Unfair dismissal; how to calculate the high income threshold

Here is an extract from a case which provides assistance on the proper approach to be taken to calculating whether an employee’s earnings exceed the high income threshold.

“It is generally considered that the respondent employer has the evidentiary onus to demonstrate a jurisdictional objection associated with the high income threshold.7 In practical terms, this means that the employer must provide the Commission with sufficient persuasive evidence that enables the Commission to properly assess the level of earnings, including where relevant the proper value of payments and benefits beyond wages, in order to satisfy the Commission that the high income threshold has been exceeded.

[33] The approach to be taken to the concept of assessing the rate of earnings in the present context was comprehensively considered by the Full Bench in Sam Technology. After setting out that a car allowance would not be an amount worked out in accordance with the regulations or ordinarily fall within the scope of payments or benefits referred to in s.332(1) of the FW Act, the Full Bench considered the broader context in the following terms:

“[54] We are of the view, however, that the definition of “earnings” in s.332 of the Act is non-exhaustive and as such, “earnings” should be given its ordinary meaning (subject, of course, to the payments and benefits referred to in s.332(1) being included in the meaning of “earnings” and the payment and benefits referred to in s.332(2) being excluded from the meaning of “earnings”). Our reasons for so concluding are as follows.

[55] First, many of the words and expressions in the dictionary of the Act (s.12) are defined by the use of the word “means”. This may be contrasted with the use of the expressions “include” and “do not include” in s.332 to define “earnings”. The distinction between these approaches favours the conclusion that the word “include” in s.332 is not intended to be exhaustive. Although the word “includes” can, in some cases, be interpreted as “means and includes” and thereby provide an exhaustive definition, this is only where the provision in which it appears reveals that intention. Section 332 does not reveal that intention; the draftsperson(s) carefully discriminated between the use of “means” and “includes”.

[56] Secondly, the ordinary meaning of “earnings”, as defined in the Macquarie Dictionary, is “money earned; wages; profits”. This would include payments to an employee such as loadings. There is no reference to loadings in s.332(1) of the Act. It follows that the full content of the ordinary meaning of the word “earnings” extends beyond those payments and benefits specifically referred to in s.332(1) of the Act. This supports the conclusion that the definition of “earnings” in s.332 of the Act was not intended to be exhaustive.” (notes excluded)

[34] When further considering the status of car allowances and after setting out the definitions of “base rate of pay” and “full rate of pay” from ss.16 and 17 of the FW Act, the Full Bench then stated:

“[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).

[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.

… …

[68] It must be recognised that previous legislation used the term “remuneration” to work out whether an employee exceeded the high income threshold. “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”. However, “remuneration” ordinarily involves the same considerations as “earnings”. 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.” (notes omitted)

[35] I will return to the specific treatment of car allowances in due course.

[36] Mr McCappin seeks to both challenge and distinguish the approach adopted in Sam Technology on the basis set out earlier in this decision.

[37] Despite the valiant efforts of Mr McCappin’s Counsel, I consider that the approach in Sam Technology is relevant authority to be applied in the absence of cogent reasons 8 and is not relevantly distinguishable from this matter.

[38] It is apparent from the decision in Sam Technology that the Full Bench was alert to the fact that s.332 of the FW Act was not a definition in the normal sense. It expressly noted that the term stated that it ‘includes’ rather than ‘means’ and considered that it should be given its ordinary meaning subject to the specific provisions of s.332. The Full Bench also addressed how the term “earnings” sat with the other defined terms within the FW Act and posited the difference between “earnings” and “full rate of pay”. 9 In that regard, I note that these observations have a similar application to the difference between “earnings” and “remuneration” as used in Part 3-2 of the FW Act, given the import of the exclusion in s.332(2)(a), and I do not understand that decision to suggest otherwise.

[39] I also do not consider that the Full Bench assumed that the car allowance was paid in lieu of salary and the basis upon which it approached the task makes it clear that it did not rely upon any concessions by any of the parties, but rather, determined the issues by applying general principles of construction and then the specifics of the provision.

[40] I observe that there is no contrary Full Bench authority relevant to the FW Act that has been referred to me by the parties. It also appears that the approach set out in Sam Technology has been consistently applied by the Commission. As a result, it is appropriate that I deal with this application on that basis.

4.2 Excess superannuation contributions

[41] The evidence supports the notion that the level of superannuation contributions was not negotiated between Kone and Mr McCappin, but rather, set and adjusted by the employer from time to time in excess of the required SGC rate. 10

[42] In Zappia v Universal Music Australia Pty Limited T/A Universal Music Australia 11 (Zappia) the Commission considered that the additional 1 per cent superannuation contribution (above the SGC level) made by the employer in that case was an amount applied or dealt with on the applicant employee’s behalf and it was included for the purposes of calculating the rate of remuneration and applied to the high income threshold.12 That is, the Senior Deputy President considered that the additional superannuation contribution was earnings and that s.332(1)(b) applied. I observe that Zappia was subject to appeal13 and whilst the Full Bench expressly noted14 that this approach had been adopted and found15 that there was no error in the findings or conclusions at first instance, the excess superannuation contribution issue was not separately challenged.

