In brief – Employers must act fairly and follow their policies in performance management and termination of employees

If employers do not act fairly and follow their own policies, they risk unfair dismissal claims, workers’ compensation claims and claims for damages.

(This article is the third in a series. Please see our earlier articles Performance reviews and performance management of employees: criteria for effectiveness and Performance reviews and performance management of employees: criteria for effectiveness – Part 2.)

Unfair dismissal claims and performance management

Unfair dismissal claims will only be an issue if the employee is not employed by a constitutional corporation, or if is, then the constitutional corporation must have more than 15 employees. Other conditions apply such as remuneration, but assuming that a terminated employee is eligible, then relief may be available.

In my view, employers should bear in mind the need to be "fair" in all circumstances, even when they are not obliged to do so. To do otherwise invites an employee to consider options that they may have and take further action.

Often disgruntled employees who are terminated for controversial performance issues will seek legal advice. Their lawyers will often develop cases against employers, particularly when there has not been an adequate audit trail regarding performance concerns and only lip service has been given to fair process in the review of the performance issues.

Employers must act fairly to avoid employees taking stress leave

If an employee becomes stressed due to poor behaviour as a result of a performance review or performance management process, then that employee could take stress leave and claim workers’ compensation. The requirements of the workers’ compensation laws still apply to all employers.

Under section 11A of the Workers Compensation Act 1987 (NSW), stress leave claims cannot be made if the stress results from "reasonable" actions taken by an employer. However, workers compensation cases have essentially held that "reasonable" action by an employer may also mean "fair action".

Consequently, if employers do not treat employees fairly and employees get stressed, then they will be eligible to seek benefits from the employer's workers' compensation insurers. A further consequence from such an action is that employers will be restricted from terminating employees if they are on workers’ compensation or are temporarily absent from the workplace or on sick leave.

There are no exclusions to employees making these claims. No remuneration cap applies for unlawful termination provisions. Even executives can claim and make applications for compensation. Fines can even be imposed.

Enforcement of human resources policies

There are a number of recent cases involving enforcement of human resources policies. There was a rush many years ago of employers endeavouring to become "employers of choice" and issuing policies that portrayed them as beacons and exemplars of the ideal workplace, where decisions were fairly and equitably made and where issues were confidentially and justly resolved. Managers were often nominated to be available to consult on all decisions which affected individuals at the workplace.

Notwithstanding the warm glow that was acquired by those who prepared such policies, the problem often was that very few people actually read or even knew what was contained in the policies (worryingly, many did not believe them at all). The adoption of a policy is insufficient if it is not backed up by training, compliance mechanisms and resources for the HR teams.

The other problem that has emerged in recent years (certainly in the business context) is that employee issues are not always dealt with promptly and prescribed procedures cannot always be applied to every situation.

Policies adopted by employer are part of the employment contract

There are some court decisions in which employees have been successful against employers by relying on the language used in policies to successfully create rights. There are two significant recent examples, namely, Dare v Hurley (2005) FMCA 844 and Goldman Sachs J B Were Services Pty Ltd v Nikolich (2007) FCAFC 120.

In both cases, it was held that the policies adopted by the employer were incorporated into the employment contract because the contract required the employees to comply with policies. Having such contracts and policies is not necessarily anything that is wrong.

The courts essentially have held that if the policies are there, they must be complied with. You would think that was stating the obvious.

The logical consequence of not following a policy is that a failure to follow a fair procedure will result in compensation being awarded by the courts to an employee for that failure. The compensation in these cases reflects the time it would have taken to follow the procedure and also the likelihood that the employee may not have lost his/her job had a proper procedure been conducted.

Compensation that has been awarded in these circumstances has been significantly more than what would have been awarded for a failure to provide reasonable notice.

Employee terminated during three month probationary period

In Dare v Hurley, the employee, Ms Dare, was terminated during her three month probationary period. However, she was dismissed after she disclosed that she was pregnant. To add to the complexity, she was contracted by a labour hire company and informed over the phone of her termination while she was on sick leave.

At the hearing the employer asserted that the real reason for termination was because the employee had inappropriately deleted documents from her computer and installed password protection on documents contrary to their policy. However, these issues were never put to the employee prior to termination.

In reply, evidence was given by Ms Dare that although she was given an employee manual, she was not invited either to read it or to verify that she had done so.

The court held that the employee policy formed part of an employment contract. Given that it had not been verified, the court held that it did not require compliance by the employee, even though the court held that there was an implied term that the obligations of the policy formed part of an implied term of the employment contract.

Employer failed to follow its own disciplinary procedures

However, more significantly, the court held that the employer had failed to follow its own disciplinary procedures by not issuing warnings and giving the employee an opportunity to respond. As a result, the employer did not have a clear right to terminate the employment.

The court ordered damages to be paid to the employee by the employer. It held that if the employer had complied with its policies, there would have been a chance that the employee would have saved her employment and only received a warning and would not have been terminated.

The court awarded the employee a further two months’ pay as compensation. She was also awarded damages for the stress caused by her dismissal. Compensation could have been even greater had the court held that it was unlikely that the employee would have retuned to work after giving birth.

Employee takes stress leave and terminated for inability to return to work

In Goldman Sachs J B Were Services v Nikolich, the employee was employed as a trader and performed his duties as part of a group. Remuneration was based on the group achieving targets.

A critical employee resigned from the employee's team and a rearrangement of working team members meant that the employee would not be earning as high an income as he had previously.

The employee protested and sought a review of the decision that had been made pursuant to the employee manual that was in existence at the time with his employer. The employer failed to do so.

As a result of the employee's frustrations, he took stress leave. He was terminated for his inability to return to work and commenced proceedings in the Federal Court against the employer.

Employee awarded damages because the employer did not deal with his complaint properly

The employee was awarded damages which were calculated for the purposes of placing him in the position that he would have been in if the company had complied with its own policy. Had the complaint been dealt with properly, he would not have been subjected to frustrations that he experienced and would not have fallen into a depressive state and lost his job.

He was awarded lost income up until the date of judgment plus a further six months' pay. The court was of the view that it would take this additional period for him to find a new job. The compensation was significant and amounted to over $450,000.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2024.

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