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Is a motor vehicle allowance part of an employee’s earnings?

By Charles Power on April 11th, 2018
  1. Termination of Employment
  2. Unfair Dismissal

 

In order to lodge an unfair dismissal claim under the Fair Work Act 2009 (Cth) (FW Act) with the Fair Work Commission (FWC), a worker’s earnings cannot exceed the high-income threshold which, for this financial year, stands at $142,000.

So, does a motor vehicle allowance form part of an employee’s earnings?

In Sam Technology Engineers Pty Ltd v Bernadou (2018) the FWC noted the disparity of approaches in decisions of the FWC, with some treating it as earnings (so it is included) and some not treating it as earnings (so it is excluded).

Where an employer supplies an employee with a vehicle and allows the employee to use it for non-work-related purposes, the proper approach is to estimate the real or notional value of the private benefit (assuming a reasonable monetary value has not been agreed for its private use) and treat the private use proportion of the allowance as earnings.

A car allowance, however, is a payment of money. Therefore, the question is whether it should be included in the employee’s ‘annual rate of earnings’.

The FW Act’s definition

The FW Act definition of ‘earnings’ includes particular payments and benefits such as ‘wages’ and excludes particular payments and benefits, such as ‘reimbursements’.

A car allowance is not part of an employee’s ‘wages’, unless the car allowance is paid to the employee as a means of providing them with additional income and there is no requirement or expectation that the employee will have to use their car for work purposes.

Yet, a car allowance is not a reimbursement because it is a definite predetermined amount to cover an estimated expense, and will be paid regardless of whether the recipient incurs the expected expense.

The FWC’s definition

But the FWC ruled that the ordinary meaning of earnings includes all remuneration received in return for services given, including a car allowance.

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 part of the employee’s wages and is therefore included in their ‘earnings’.

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.  This is done by:

  1. Determining 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
    1. 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 that 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.
  1. 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.
  1. Estimate the cost per kilometre for a car of the type used. This information can be obtained from the RACV, NRMA or other such motoring organisations.
  1. 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
    1. 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 (see paragraph 4), the difference is the private benefit to the employee of the car allowance, which forms part of their “annual rate of earnings”.

Need more help to avoid claims of unfair dismissal in a variety of circumstances?

The Employment Law Practical Handbook has more than 80 chapters covering the A-Z of employment. Subscribers with unfair dismissal concerns can consult chapter U1 Unfair Dismissal, or chapter A3 Modern Awards, or E1 Employment Contracts or even F1 Fair Work Commission – and that’s just for one topic.

Imagine all the other answers you can find at your fingertips if you had a copy of the Handbook.

Don’t delay, order your copy today of the Employment Law Practical Handbook and see for yourself how it can help simplify your business.

 





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