Dis­miss­ing Senior Employ­ees – The Pit­falls to Avoid – Part 2

In the sec­ond and final part of this arti­cle we exam­ine the legal claims senior exec­u­tives can bring on ter­mi­na­tion of employ­ment – and how employ­ers can safe­guard against them. Read Dis­miss­ing Senior Employ­ees — The Pit­falls to Avoid — Part 1’ here.

Unfair dis­missal

For an employ­ee who is cov­ered by the unfair dis­missal juris­dic­tion in the Fair Work Act 2009 (Cth), there are clear rea­sons for employ­ers to fol­low a fair pro­ce­dure before ter­mi­nat­ing the employ­ee’s employment. 

A fair pro­ce­dure gen­er­al­ly involves issu­ing poor­ly per­form­ing employ­ees and those guilty of mis­con­duct with a series of writ­ten warn­ings (and oppor­tu­ni­ties to improve) before ter­mi­na­tion of employ­ment is contemplated.

Fur­ther­more, before an employ­er decides to dis­miss the employ­ee, gen­er­al­ly they should be giv­en a writ­ten invi­ta­tion to a for­mal dis­ci­pli­nary meet­ing, which also sets out the alle­ga­tions against them and advis­es them of their right to be accom­pa­nied by a sup­port per­son. At the meet­ing the employ­ee should be giv­en an oppor­tu­ni­ty to address the alle­ga­tions and — show cause” as to why they should not be dis­missed — before a deci­sion to ter­mi­nate their employ­ment is made. 

Sim­i­lar­ly, in a redun­dan­cy sit­u­a­tion, employ­ees should be con­sult­ed about the redun­dan­cy and the employ­er should con­sid­er whether there are any alter­na­tive roles that an employ­ee could be rede­ployed into.

Fail­ing to fol­low these pro­ce­dures risks a find­ing of unfair dis­missal, and an order that the employ­er rein­state the employ­ee in their for­mer role and/​or pay damages.

The good news for employ­ers is that many senior exec­u­tives are not enti­tled to bring an unfair dis­missal claim, regard­less of the per­ceived unfair­ness” of their dismissal.

This is because the Fair Work Act 2009 pro­vides that employ­ees who earn more than the high income thresh­old (cur­rent­ly $145,400) can­not bring a claim for unfair dis­missal unless their employ­ment is cov­ered by an enter­prise agree­ment or a mod­ern award.

Giv­en that mod­ern awards do not gen­er­al­ly apply to senior employ­ees, many senior exec­u­tives will be out­side the award régime. How­ev­er, some awards do pro­vide cov­er­age for even very senior employ­ees and there have been cas­es where even CEOs have been held to be award cov­ered (see: Ms Veron­i­ca Cubil­lo v North Aus­tralian Abo­rig­i­nal Fam­i­ly Vio­lence Legal Ser­vice [2011] FWA 6818). 

It is there­fore essen­tial to con­sid­er award cov­er­age pri­or to ter­mi­nat­ing a senior executive.

Gen­er­al Pro­tec­tions / Discrimination

If a senior employ­ee is not enti­tled to bring a claim in unfair dis­missal then, at least from the per­spec­tive of an unfair dis­missal claim, there is no need for an employ­er to fol­low any for­mal process to effect the dis­missal. An employ­ee’s employ­ment can be ter­mi­nat­ed with­out any pri­or for­mal warn­ings giv­en, with­out any rea­son for the ter­mi­na­tion being giv­en and (in a redun­dan­cy sit­u­a­tion) no thought giv­en to rede­ploy­ment, with­out the risk of a find­ing of unfair dismissal. 

How­ev­er, giv­en the oth­er poten­tial legal reme­dies avail­able to employ­ees on ter­mi­na­tion – for exam­ple claims in dis­crim­i­na­tion or pur­suant to the gen­er­al pro­tec­tions pro­vi­sions in the Fair Work Act 2009  — it is often advis­able for some sort of process to be fol­lowed pri­or to ter­mi­na­tion and at the very least for the employ­ee to be giv­en writ­ten rea­sons for their dis­missal, to seek to reduce the risk of a suc­cess­ful chal­lenge by the employee.

If a senior exec­u­tive’s employ­ment is ter­mi­nat­ed with­out being giv­en a rea­son for such ter­mi­na­tion, it will be much eas­i­er for them to allege that the true rea­son for the ter­mi­na­tion was one pro­hib­it­ed by law.

For exam­ple, the gen­er­al pro­tec­tions régime under the Fair Work Act 2009 makes it unlaw­ful to take adverse action” (includ­ing dis­miss­ing an employ­ee) because they have exer­cised a work­place right” which includes mat­ters such as tak­ing leave or mak­ing a com­plaint in rela­tion to their employment.

Often in cas­es where the rela­tion­ship with a senior exec­u­tive has bro­ken down (which in fact may be the rea­son for the ter­mi­na­tion of employ­ment), the employ­ee will have made some sort of com­plaint to the senior man­age­ment team about an aspect of their employment. 

With­out an employ­er tak­ing steps to demon­strate that such com­plaints played no part in the deci­sion to dis­miss (at the very least by pro­vid­ing writ­ten rea­sons for the ter­mi­na­tion which ref­er­ences the employ­ee’s per­for­mance, con­duct, etc), then there is a real risk that an employ­ee will be able to mount at least an arguable claim that the employ­er has ter­mi­nat­ed their employ­ment in breach of the gen­er­al pro­tec­tions pro­vi­sions. Dam­ages in gen­er­al pro­tec­tions and dis­crim­i­na­tion cas­es are uncapped and the court and Fair Work Com­mis­sion also have pow­ers to order rein­state­ment in some circumstances.

