Executives have a host of employment rights if their employment is terminated without agreement
When an employer is contemplating the termination of an employment relationship, it would do well to consider the plethora of rights available to employees, even those not protected by the unfair dismissal laws.
The unfair dismissal laws contained in the Fair Work Act 2009 (FW Act) protect employees earning up to $118,100 plus the 9% statutory superannuation (indexed by a CPI formula on 1 July each year), or those covered by an award or enterprise agreement irrespective of income. It excludes employees on fixed-term contracts whose employment ends on the expiry of the contract and employees in the first six months of employment (or 12 months for employees in organisations employing less than 15 employees).
The excluded class of 'high income' employees are treated as 'sophisticated investors', capable of creating and protecting their own employment interests. However their rights are not enshrined alone in beautifully crafted contracts: they have a range of other statutory and common law causes of action at their fingertips in the event of termination. Although these causes of action do not always receive the same attention as the unfair dismissal laws, the underpinning rights and protections are often more powerful tools because compensation is not capped and the courses of action apply to all stages of employment. Of course all employees have these rights, but they are particularly pertinent for the 'executive' class.
This article provides a brief overview of some of the causes of action that take centre stage when the employment relationship between an executive and an employer is no longer tenable.
The pre-employment promise
Employees have a cause of action under the Australian Consumer Law and its predecessor the Trade Practices Act 1974 against misleading and deceptive representations made during pre-employment negotiations. Executives and highly paid employees have successfully claimed they were induced to accept an offer of employment that was subsequently cut short on the basis of promises about:
- the length of their employment
- the opportunities of employment
- the financial health of the company (which influences the length of tenure and the reputation of an executive).
In Moss v Lowe Hunt & Partners Pty Ltd, an advertising executive who owned his own business accepted an offer of employment with one of his key clients as its strategic planning director, however within 18 months the position was made redundant and his employment was terminated. The executive settled his personal claim against his former employer but brought an action in the Federal Court on behalf of his business (which he had to re-establish following termination). On behalf of his business, the executive claimed that the managing director of the company made misleading representations about the health of the company, including that recent redundancies within the company had saved the company money and placed it in a healthy financial state, and that these representations induced the executive to take up the position.
Justice Katzmann of the Federal Court awarded the executive's business $306,740 for loss of profits because her Honour was satisfied that the executive was 'unlikely to have accepted the job offer if he thought he would be made redundant within 18 months of doing so' and the managing director's misrepresentations had 'lulled him into a false sense of security'.
An aggrieved employee whose employment is terminated earlier than expected will look back to the promises made at the time that he or she was engaged. Given the potential range of compensation for highly paid executives, employers and recruitment agencies acting on behalf of employers must tread carefully when courting potential executives and drafting the contract of employment that will form the basis of the relationship.
The contract of employment
The importance of the contract of employment is amplified where the unfair dismissal laws do not apply. Breach of the express or implied terms of the contract of service may entitle a disgruntled former executive to recover damages. A case in point is the highly publicised claim of Bruce Guthrie, former editor of Melbourne newspaper the Herald Sun, who was awarded $580,808 plus costs and interest in May 2010 after the Victorian Supreme Court found that the newspaper had breached its contractual requirement to pay Mr Guthrie a termination payment. The lesson of this case, and the brief examples below, is to be very aware of the scope of the employment terms and conditions before making a decision to terminate.
For example, does the contract of employment specify a period of notice for termination? If so, is that contract still current and does that period of notice still apply? The well cited case of Quinn v Jack Chia Australia Ltd handed down in 1992 found that the employee's initial contract of employment had been displaced by a new oral contract as he had taken on increased responsibilities over the course of his employment. The employer gave the employee one month's notice but the Victorian Supreme Court found that because the new, oral contract of employment was silent on the notice period required, 'reasonable notice' would apply. The employee was awarded 12 months' notice to enable him to find alternative employment.
A senior executive whose contract of employment has been replaced by an oral contract, or whose contract of employment is silent on the question of notice, may reasonably expect to receive between 3 and 12 months' notice, having regard to the employee's length of service, salary and level of seniority. However, as the FW Act contains minimum notice periods that apply to all employees, it has been argued that these periods should displace the notion of 'reasonable notice'. Employers assert this in their pleadings but there is no definitive case on point to date.
