High income threshold and allowances

There has been some judicial controversy about what is to be included in the “annual rate of earnings” for the purposes of determining whether an employee has access to an unfair dismissal remedy under the Fair Work Act, if his or her employment is not the subject of a modern award or enterprise agreement. In particular the issue of the distinction between the payment of a motor vehicle allowance and the provision of a motor vehicle has been particularly vexed. Here is the answer.

“ [65] Parliament made a conscious choice to use an employee’s “earnings”, rather than their “base rate of pay” or “full rate of pay”, to define the cut-off point at which employees, who are not covered by a modern award and/or do not have an enterprise agreement that applies to them, are excluded from protection against unfair dismissal. An employee’s “earnings” are higher than the “base rate of pay” of an employee but are narrower in scope than the “full rate of pay” of the employee, because “earnings do not include the … payment of amounts which cannot be determined in advance” such as incentive based payments, bonuses and overtime (unless the overtime is guaranteed).[38]

[66] The purpose of s.382(b)(iii) of the Act is to exclude from protection against unfair dismissal a high income employee who is not covered by a modern award and/or do not have an enterprise agreement that applies to that employee . A “high income employee” is excluded from protection against unfair dismissal by reference to their “annual rate of earnings” (and any amount worked out under the regulations) and not by reference to their “base rate of pay” or “full rate of pay”. To reach a conclusion that an employee is a “high income employee” by including the whole of a car allowance paid to them at the time of their dismissal, in the sum of their “annual rate of earnings”, in circumstances where there is a requirement on the part of the employee to use their car for work purposes, without any reference to what portion of that car allowance, if any, the employee actually derived personal benefit from, is inconsistent with the purpose of s.382(b)(iii) of the Act. In this context, “earnings” are what an employee receives for the work done by the employee in the course of their employment, rather than an amount paid to an employee to meet an expense incurred by the employee in undertaking such work.

[67] Consistent with the purpose to which we refer in the previous paragraph, it has long been held, for the purpose of determining whether an employee is above the high income threshold for protection against unfair dismissal, that the focus is on the private benefit derived by an employee from the provision of a fully maintained motor vehicle. The provision of the vehicle for business purposes is not included in determining whether the employee has exceeded the high income threshold. A Full Bench of the Australian Industrial Relations Commission in Rofin Australia Pty Ltd v Newton[39] endorsed the following approach taken by Senior Deputy President Watson[40] in determining whether any part of the provision of a fully maintained motor vehicle to an employee should be included as part of the employee’s remuneration:

“1. The private benefit derived by an employee through the provision to such an employee of a fully maintained motor vehicle will constitute remuneration for the purpose of s 170 CC(3) and (4), and

 

  1. For the purposes of determining remuneration, the focus should be upon the private benefit derived by the employee and the provision of a motor vehicle for business purposes would not form part of the remuneration.

…Where a motor vehicle is provided to an employee in lieu of salary that might otherwise have been paid, it is appropriate that the private benefit derived by the employee from the provision of the motor-vehicle be counted as part of the employee’s remuneration.”[41]

[68] It must be recognised that previous legislation used the term “remuneration” to work out whether an employee exceeded the high income threshold.[42] “Remuneration” was held to mean “the reward payable by an employer to an employee for the work done by that employee in the course of his or her employment with that employer”.[43] However, “remuneration” ordinarily involves the same considerations as “earnings”.[44] We do not discern any intention on the part of the legislature to alter the point at which an employee exceeds the high income threshold by replacing “remuneration” with “earnings” as the relevant means by which the threshold is assessed.

[69] It would be somewhat incongruous to adopt an approach whereby:

(a) an employee who was provided with a fully maintained motor vehicle where the employee was required to use their vehicle for work purposes (but derived a private benefit because he or she did not use the vehicle solely for business purposes) had only the private benefit (but not the proportion attributable to the use of the vehicle for business purposes) included as part of their “annual rate of earnings” for the purpose of determining whether they exceeded the high income threshold, but

(b) an employee who was paid a car allowance in circumstances where the employee was required to use his or her car for work purposes (but derived a private benefit because they did not use the whole of the car allowance for business purposes) had the whole of the car allowance included as part of their “annual rate of earnings” for the purpose of determining whether they exceeded the high income threshold.

