In the recent decision of Sam Technology Engineers Pty Ltd v Mr Andrew Bernadou [2018] FWCFB 1767 the Full Bench of the Fair Work Commission (FWC) considered (as part of an appeal) the issue of how to treat car allowances for the purpose of determining the annual rate of earnings for unfair dismissal purposes.

This is important because if the annual rate of earnings of an employee exceeds the high income threshold ($138,900 per annum at the relevant time of termination in this decision, $142,000 per annum since 1 July 2017) an employee is jurisdictionally barred from pursuing unfair dismissal proceedings. (Unless the employee is covered by a modern award or an enterprise agreement applies to them.)

One of the reasons cited by the Full Bench of the FWC for granting the employer permission to appeal was:

"... a disparity of approaches in decisions of individual members of the Commission, such as to warrant some clarity being delivered by a consideration of the issues by a Full Bench. This appeal squarely raises the proper treatment of motor vehicle allowances for the purposes of determining whether and what amounts form part of a person's earnings and whether, as a consequence, they are outside or inside the jurisdiction of the Commission because of the high income threshold."

The issue was considered to be of some significance and as a result submissions were made not only on behalf of the employer and employee but also the Australian Taxation Office (ATO), Australian Industry Group (AiGroup), Australian Chamber of Commerce and Industry (ACCI) and Australian Council of Trade Unions (ACTU).

CAR ALLOWANCE AS OPPOSED TO COMPANY-SUPPLIED VEHICLE

The Full Bench of the FWC noted the distinction between a vehicle supplied by an employer to an employee and a car allowance:

"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."

THE TEST TO BE APPLIED

After an extensive consideration of the submissions and relevant principles, the Full Bench of the FWC set out the following comprehensive test:

"...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:
  1. 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
  2. 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
    4. 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.
  3. 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.
  4. 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.
  5. 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
    3. 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"."

EMPLOYERS SHOULD GET INTO GEAR

In calculating the effect of a car allowance on annual earnings for unfair dismissal purposes employers will need to carefully consider any requirement attached to the allowance and the specific motor vehicle and type of travel to which the allowance is applied by the employee.

If it is an allowance where there is an expectation or requirement of business travel then the creation and retention of accurate documentation and records will be important, as will a right for the employer to be furnished with that information periodically or on demand in the event a calculation of annual earnings needs to be made. If they don't already do so for tax or other purposes, employers should seek to compel employees to keep and provide such records.

For further information please contact:

Michael Byrnes, Partner
Phone: +61 2 9233 5544
Email: MJB@SWAAB.COM.AU

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.