Breach of contract

Before tak­ing any deci­sion to dis­miss, employ­ers should also care­ful­ly con­sid­er the terms of the senior exec­u­tive’s employ­ment con­tract and any work­place poli­cies in place. If an employ­ee can show that they have a con­trac­tu­al right for some sort of dis­ci­pli­nary process to be fol­lowed before their employ­ment can be ter­mi­nat­ed, fail­ure to fol­low this risks a claim in breach of con­tract if the process is not adhered to.

Whilst a well draft­ed dis­ci­pli­nary pol­i­cy is often a use­ful tool for an employ­er to imple­ment (for rea­sons includ­ing that it pro­vides a process for man­agers to fol­low that will reduce the risk of a find­ing of unfair dis­missal), it is gen­er­al­ly advis­able that such poli­cies make clear that they do not apply to the most senior mem­bers of the com­pa­ny (in order to give the employ­er a com­plete dis­cre­tion as to when and how such employ­ees’ employ­ment will be terminated).

Oth­er mat­ters to consider

Although each sit­u­a­tion will depend on its own facts we set out below some fur­ther mat­ters that it may be pru­dent for employ­ers to con­sid­er when ter­mi­nat­ing the employ­ment of senior executives:

1. Will the employ­ment be ter­mi­nat­ed forth­with (and any enti­tle­ment to notice be paid in lieu) or will the employ­ee be required to work out their notice peri­od? If they are required to work out their notice peri­od should they be put on gar­den­ing leave?

These ques­tions will often involve bal­anc­ing the poten­tial dam­age an employ­ee can do whilst remain­ing employed, with the loss of con­trol an employ­er can assert over an indi­vid­ual once they have left employment.

Whilst an employ­ee is on paid gar­den­ing leave, an employ­er can gen­er­al­ly require the employ­ee to not con­tact oth­er employ­ees or clients or access com­pa­ny infor­ma­tion (fail­ure to adhere to such direc­tions might result in the employ­ee’s ter­mi­na­tion of employ­ment and loss of notice pay). It can also be an effec­tive way of stop­ping the employ­ee from set­ting up in com­pe­ti­tion against the com­pa­ny. This is one rea­son why pro­vid­ing for a long peri­od of notice for senior employ­ees in their employ­ment con­tracts can be advantageous. 

An employ­ee who is ter­mi­nat­ed sum­mar­i­ly is much hard­er to con­trol. Though they may be sub­ject to con­trac­tu­al restraints of trade, enforc­ing these can be oner­ous and expen­sive. There are also often argu­ments as to whether such restraints are enforce­able (giv­en that unrea­son­able restraints of trade will have no effect).

2. Deeds of Release and an agreed exits

The ter­mi­na­tion of a senior employ­ee’s employ­ment can be unset­tling to oth­ers with­in the organ­i­sa­tion and also has the poten­tial to dam­age the com­pa­ny’s rep­u­ta­tion in the out­side world.

Some­times employ­ers will there­fore wish to offer senior employ­ees the oppor­tu­ni­ty of resign­ing (rather than being dis­missed) to seek to pre­serve the rep­u­ta­tion of the company. 

Such an offer may not be an attrac­tive one to an employ­ee — espe­cial­ly if they do not con­sid­er there is a good rea­son for their employ­ment to be ter­mi­nat­ed – and employ­ers will often need to include in such offer a finan­cial pay­ment to incen­tivise employ­ees to agree. 

Usu­al­ly such arrange­ments are for­malised in a Deed of Release where­by the exact terms of the depar­ture can be agreed.

Deeds of Release often also include pro­vi­sions where­by there is an agree­ment about the form of com­mu­ni­ca­tion (by both employ­er and employ­ee) to be used regard­ing the end of the employ­ment. This can be used to ensure that the mes­sage giv­en to inter­nal and exter­nal stake­hold­ers is a pos­i­tive one, eg that the out­go­ing employ­ee is con­tin­u­ing to work with the com­pa­ny whilst their replace­ment is recruit­ed to ensure a smooth tran­si­tion, etc.

The Deed will often set out exact­ly what the employ­ee can and can’t do dur­ing the remain­der of their employ­ment – and may lim­it their con­tact with oth­er employ­ees and clients.

In addi­tion, a Deed of Release will also usu­al­ly pro­vide that, in con­sid­er­a­tion of a pay­ment to the employ­ee, the employ­ee waives the right to bring any legal claims against the employ­er in respect of the employ­ment or its termination.

It is pos­si­ble to struc­ture the Deed so that pay­ments are made to employ­ees as some­thing of a good behav­iour bond. For exam­ple, the Deed might pro­vide that the employ­ee will con­tin­ue to receive sev­er­al stag­gered pay­ments from the com­pa­ny post-ter­mi­na­tion of employ­ment, so long as the for­mer employ­ee does not com­pete with the com­pa­ny or con­tact its clients. This may be an eas­i­er way to con­tain a for­mer employ­ee than rely on con­trac­tu­al restraint of trades – but it will come at a finan­cial cost to the employer. 

As above, employ­ers should take care that any ter­mi­na­tion pay­ments do not offend the ASX rules or those set out in the Cor­po­ra­tions Act 2001.