[43] Mr McCappin contends that superannuation contributions are not earnings in the ordinary sense, are not covered by s.332(1)(b), which should be read as applying only to salary sacrifice and other similar arrangements, and the exclusion of certain superannuation contributions in ss.332(2)(c) and (4) of the FW Act does not mean that the concept of ‘earnings’ should be applied to the contrary.

[44] In relation to the approach to s.332(1)(b) of the FW Act, Mr McCappin contends that the inclusion could be read in two ways; namely, a “literal” interpretation where the (superannuation contribution) is considered to have been applied on the employee’s behalf and a “purposive” interpretation where an amount is included only where it is paid where the employee would otherwise have had to pay such for themselves. Given the beneficial nature and object in s.3 of the FW Act, he posits that this provision should be read to give the greatest benefit to employees. 16

[45] I accept that the exclusion of certain superannuation contributions in ss.332(2)(c) and (4) does not of itself mean that superannuation contributions must otherwise be earnings for present purposes. However, at least in the present context, I consider that the superannuation contributions made by an employer on behalf of an employee are capable of being considered to be a payment of value to the employee that is paid in recognition of the work performed. That is, “earnings” more generally for present purposes. Further, and in any event, I consider that, consistent with the approach adopted in Zappia, superannuation contributions are amounts contemplated by the inclusion provided by s.332(1)(b) of the FW Act; namely, amounts applied or dealt with in any way on the employee’s behalf or as the employee directs (emphasis added). Whilst this would include salary sacrifice arrangements and similar arrangements, the broad scope of the inclusion does not lend itself to a narrow application as contended here by the Applicant. In that regard, I do accept that the FW Act is beneficial legislation 17 to be applied with regard to the purpose of the statute18 and the Acts Interpretation Act 190119 is also to be utilised in that regard. To that end the purpose or object of the Act is to be taken into account even if the meaning of a provision is clear. When the purpose or object is brought into account an alternative interpretation may become apparent. If one interpretation does not promote the object or purpose of the Act, and another does, the latter interpretation is to be preferred. Of course, s.15AA requires the Commission to construe the Act, not to rewrite it, in the light of its purpose.20 Further, where as in the case of the FW Act, the objects involve striking a balance between competing interests,21 the beneficial purpose may be constrained in its operation.22 For reasons stated in Sam Technology,23 the intention of the FW Act is to limit access to the benefit of a review of an alleged unfair dismissal in certain defined circumstances and there is no warrant provided by the context of the statutory objects to read the provision down in the manner posited by Mr McCappin. That is, to read s.332(1)(b) as applying only to salary sacrifice or similar arrangements is not simply adopting a preferred approach but rather would involve a departure from the ordinary and natural meaning of the terms of the provision when read in context and according to its apparent statutory purpose.

[46] The exclusion of certain superannuation contributions in ss.332(2)(c) and (4) of the FW Act reinforces the above approach.

[47] As a result, I consider that the excess superannuation contributions of $4,313.40 paid on Mr McCappin’s behalf, that is, the contributions not excluded by virtue of s.333(2)(c), form part of the annual rate of remuneration for present purposes.

4.3 Excess car allowance

[48] The evidence in this matter is that initially Mr McCappin was given the choice between having a motor vehicle supplied or being paid a car allowance; with Mr McCappin opting to receive the allowance. The unchallenged evidence of Mr McCappin is that the rules were subsequently changed so that he had no choice but to continue to receive the car allowance and I have dealt with this aspect on that basis.

[49] At the time of dismissal, the car allowance was $20,450 per annum and this was paid to Mr McCappin without regard to the extent of business travel required of him from time to time.

[50] I have earlier set out the general approach to the consideration of car allowances in the present statutory context as adopted in Sam Technology. In terms of the specific inclusion of car allowances as part of the annual rate of earnings the Full Bench also stated:

“[48] At the outset, we do not take issue with the method of apportionment adopted by the Full Bench in Fewings and consider it entirely appropriate for circumstances in which an employee has a company-supplied vehicle (from which he or she derives a benefit) and a reasonable monetary value has not been agreed for its private use. We consider that the Fewings method of apportionment is appropriate to enable the Commission to estimate the real or notional value of the benefit in the manner contemplated by regulation 3.05(6) of the Regulations, which deals with benefits other than the payment of money. A car allowance, however, is a payment of money. Therefore, regulation 3.05(6) is not relevant to the determination of whether the payment of a car allowance to an employee takes the employee above the high income threshold.

[49] It follows that the payment of a car allowance to an employee is not an amount “worked out in relation to the person in accordance with the regulations” and therefore will only take the employee above the high income threshold if it is part of the employee’s “annual rate of earnings” within the meaning of s 382 of the Act.

