Australia: What are the potential risks of terminating an employee's employment?

For most employers the demands of running a business require an ability to dispense with services of workers in certain circumstances.

Reasons for terminating an employee's employment may include the employee being:

• excess to requirements;
• guilty of misconduct;
• incompetent and incapable of performing their role; or
• incompatible with the culture or personnel of the organisation.

There are a number of issues to overcome when terminating an employee's employment, not all of which can be covered here. This article concentrates on redundancy, misconduct and poor performance.

In dismissing an employee, employers are required to demonstrate both substantive fairness and procedural fairness. Substantive fairness requires a legitimate reason to dismiss the employee and procedural fairness concerns the manner in which the termination is effected.

Employers who fail to apply both substantive and procedural fairness in terminating an employee's employment run the risk of a claim for:

• Unfair dismissal (s.385(d) of the Fair Work Act 2009 ("the Act")). Unfair dismissal is available to employees who have completed the minimum period of employment (six months or 12 months in the case of a small business), whose employment is covered by an award or agreement or who earn less than the high income threshold (currently $123,300).
• Breach of contract.
• Breach of Award
• Breach of Enterprise Agreement.

Or other offences under the Act.

An incompatibility with the culture or personnel of the employer's organisation is not a valid ground for terminating an employee's employment where he/she is adequately performing the duties required of the position.

Redundancy

An employer may terminate an employee for the reason of redundancy if the employer no longer requires the position to be performed by the employee or by anyone else due to operational requirements of the business (s.389(1) of the Act).

An employee genuinely made redundant cannot claim unfair dismissal. However, a redundant employee is entitled to additional pay (known as redundancy pay or severance) over and above other entitlements payable on termination of employment. Redundancy pay is also payable when termination of employment occurs due to the employer's insolvency or bankruptcy (s.119 of the Act).

It is not a case of genuine redundancy if it was reasonable for the employee to be redeployed within the employer's enterprise or any associated entity of the employer (s.389(2) of the Act).

In the case of genuine redundancy, the employer must ensure it complies with any obligation in an applicable award or enterprise agreement regarding consultation and job search entitlements.

If the redundancy is not a genuine redundancy, the employer may be liable for claims as set out above.

Misconduct

In exceptional circumstances an employer may dismiss an employee without warning and without notice or payment in lieu thereof. This is known as summary dismissal.

Summary dismissal tends to be hard to justify and in all but the most blatant cases, taking legal advice prior to effecting a summary dismissal is essential.

In many cases, the cost of paying out an employee's notice will be lower than the cost of the dispute that so often subsequently develops after a summary dismissal.

The following will, in theory, justify summary dismissal:

• wilful or deliberate behaviour by an employee that is inconsistent with the continuation of the contract of employment (typically this must be blatant repeated conduct);
• conduct that causes serious and imminent risk to the reputation, viability or profitability of the employer's business;
• conduct that causes imminent risk to the health or safety of a person;
• the employee, in the course of the employee's employment, engaging in criminal conduct such as theft, fraud or assault;
• the employee being intoxicated at work;
• the employee refusing to carry out a lawful and reasonable instruction that is consistent with the employee's contract of employment (typically this would need to be blatant repeated conduct);
• gross neglect of duty or incompetence. Only exceptional circumstances of incompetence would justify summary dismissal e.g. where it could be shown that the employee was actually dishonest or fraudulent in the recruitment process; and.
• grave breach of confidentiality (if pertinent to the position).

Poor performance

An employee's performance will be inadequate if the employee frequently fails to meet targets or other inherent requirements of the position. The employee must be made aware of the requirements of the position before commencing employment (and of any change to his/her duties agreed after engagement). Terminating an employee for poor performance runs a significant risk of an unfair dismissal claim, to minimise this risk employers need to comply with procedural requirements carefully.

(i) Fairness

Substantive fairness requires that the employer have a legitimate reason to justify terminating the employee's employment such as misconduct or performance issues.

