This is what the Fair Work Commission’s unfair dismissal benchbook says about calculating compensation for unfair dismissal.
“Overview
See Fair Work Act 2009 ss.392(2)(c), 392(2)(e) and ss.392(5)‒(6)
The formula set out in Sprigg v Paul’s Licensed Festival Supermarket[1] (the Sprigg formula) is commonly used in working out the appropriate amount of compensation. The Sprigg formula has been refined with use.
The Sprigg formula was decided under previous legislation but it has continued to be applied under the Fair Work Act.[2]
The Full Bench of the Commission in Bowden v Ottrey Homes Cobram and District Retirement Villages[3] set out the approach to be taken under the Fair Work Act regarding the determination of compensation.[4]
If, when applied, the Sprigg formula ‘yields an amount which appears either clearly excessive or clearly inadequate’ then the Fair Work Commission should reassess the assumptions made in reaching that amount.[5] Compensation should be appropriate having regard to all of the circumstances of the case.[6]
The Sprigg formula[7]
Estimate the remuneration the employee would have received if they had not been dismissed. Lost remuneration is usually calculated by estimating how long the employee would have remained in the relevant employment but for the termination of their employment, ie the anticipated period of employment.
Deduct any remuneration earned by the employee since their dismissal until the end of the anticipated period of employment. Workers compensation payments are deducted but not social security payments. The failure of an applicant to mitigate his or her loss may lead to a reduction in the amount of compensation awarded.
Deduct an amount for contingencies. This is a calculation of future economic loss.
Consider the impact of taxation and adjust the figure accordingly.
Assess the figure against the compensation cap. If the amount is more than the compensation cap it should be reduced to the compensation cap.
How is remuneration estimated in step 1?
The assessment of remuneration lost is a necessary element in determining an amount to be ordered in lieu of reinstatement.[8] Such an assessment is often difficult, but it must be done.[9]
In circumstances where the Commission forms the view that the employee would have stayed in the former job for a number of years then remuneration that would have been received over that period is calculated. This may include long service leave and potential bonuses.[10]
What is deducted as remuneration in step 2?
Remuneration earned in other employment.
Social security payments are not generally considered to be ‘remuneration’.[11] Whether an employee who has received social security payments is obliged to repay those benefits is a matter between the employee and social security and is not a relevant consideration.[12]
Workers’ compensation payments are generally considered to be ‘remuneration’ and will be deducted.[13]
The failure of an applicant to mitigate his or her loss may lead to a reduction in the amount of compensation awarded.[14]
Related information
Mitigation
What are the contingencies referred to in step 3?
In Ellawala v Australian Postal Corporation[15] the Commission made the following points in relation to contingencies:
Step 3 involves the deduction of an amount from the total remuneration for situations that may have arisen and which ‘might have brought about some change in the earning capacity or earnings’.[16]
A 25% discount for contingencies was applied in Sprigg.[17] This amount was decided on the basis of the facts of that case.[18] It is not a statement of an amount that is generally appropriate.[19]
In assessing the impact of contingencies it is necessary for the Commission to exercise broad discretion and this involves considering both favourable and unfavourable contingencies.[20]
Contingencies only apply to the anticipated period of employment.[21]
Case example
Contingencies
Enhance Systems Pty Ltd v Cox PR910779 (AIRCFB, Williams SDP, Acton SDP, Gay C, 31 October 2001).
In this case it was found that the discount for contingencies should only be applied to that part of the anticipated period of employment that is not actually known – that is the period between the date of the decision and the end of the anticipated period of employment.
The Full Bench dismissed an appeal of the decision and considered the amount ordered in lieu of reinstatement was appropriate.
Any discount for contingencies depends upon the circumstances of the case. In this case, the Full Bench stated that for the period from the date of the termination of employment until the hearing of the application by the Commission, the economic effect of the termination of employment is known and capable of calculation. There is considerable force in the argument that any discount for contingencies should only be applied in respect to an ‘anticipated period of employment’ that is not actually known, ie a period that is prospective to the date of the decision. There is no discount for the period actually known.
What are the taxation considerations in step 4?
The compensation amount is reduced by the tax the employee would have paid if they had received the amount as wages, this gives the net amount.[22]
The net amount is then increased by the amount of tax liability on the compensation as ordered. This is usually taxed as an employment termination payment.[23]
What is the compensation cap in step 5?
The compensation cap is set in s.392(5) of the Fair Work Act. The amount ordered to be paid by the Commission must not exceed the lesser of:
the total amount of remuneration either received by the person, or to which the person is entitled, for any period of employment with the employer during the 26 weeks immediately before the dismissal, and
half the amount of the high income threshold immediately before the dismissal.[24]
From 1 July 2024, the high income threshold was $175,000 per annum and from 1 July 2025 it is $183,100. Therefore, the compensation cap is:
$87,500 for a dismissal that occurred on or after 1 July 2024 and before 1 July 2025, and
$91,550 for a dismissal that occurred on or after 1 July 2025.”