Have you provided for ‘double dipping’ on casual entitlements in 30 June 2020 financial statements?
The recent Federal Court decision in WorkPac Pty Ltd v Rossato (Rossato decision) means that entities employing casual workers in similar circumstances to this case (i.e. on a regular, systematic and predictable basis with a predictable work schedule) will need to consider whether a provision is required in 30 June 2020 financial statements for any unpaid, or unused entitlements for annual leave, personal and carer’s leave, compassionate leave, public holiday pay and redundancy payments. This is particularly important given the level of retrenchments of casual workers during the COVID-19 pandemic.
It has long been accepted practice that the pay rate for a casual employee includes a ‘loading’, usually 25% higher than normal pay rates for full-time or permanent part-time staff. This ‘loading’ is to compensate the casual employee who does not receive holiday pay, sick pay, and other entitlements such as public holidays, and this fact is often specifically stated in employment contracts for casual staff.
However, the Rossato decision means that casual employees who fit the criteria stipulated in the case can effectively ‘double dip’, thereby receiving the higher pay rate, and also various employee entitlements. Employers with casual staff will therefore need to assess whether a provision for these entitlements is required in 30 June 2020 financial statements.
In a recent update to FAQ 1 dealing with its focus areas for companies, directors and auditors during the COVID-19 pandemic, ASIC notes the following regarding the Rossato decision:
||BDO’s comment on relevant Accounting Standard
|Past and present ‘casual employees’ that were/are employed in circumstances covered by the Rossato decision
||Entities should provide for additional employee entitlements because the decision did not allow for offsetting against any casual loading paid
||IAS 19 Employee Benefits
|‘Casual employees’ employed in circumstances that were not clearly covered by the decision (the ‘grey’ area)
||A provision or contingent liability may be required
||IAS 37 Provisions, Contingent Liabilities and Contingent Assets
|‘Casual employees’ who are unaffected by the decision
||No provision is required
We recommend that preparers take note of ASIC’s directive, even though at the time of writing, special leave to appeal to the High Court has been granted to Workpac Pty Ltd.
When preparing 30 June 2020 financial statements, entities should take into account all available information at 30 June 2020. In this regard, entities employing casual workers may need to obtain legal advice to determine whether the Rossato decision could have an impact on their obligations for outstanding employee entitlements.
Any subsequent event which could change the status quo prior to the 30 June 2020 financial statements being finalised (for example, if the decision were to be overturned on appeal prior to the completion of the financial statements) is a ‘non-adjusting’ event and whose impact will merely be disclosed in 30 June 2020 financial statements. Such a development will not alleviate the need for entities to make a provision in 30 June 2020 financial statements.
Provision required in financial statements – IAS 19 Employee Benefits
Employee benefits are usually recognised as expenses and liabilities during the period that the employee provides services to the entity. To date, casual employees have worked over a number of years, and been paid at a higher rate in lieu of receiving employee entitlements such as annual leave, public holidays, etc. The main implication of the Rossato decision is that many casual employees will be entitled to ‘back pay’ if they have since left the entity, or be able to take extra paid leave in future based on past entitlements if they are still working for the entity.
This ‘back pay’ goes back for a period of six years. Any ‘catch up’ provisions required as a result of the Rossato decision would be considered a change in accounting estimate, accounted for during the current period, rather than an error, where retrospective restatement would be required. This is because it was previously standard practice not to afford leave entitlements to casual employees.
Because the Rossato decision did not allow for any offsetting of additional loading previously paid against outstanding employee entitlements, entities should provide for the gross amount of any outstanding entitlements at 30 June 2020.
Short-term paid absences
IAS 19 distinguishes between ‘accumulating’ and ‘non-accumulating’ paid absences. ‘Accumulating’ absences can further be broken down into ‘vesting’ (where unused balances are paid out when an employee leaves the entity), and ‘non-vesting’ (where there is no cash payout on leaving the entity).
For past casual work performed, it makes no difference whether an entitlement is accumulating or non-accumulating because a provision is required based on actual hours worked for annual leave and public holidays, and actual hours not worked because a casual employee was sick or unable to work on compassionate grounds. However, these categories are important when providing for entitlements in future (refer table below).
The table below outlines examples of the various paid absences and illustrates how provisions might be recognised for each entitlement. Note: The classification of certain paid absences below as accumulating (vesting or non-vesting) and non-accumulating must be assessed by each entity based on laws applicable to the entity.
|Type of entitlement
||Recognise catch up provision for past casual work performed to 30 June 2020 based on….
||Recognise provision for future casual work performed from 1 July 2020 based on…
|Accumulating – vesting
||Actual number of annual leave days outstanding based on pro rata of hours worked
||Accumulating - vesting
||Actual number of public holidays which coincided with regular work roster (e.g. if regularly work on Mondays then casual employee may be entitled to pay for a public holiday that fell on a Monday)
||Accumulating – non-vesting
||Amounts of actual shifts not worked due to need for personal/carer’s/sick days.
||Even though leave accumulates, provision is only recognised for the amount expected to be taken in excess of the annual entitlement
||Amounts of actual shifts not worked due to a known bereavement.
||NIL. IAS 19, paragraph 13(b) requires provision to be recognised only when the absence occurs.
No provision is made for redundancy payments until the recognition requirements for termination benefits in paragraph 165 of IAS 19 have been met. Entities still employing casual workers at 30 June 2020 are therefore not required to recognise a provision for redundancy. However, provisions may be required where entities have previously terminated casual employees without redundancy pay. Amounts to be recognised may depend upon specific industry awards or employment legislation.
Contingent liability – IAS 37 Provisions, Contingent Liabilities and Contingent Assets
ASIC’s position in FAQ 1 is that a provision or contingent liability may be required for ‘casual employees’ employed in circumstances that were not clearly covered by the decision (the ‘grey’ area).
Determining whether an entity has a liability for employee benefits under IAS 19, or a provision or contingent liability under IAS 37 requires judgement, depending on how closely its particular facts and circumstances resemble those in the Rossato decision. Entities may need to obtain legal advice in this regard.
Disclosure regarding significant estimates and judgements.
As noted above, entities may need to apply a significant amount of judgement in order to determine whether provisions for unpaid or accumulated employee benefits is required (including assessing legal advice), and then, if appropriate, to estimate the amount of the provision. In this regard, entities with casual employees should disclose sufficient information to explain how they arrived at their conclusion for recognising a provision in the financial statements, simply disclosing a contingent liability, or doing nothing at all.
IAS 1 Presentation of Financial Statements, paragraphs 122 and 125 include disclosure requirements for significant estimates and judgements.
Please contact BDO’s IFRS Advisory team if you require assistance determining the appropriate accounting treatment for employee entitlements for casual employees.
BDOs’ People Advisory or Risk Advisory teams can also provide assistance to employers in relation to employee entitlements, ‘wage theft’ and the Fair Work Act.