Performance reviews and performance management of employees - criteria for effectiveness - Part 2

Employment contract must properly reflect the employee's current role

When an employee's duties and conditions fundamentally change, employers should confirm the new arrangements immediately with a written document or contract.

This article is a continuation of our earlier article Performance reviews and performance management of employees - criteria for effectiveness.

Many employment contracts are no longer relevant

Most professional and executive employees are employed pursuant to a written (and sometimes unwritten) contract of employment. Solicitors and most executives are not covered by an award, but support staff are generally covered.

Many contracts of employment are poorly worded, ancient and are no longer relevant. Examples I have come across regularly include individuals who are employed at a particular level but then move to more senior roles.

Teacher's initial letter of appointment does not encompass more senior role

One particular example that stands out is a teacher who was first employed in 1978 to teach agriculture at a Sydney school pursuant to a letter of appointment that confirmed the role. The appointment expressed no notice period if the appointment was to be terminated. The teacher then taught other subjects at a much more senior level.

It was clear that the teacher's employment had morphed into something that was other than what was initially envisaged at the time that the letter of appointment was given to the employee in 1978. Essentially, the employee was employed over 25 years later pursuant to an unwritten contract which was terminable on the giving of reasonable notice.

Project manager promoted to CEO without written confirmation

In a seminal case decided by the Supreme Court of Victoria, Quinn v Jack Chia Australia Limited (1991) 1 VR 567, the court held that an employee who was initially employed pursuant to a simple appointment letter but then had his conditions of employment profoundly changed as a result of a promotion, was no longer employed by the original letter.

In that case, the employee was initially employed as a project manager for a construction company. The appointment was confirmed by way of a letter of appointment which expressed an ability by the employer to terminate the employee by giving two weeks' notice.

The employee in the Quinn case was promoted to the CEO position after a few years with no written confirmation or new appointment letter or contract. Subsequently the employee was terminated by the employer relying on the original letter of employment. The Victorian Supreme Court held that because the employment had profoundly changed, this cancelled out the initial appointment letter.

New arrangements need to be confirmed in writing

The lesson from this case is that when the employment circumstances and conditions fundamentally change, consideration must be given immediately to confirming the new arrangements by way of a written document or contract. Otherwise an employer risks cancelling out any previous written term and exposing the employer to a claim for reasonable notice on termination.

In the Quinn case, the employee was given 12 months' pay in lieu of notice in circumstances where he was an employee overall for less than five years but was aged in his late 50's. The court took into account the senior nature of his employment and the likelihood that he would not be able to obtain senior employment for a considerable period of time again.

Performance appraisal is natural starting point for terminating an employee

In any event, with respect to termination, if a business wishes to consider terminating an employee on performance grounds in circumstances where there is no written contract of employment allowing for termination on notice, then the performance appraisal/management process will be the natural starting point to justify the termination.

There is an implied term in all employment contracts (whether written or unwritten) that the employee is competent to perform the duties for which they are employed.

The inability to discharge those functions must be proved by the employer on a balance of probability basis.

Duties that are implied in employment

Whether a contract of employment is in writing or not, there will be some duties that will always be implied. Some of them give significant management discretion and power to employers. They exist in all employment circumstances and can be readily applied. Some are listed below.

Fiduciary obligations

Although not extensively applied across all categories of employees, very senior employees can be held to owe fiduciary duties if they exercise functions of trust and discretion.

Duty to obey orders

This must be related to what the employee was contracted to do. However, a direction cannot be for an unlawful act.

Duty of fidelity and good faith

This is hard to define precisely but it can be stated to be essentially the giving of loyalty by an employee to an employer. It covers a multitude of common issues such as, for example:

• attending work on time and remaining until finishing time
• performing work in a competent manner
• obeying orders

The immediate manifestation of this duty enables an employer to do performance appraisals and management of an employee. In essence it is the source of the employer's power to conduct a performance review.