Recently employers have faced unprecedented challenges relating to the management of employees working from home, the return of employees to the office following the ease of lockdowns and ensuring business operations remain viable in the context of the COVID-19 crisis. A number of employers have also been forced to make difficult decisions to implement salary reductions or undertake restructures which lead to a reduction of roles.
There are a number of legal risks associated with the implementation of change including redundancies or dismissals. One of the major risks is that a dismissed employee might make an unfair dismissal claim pursuant to section 394 of the Fair Work Act 2009 (Cth) (FW Act). However, this risk does not arise where the employee is not covered by industrial instrument and their income is above the threshold prescribed by section 333 of the FW Act (currently $153,600 gross).
The issue of how the high income threshold applies is more topical than ever because many employers are now restoring salaries in the path to recovery from the COVID-19 crisis. As a consequence, employees whose salaries previously fell below the high income threshold (and who were therefore protected from unfair dismissal), might now become ineligible for such protection if their salary is restored above the threshold.
The recent decision of the Fair Work Commission (Commission) in Stinger v 1 Step Communications Pty Ltd  FWC 3508 (Stinger) illustrates the serious challenges employers might face if a salary restoration for high income earners is not implemented in a careful manner. The impact of this decision for employers is discussed below.
WHAT ARE EARNINGS FOR THE PURPOSES OF THE HIGH INCOME THRESHOLD?
Under the FW Act, the earnings which can be taken into account for the purpose of assessing whether an employee exceeds the high income threshold include wages and the agreed money value of non-monetary benefits (such as use of a motor vehicle). In contrast, earnings which cannot be determined in advance (such as incentive-based payments or overtime, unless the overtime is guaranteed), reimbursements and compulsory superannuation contributions are not included.
WHEN DOES THE ASSESSMENT OF EARNINGS TAKE PLACE FOR THE PURPOSES OF THE HIGH INCOME THRESHOLD?
Regulation 3.05 of the Fair Work Regulations 2009 (Cth) (FW Regulations) states that the assessment of earnings for the purposes of the high income threshold must take place “immediately before the dismissal“.
STINGER V 1 STEP COMMUNICATIONS PTY LTD  FWC 3508
While the issue of salary manipulation “immediately before the dismissal” in the context of regulation 3.05 of the FW Regulations has remained untested for a long time, the Commission has finally addressed it in Stinger.
In Stinger, an executive level employee whose pre-reduction salary was above the high income threshold and who subsequently agreed to a salary reduction was held to be a person protected from unfair dismissal, even though the employer restored her pre-reduction salary on the day of the dismissal.
The employer argued that the employee’s salary exceeded the high income threshold at the time of dismissal. The employer also argued that the decision to restore the employee’s salary was not implemented for the purpose of avoiding the unfair dismissal jurisdiction, but to allow the employee to receive payment of her accrued entitlements at the higher rate. The employer submitted that the employee’s earnings should be ascertained by reference to her final payslip only.
On the other hand, the employee argued that her annual rate of earnings should be ascertained by reference to her post-reduction salary.
The Commission rejected the employer’s argument and ruled that the employee’s final payslip did not “provide a sound basis on which to ascertain the [employee’s] annual rate of earnings [for the purposes of the high income threshold]“. It also noted that in ascertaining the employee’s rate of annual earnings it is necessary to consider the circumstances leading up to dismissal. It therefore determined that the employee’s lower salary which was in place prior to the date of dismissal was the rate that applied. The Commission ruled that a different finding would “allow for the manipulation of the [employee’s] salary by the [employer] with the effect of denying the [employee] a right to challenge her dismissal“.
WHAT ARE THE IMPLICATIONS FOR EMPLOYERS?
Employers must be vigilant not only when implementing salary reductions, but also when an employee’s salary is increased, particularly if the increase places them above the high income threshold.
While the FW Regulations require earnings for the purposes of the high income threshold be assessed immediately before dismissal, Stinger explains this exercise does not involve a simple analysis of an employee’s final payslip.
Employers who have implemented COVID-19 related salary reductions for high income earners will face a challenge if they restore an employee’s salary above the high income threshold immediately before dismissal in an attempt to preclude them from making an unfair dismissal claim. However, that challenge might be overcome if:
- The restoration of the employee’s salary is not made immediately before the dismissal; and
- The restoration of salaries is made across the board and includes all staff (not just those being dismissed).
While high income employees are precluded from making unfair dismissal claims if they are also award or enterprise agreement free, employers should be wary that they still have access to a number of other protections under the FW Act (such as general protections claims) and anti-discrimination legislation. Employers must implement a well-planned and careful approach to redundancies and other dismissals to avoid employees challenging those decisions using the mechanisms available to them.
If you require guidance with the implementation of a business restructure, or require assistance with defending employee claims, please contact us.
This article was written by Clare Raimondo, Partner and Michal Bergander-Florek, Associate.