Unfair Dismissal Payouts Explained
The ideal method of resolving an unfair dismissal claim is the reinstatement of the employee to the position they were originally at. Alternatively, they can be placed in a position that is similar based on hours, responsibilities and pay.
In most unfair dismissal cases though, reinstatement isn’t realistic or practical, so a payout is made to the employee.
What is the maximum unfair dismissal payout?
Where a compensation is awarded instead of reinstatement, it is capped at the lesser of six months’ pay, or half of the current unfair dismissal high income threshold, which is $148,700 as of July 1 2019.
The maximum amount of compensation that can be rewarded is $74,350.
What are unfair dismissal payouts based on?
Compensation will only be ordered if considered to be appropriate by the Fair Work Commission. Compensation is based in a five-step process for calculating an Unfair Dismissal Payout.
Those five considerations are:
- Estimate the remuneration the employee would have received or would have been likely to receive if the employment had not been dismissed
- Deduct remuneration earned by the employee since their dismissal
- Deduct contingencies
- Consider taxation
- Assess the figure against the compensation cap
This is the five-step process for calculating an Unfair Dismissal payout. The formula is set out in Sprigg v Paul’s Licensed Festival Supermarket (The Sprigg formula). Calculating compensation can also be found in s393(2) of the Fair Work Act.
Compensation will only be ordered if considered appropriate by the Fair Work Commission, and reinstatement isn’t possible. Compensation cannot be awarded for shock, distress or humiliation, or other analogous hurt, caused to a dismissed employee by the manner of the person’s dismissal.
Calculating Unfair Dismissal payouts
1. Estimating remuneration:
The first step for the Commission is to figure out how long the employee would have remained employed if they weren’t dismissed. This is done to calculate the amount of money the employee would have earned had they not been dismissed. The Commission will look at the length of time employed before the dismissal, workplace behaviour and their work history.
This amount sets the basis for which the Commission decides how much compensation to order.
In circumstances where the Commission forms the view that the employee would have stayed in the former job for a number of years then remuneration that would have been received over that period is calculated. This may include long service leave and potential bonuses.
As an employee, you will need to provide some evidence of the amount you were earning, including allowances or consistent over time. It is generally a good idea to retain your payslips, or alternatively, use bank records.
2. Calculating Deductions
The second step is the calculation of any deductions. This is remuneration that is earned in any other forms of employment.
Social security payments are generally not considered to be remuneration. However, Workers’ compensation payments are considered to be remuneration and will be deducted.
Furthermore, the effect of compensation on the employer will be considered when making a deduction. The viability of a business essentially means the ability of the business to continue operating. Deductions can be made when the employer presents evidence of the financial situation and the likely effect of compensation on the viability of the business.
This step involves the deduction of an amount from the total remuneration for situations that may have arisen and which ‘might have brought about some change in the earning capacity or earnings’. This includes possible future economic loss or gain.
If an employee’s misconduct contributed to their dismissal, the amount of compensation ordered will likely be reduced. Misconduct is not limited to the period of employment. It can include activities after the dismissal.
Misconduct may include:
- Breach of workplace health and safety
- Threats towards management or
- Illegal activity.
Efforts to reduce loss
The compensation ordered can be affected by the employees’ steps taken to reduce their loss. This means that the employee has taken reasonable, intentional steps to reduce the effect that the dismissal has on them, such as efforts to find a new job. What is considered reasonable depends on the case circumstances. Employees will need to provide proof of the steps taken to reduce the impact of dismissal.
If you have made an unfair dismissal claim, you cannot claim that the dismissal has caused you a loss if they refused to start a new job with the new employer. Such activity can constitute a failure to reduce loss. However, there are circumstances where failure to reduce loss does not occur due to a re-employment offer:
- refusal of a job that is “worse” than the original in terms of status and/or pay
- refusal of a new position where the employee has lost confidence and/or trust in the workplace or employer.
The compensation amount is reduced by the tax the employee would have paid if they had received the amount as wages, this gives the net amount.
The net amount is then increased by the amount of tax liability on the compensation as ordered. This is usually taxed as an employment termination payment.
5. Compensation Cap
The compensation cap is set in s392(5) of the Fair Work Act. The amount ordered to be paid by the Commission must not exceed the lesser of:
• the total amount of remuneration either received by the person, or to which the person is entitled, for any period of employment with the employer during the 26 weeks immediately before the dismissal, and
• half the amount of the high-income threshold immediately before the dismissal