Additionally, the application of internal policies on termination and performance management is not always clear. Internal company policies usually cover all employees, including executives, unless the executive's contract of employment expressly excludes the operation of these policies, or the policy itself expressly states that performance management of executives is not governed by the policy. If the contract does not expressly exclude these policies they may be found to be a binding term of the contract. In the event the employer does not adhere to the processes set out in the policies, it may amount to a breach of contract and give rise to a claim for damages.
Even if internal policies are not contractually binding, comprehensive performance review processes should be followed where possible. Following a performance management policy may prove to be vital in protecting the employer from any of the following causes of action against the reason for termination.
The reason for termination
The FW Act introduced general protection provisions, making it unlawful to terminate an employee or threaten to terminate an employee (called taking adverse action) in a number of circumstances, including relevantly:
- as retribution for the employee exercising a workplace right, such as making a complaint to the employer (potentially even a verbal and informal complaint) or an external body, including the Fair Work Ombudsman or the Australian Human Rights and Equal Opportunity Commission (HREOC) regarding discrimination in the workplace
- to prevent an employee from exercising a workplace right, such as taking paid sick leave or maternity leave under the National Employment Standard (NES)
- for a reason that is prohibited by the FW Act. These are discriminatory reasons such a race, sexual preference, disability, family or carer's responsibilities listed within the FW Act, unless the employer establishes that it is an inherent requirement of the particular position
- for temporary absence from work due to illness or injury (up to three months or continuous paid sick leave, whichever is the greater) or absence due to maternity or parental leave.
This cause of action is intended to complement the prohibitions against discrimination in the workplace contained in Commonwealth and state anti-discrimination laws, which notably also prohibit harassment and vilification. Recent cases applying the adverse action provisions, and the remedies contained in the FW Act, suggest that pursuing an adverse action claim is likely to be seen as a more attractive option to employees than working through the conciliation process under anti-discrimination legislation. It is a cost-free jurisdiction (except for vexatious claims or claims brought without reasonable cause) where the onus of proof shifts heavily to the employer respondent to show that the workplace right alleged by the applicant employee played no part in the decision.
A recent Full Court of the Federal Court decision Barclay v Bendigo Institute of TAFE reinforced the hurdles employers must overcome in defending an adverse action claim (although leave has been given for a High Court appeal). The court's task, it said, was to establish the 'real reason' for the decision to terminate the employee, which is an objective test. Accordingly, the reason given by the employer is not necessarily the real reason even if the person genuinely believes they were not motivated to take action for a prohibited reason. Further, the prohibited reason only needs to have been one reason for dismissal, not the substantive or sole reason for the decision.
An example that may arise is where, coincidentally, an executive makes a complaint to the employer shortly prior to the commencement of performance management processes leading to termination. As in Barclay, the employer will face the difficult burden of establishing the complaint was not an unconscious reason, or part of the reason, for dismissal.
The Federal Court or the Federal Magistrates' Court may make any order the court considers appropriate if it is satisfied the employer has, or proposed to, contravene these provisions. This includes orders for injunction, compensation for loss as a result of the contravention (which unlike the unfair dismissal laws under the FW Act is not capped) and orders for reinstatement of the former employee. Compensation awarded in Australian Licensed Aircraft Engineers Association v International Aviations Service Assistance Pty Ltd included $7,500 for hurt and humiliation to the applicant, who was a licensed mechanical aircraft engineer, highlighting the potential for even greater awards in the case of executives whose reputations and standing within their domain are harmed as a result of the prohibited action.
Whereas Commonwealth and state anti-discrimination laws create criminal offences for victimising employees, taking adverse action under the FW Act is a civil penalty provision that allows the court to impose a penalty of up to $33,000 for companies for each individual breach and up to $6,600 for individuals. Where a course of action has occurred, the employee may claim multiple breaches and penalties and name as respondents individuals in the organisation who were allegedly responsible for the breaches (or aided and abetted the perpetrators).
Unexpected dismissal leaves employees searching for answers and will encourage former employees to query the basis for termination. Where possible, performance management or a documented process leading to dismissal should occur before the employer makes the decision to terminate the employment. The employer should also provide the employee with the clear and unambiguous reason(s) for the decision.
The decision to dismiss an executive is a difficult decision in any circumstance. The absence of unfair dismissal laws does not lessen the burden on employers when making the decision to terminate. Employers must be vigilant and ensure the relationship established during pre-employment negotiations is sound, the employer complies with all contractual requirements and common law obligations and the reason for termination is not, and cannot be perceived as, an unlawful reason for termination. And watch out for the email sent by one of the decision makers in the organisation that destroys your carefully prepared legitimate decision process that pops up during the interlocutory proceedings...
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