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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.