Procedural fairness requires the employee be given:

• notification;
• an opportunity to respond; and
• warning(s) of termination of employment.

Procedural fairness requires that the disciplinary procedure be applied fairly and consistently to all employees. In any claim for unfair dismissal, the Fair Work Commission with carefully review the process undertaken in dismissing an employee and determine whether it was fair.

(ii) Warning

Where an employee's performance does not meet a satisfactory standard, the first step taken should be informal counselling. The employer should provide the employee with details of the performance issues and give the employee an opportunity to improve within a specified period. Any support required to assist the employee should be discussed. Where informal counselling does not produce the required outcome, a more formal process should be commenced. This may involve a performance management plan that documents the issues, actions to be taken and set the timeframe for improvement and further review.

The Act does not set the number of warnings that must be given to an employee concerning unsatisfactory performance. Employers should however, provide at least one written warning of possible dismissal which outlines the performance issues, details the improvement required and a reasonable timeframe in which the employee is given an opportunity to improve.

In the decision of Steven Bonser v Metcash Trading Limited trading as Australian Liquor Marketers Pty Ltd [2010] FWA 9325 Commissioner Cargill held the termination of Mr Bonser's employment for poor performance was not harsh, unjust or unreasonable.

Mr Bonser brought an application for unfair dismissal following the termination of his employment by Australian Liquor Marketers Pty Ltd ("ALM") in June 2010.

Mr Bonser had been employed by ALM as a storeperson for almost nine years. In 2003 ALM introduced a new work system which allowed it to identify the time required for each employee to complete their required tasks. In 2005 ALM required employees to achieve 100% accuracy per day.

Mr Bonser failed to achieve the required target and was informally counselled on 13 August 2008 and 3 March 2009. He was issued with a formal warning on 24 June 2009 for failing to wrap pallets in the manner required. In late January 2010 Mr Bonser was spoken to by his supervisor on a number of occasions for his failure to meet the required performance levels. A further written warning was issued in February 2010 for swearing at his supervisor.

Mr Bonser was again counselled for failing to meet required standards of performance in March and April 2010.

On 20 April 2010 Mr Bonser was issued with a first written warning for failing to meet required performance standards. Two performance management audits were then conducted on Mr Bonser, the first on 29 April 2010 and then on 6 May 2010. The audits identified that there were no physical or psychological impairments to Mr Bonser achieving the desired level of performance.

Mr Bonser was then moved to a less labour intensive part of the warehouse; however, his performance did not improve.

On 3 June 2010 a second written warning was given to Mr Bonser for failing to meet performance standards. A further review of Mr Bonser's performance was conducted by ALM on 11 June 2010 where it was determined he had not met the required performance standards. On 15 June 2010 Mr Bonser's employment was terminated.

In dismissing the application, the Commissioner stated:

"....I note that the evidence disclosed that the applicant had been encouraged to and offered assistance to reach the required performance levels but had not done so...I now turn to..."procedural fairness"... I am satisfied the applicant was notified of his dismissal and was given an opportunity to respond prior to the respondent making a decision to termination his employment. The applicant had at least one support person with him at each of the discussions with the respondent which took place in the period during which he was subject to performance management..."

Contract & Policy Requirements

If there are contractual terms, policies and/or procedures detailing the management of underperformance and/or the procedure for terminating employment which apply to the employee's employment, the employer must ensure it complies with those procedures.

Recommendations

Employers should tread carefully when terminating an employee's employment for performance issues. It is essential the employee is informed of any performance issues and is afforded an opportunity to improve his/her performance before termination is effected.

In cases of misconduct, the employer must have solid evidence before summarily dismissing an employee.

Where an employee is genuinely surplus to requirements they may be made redundant without risk of an unfair dismissal claim, but extra payment is required, and the procedural steps need to be followed to ensure that the redundancy is genuine.

Failure to ensure substantive and procedural fairness is applied when terminating an employee's employment is likely to result in a claim being made against the employer in respect of the termination.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.