[50] Section 332 of the Act provides a definition of “earnings” which includes particular payments and benefits such as “wages” and excludes particular payments and benefits such as “reimbursements”. A car allowance is not ordinarily considered to be one of the payments or benefits falling within the items listed in the definition of “earnings” in s.332(1), for the following reasons:

(a) a car allowance is not part of an employee’s “wages”, save for circumstances where the car allowance is, in reality, paid to the employee as a means of providing the employee with additional income and there is no requirement or expectation that the employee will have to use their car for work purposes (s.332(1)(a));

(b) a car allowance is typically paid directly to the employee and is not an “amount applied or dealt with in any way on the employee’s behalf or as the employee directs” (s.332(1)(b));

(c) a car allowance is not a “non-monetary benefit” because it is an entitlement to a payment of money (s.332(1)(c) & s.332(3)); and

(d) a car allowance is not an amount or benefit prescribed by the regulations (s.332(1)(d).

[51] It is also clear that a car allowance is not ordinarily within the scope of any of the payments or benefits referred to in s. 332(2) of the Act, which are excluded from the definition of “earnings”. This includes a “reimbursement” (s. 332(2)(b) of the Act). An allowance will usually consist of the payment of a definite predetermined amount to cover an estimated expense, and will be paid regardless of whether the recipient incurs the expected expense. In contrast, the Macquarie dictionary defines the word “reimburse” as “to make repayment to for expense or loss incurred; to pay back; refund; repay”. In order to be properly characterised as a reimbursement, the payment in question must be “made by reference to actual cost, that is to say that there would need to be some correspondence between the payment and the expenditure incurred, even if the reimbursement were to be but partial reimbursement”. The ordinary meaning of the words “allowances” and “reimbursements” are mutually exclusive, because “an allowance is an amount generally granted in anticipation of expenditure being incurred, whereas reimbursement is an amount repaying that expenditure or a part of it.”

[52] In many cases, car allowances are paid to an employee to cover an estimated or potential expense, and will be paid regardless of whether the employee incurs the expected expense. In such circumstances the car allowance would not be a “reimbursement” within the meaning of s.332(2)(b) of the Act because there is no correspondence between the car allowance and the actual expenditure incurred.

[53] Therefore, a car allowance will not ordinarily fall within the scope of any of the payments or benefits specifically “included” or “excluded” in the definition of “earnings” provided for in s. 332 of the Act.

… …

[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. 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 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:
  2. 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
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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:
  8. 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
  9. 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).
  10. 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” (notes omitted)

[51] For reasons previously stated, I intend to apply the Full Bench’s approach in the matter before me. In circumstances where, as in this case, a car allowance is paid where there is a requirement or expectation that the employee will use their car for work purposes, it is necessary to ascertain the private benefit, if any, derived from the car allowance. This involves determining the extent, if any, that the car allowance was not expended on business travel. The Full Bench in Sam Technology suggested a methodology that involves determining the extent of business travel undertaken by the applicant employee and calculating the cost of that travel by reference to the total distance travelled. In this case, the total distance travelled by Mr McCappin is not before the Commission.

[52] The suggested methodology is simply that and I do not consider that this forms some prescriptive approach where the purpose of the calculation itself becomes secondary. In this matter, it is common ground that the evidence reveals that Mr McCappin travelled between 6,500 and 10,000 km on business travel in his vehicle in the year leading up to his dismissal. This deals with the first three steps of the suggested methodology.

[53] It is then necessary to apply a cost to the extent of business travel. Kone has used figures for a vehicle relevant to that driven by Mr McCappin (a 10 year old Holden Commodore) issued by the Royal Automobile Club of WA (RACWA) for a 5 year old vehicle of the same kind. I was informed during the hearing that this is the oldest vehicle costed by the RACWA. The cost per kilometre is 101.88 cents.

[54] I raised with Counsel for Kone the use of figures derived from Western Australia given the location of the employment and it was posited that the Respondent had used the highest costs figures available, which was to Mr McCappin’s benefit. Counsel for Mr McCappin subsequently speculated that motoring costs in South Australia were higher than in other States. There is no evidence properly before the Commission about any of these propositions.

[55] In all of the circumstances of this matter, including that the use of the RACWA figure is consistent with the nature of cost sources contemplated in Sam Technology and the fact that the cost per kilometre would need to be of a significantly higher value to make any difference in this case, I consider that the RACWA figure is reasonable for present purposes.

[56] The annual cost of the business usage of the vehicle in question here is accordingly somewhere between $6,622 and $10,188. Taking the highest of these figures, this leaves $10,262 of the car allowance remaining as a payment retained by Mr McCappin. This is a private benefit forming part of his annual rate of earnings for present purposes.

  1. Conclusions

[57] Based upon the findings above, Mr McCappin’s annual rate of earnings at the time of dismissal totalled $168,355 comprising of the following: 24

  • Annual base salary $153,780
  • Excess superannuation contributions $4,313
  • Excess car allowance $10,262

[58] The annual rate of earnings of $168,355 is well in excess of the high income threshold of $148,700.

[59] Given that the other conditions of s.282(b) of the FW Act are also not satisfied, Mr McCappin was not a person protected from unfair dismissal and this application is not properly before the Commission.”

McCappin v Kone Elevators Pty Ltd – [2020] FWC 61 delivered 5 February 2020 per Hampton C