Whether an employee can bring an unfair dismissal claim will often come down to how much they earn. That’s because employees whose annual earnings exceed the high income threshold (currently $190,100) are generally unable to pursue an unfair dismissal claim (unless they are covered by a modern award or enterprise agreement).

However, calculating annual earnings is not always as simple as looking at an employee’s salary. Bonuses, benefits, allowances and other incentives may also be taken into account. Two recent Fair Work Commission (“FWC”) decisions demonstrate how various benefits will be included and excluded in annual earnings calculations.

The Fair Work provisions

The Fair Work Act 2009 (Cth) (“FW Act”) provides that an employee’s earnings include:

• wages;
• amounts applied or dealt with on an employee’s behalf;
• the agreed money value of non-monetary benefits; and
• amounts or benefits prescribed by the Fair Work Regulations.

However, an employee’s earnings do not include:

• payments which cannot be determined in advance;
• reimbursements; and
• compulsory superannuation contributions.

The FW Act specifically identifies commissions, incentive-based payments and bonuses as examples of payments that cannot be determined in advance and which are excluded when calculating annual earnings.

The first case: bonus counted as earnings

In this first case before the FWC, the employee received a base salary and was also entitled to:

• an annual bonus provided that he remained employed;
• life insurance and salary continuance insurance; and
• commuter benefits.

The key issue before the FWC was whether the employee’s bonus should be included when calculating his annual earnings, given bonuses are usually excluded from annual earnings. However, in this case, the bonus was a set amount, paid in monthly instalments together with the employee’s salary and was not dependent on performance or subject to any managerial discretion.

In these circumstances, the FWC found that the bonus formed part of the employee’s annual earnings because it operated in substantially the same way as salary and could be determined in advance.

The FWC also considered the employee’s life insurance and salary continuance premiums, which were being paid by the employer. Although these amounts were paid directly to the insurer rather than the employee, they were held to constitute a quantifiable benefit for the employee. Accordingly, those premiums were included in the employee’s annual earnings.

The commuter benefit was a discretionary amount paid by way of reimbursement for private commuting expenses. The FWC found that, while the benefit was not earnings under the FW Act, it could still be included under the Fair Work Regulations because it was a non-monetary benefit capable of being quantified.

Once the bonus, insurance premiums and commuter benefits were added to the employee’s base salary, the employee’s annual earnings exceeded the high income threshold and his unfair dismissal application was dismissed.

The second case: retention payment excluded from earnings

In the second case, a different outcome was reached because the retention payment received by the employee in addition to his salary did not meet the FW Act definition of annual earnings.

This is because the retention payment was subject to a range of conditions. To receive this payment, the employee was required to remain employed until specified dates, maintain performance standards, meet company objectives and satisfy behavioural and conduct expectations.

The FWC found that the retention payment was contingent on events that were uncertain and could not be determined in advance. Accordingly, it was excluded when calculating the employee’s annual earnings.

With the retention payment excluded, the employee’s annual earnings fell below the high income threshold and he was able to proceed with his unfair dismissal application.

• What does this mean for employers?

The cases demonstrate that calculating annual earnings for unfair dismissal purposes involves more than simply identifying an employee’s base salary.

Before making termination decisions, employers should be aware of the potential risks, including whether an employee has access to the unfair dismissal regime. A key part of this is accurately calculating an employee’s annual earnings.

You can read more about how the FWC approaches the specific issue of car allowances, annual earnings and the high income threshold here.