent decision, and given the absence of any revision to existing ATO views, we would recommend that employers apply caution in relying solely on CBA, particularly where doing so would conclude that above-base rate payments are not superable.

It is notable that the labelling of payment types within Single Touch Payroll – Phase 2 (STP2) were designed to be, and remain as being, reflective (at least in part) of the ATO’s current views of payments which constitute OTE, pursuant to guidance within SGR 2009/2. 

Relevantly, as announced in the 2023-24 Federal Budget, $27 million will be allocated to the ATO to enhance data matching capabilities with the purpose to identify SG non-compliance. We anticipate at least some of this investment will be focused on STP2 and other reporting (e.g. SuperStream). As such, where an employer seeks to apply the CBA decision in a way which results in alternate conclusions to those which would be arrived at under SGR 2009/2, this may signpost potential non-compliance to the ATO through STP2 reporting. 

With the guiding principles of SGR 2009/2 now almost fifteen years old, and with the emergence of recent case law that has both challenged and complemented some aspects of those principles, there may be cause for the ATO to revisit its public ruling to consider any amendments necessary – if not to revise certain views, then at least to reconcile retained views to recent decisions of the courts. Further, any such update could also include examples relevant to modern working arrangements, particularly in relation to hybrid and working from home arrangements.

As a final thought, in the event of any of the views within SGR 2009/2 being amended, it may be the case that such amendments, dependent on their nature, could present cause for consequential revision to STP2 payment classification (i.e. to maintain the accuracy of data matching linked to STP2). 

However, we await more critically the views of the ATO on the impact (if any) of recent cases, which will hopefully provide clarity and certainty to employers for the purpose of SG compliance.

If you have any questions, please contact the PwC Workforce team for assistance.