[70] Many of the cases in which it has been held that “earnings” means gross earnings have been decided, in part, on the basis that there would be “endless difficulties” if the court had to find out the figure which results after deducting expenses from gross earnings.[45] No such problem arises in the context of a car allowance provided to an employee. As has been the case for at least 20 years[46] in relation to the provision of a fully maintained car to an employee, there is no significant barrier to the determination and calculation of the private benefit component of either the provision of a fully maintained car or the payment of a car allowance to an employee.

[71] We are fortified in our view that a car allowance should be treated in the manner we propose when regard is had to the exclusionary provisions in s.332(2), for example the exclusion of reimbursements from earnings in s.332(2)(b). It seems to us that if an employee uses his or her motor vehicle for work purposes and makes a claim for a motor vehicle mileage payment, this would properly be described as a reimbursement. Yet, if that same employee has been paid a vehicle allowance in anticipation of some work related use of the employee’s vehicle, should the proportion of the allowance paid in advance which can be attributed to work related private vehicle use be treated as “earnings”? We think not.

[72] For the reasons set out above and having regard to the relevant statutory context, we are of the view that a car allowance should be treated in the following way for the purpose of calculating an employee’s “annual rate of earnings” within the meaning of ss.332 and 382(b)(iii) of the Act:

(a) If a car allowance is paid to an employee in circumstances in which there is no requirement or expectation that the employee will have to use his or her car for work purposes, then the whole of the car allowance is, in reality, part of the employee’s wages and is therefore included in their “earnings”; or

(b) If a car allowance is paid to an employee at the time of their dismissal in circumstances in which there is a requirement or expectation that the employee will have to use his or her car for work purposes, then it will be necessary to determine and calculate the private benefit, if any, derived by the employee from the car allowance. To that end, we suggest the following methodology, which is based on the approach taken in Fewings:

 

  1. Determine the annual distance travelled by the car in question. The amount of the annual distance will be as follows:
    1. if the car allowance has been paid for at least 12 months prior to the dismissal – the distance travelled by the car over the 12 months immediately prior to the dismissal; or
    2. if the car allowance has been paid for a period of less than 12 months prior to the dismissal, determine the distance travelled by the car in the period during which the car allowance has been paid and then extrapolate that distance over a period of 12 months to calculate an annual distance. For example, if an employee moved into a new position with his or her employer 6 months prior to his or her dismissal, received a car allowance during that 6 month period, and drove his or her car for 10,000 km in that 6 month period, the assumed annual distance travelled by the car for the purpose of calculating the employee’s “annual rate of earnings” would be 20,000 km.
  1. Determine the percentage of the annual distance travelled which was for business use, which would not include travel between the employee’s home and usual place of work. If the car allowance has been paid for a period of less than 12 months prior to the dismissal, determine the business use percentage of the distance travelled in the period during which the car allowance was paid.
  2. Multiply the annual distance calculated in accordance with paragraph 1 above by the business use percentage calculated in accordance with paragraph 2 above. This provides the annual distance travelled for business purposes.
  3. Estimate the cost per kilometre for a car of the type used. This information can be obtained from the RACV, NRMA or like motoring organisations.
  4. Multiply the annual distance travelled for business purposes by the estimated cost per kilometre. The result is the annual cost of using the car for work purposes. Compare that annual cost with the amount of the annual car allowance. The amount of the annual car allowance will be as follows:
    1. if the car allowance was paid for at least 12 months prior to the dismissal – the amount of the car allowance paid to the employee in the 12 months immediately prior to the dismissal; or
    2. if the car allowance has been paid for a period of less than 12 months prior to the dismissal, determine the amount of the car allowance paid in that period and then extrapolate that payment over a period of 12 months to calculate an annual amount of the car allowance. For example, if an employee in a business other than a small business was employed in that business for a period of 9 months prior to his or her dismissal, and received a car allowance of $2,000 each month in that 9 month period, the assumed annual car allowance for the purpose of calculating the employee’s “annual rate of earnings” would be $24,000 ($2,000/month x 12 months = $24,000).
  1. If the amount of the annual car allowance exceeds the annual cost of using the car for work purposes, the difference is the private benefit to the employee of the car allowance, which forms part of their “annual rate of earnings”.”

Sam Technology Engineers Pty Ltd v Mr Andrew Bernadou [2018] FWCFB 1767