Why sacking senior executives is a risky business

Since the enactment of the ‘adverse action’ provisions under the Fair Work Act 2009 (Cth) (FW Act) some 10 years ago, it is far more difficult for an employer to lawfully dismiss an executive or senior manager. Why? Because adverse action claims:

• are relatively easy to bring;
• can include compensation for hurt, distress and humiliation (and damages are uncapped);
• can be difficult to successfully defend (due largely to a reverse onus of proof); and
• expose the employer to considerable financial, legal and reputational risks – even when there was a good reason to remove the executive and the terms of the employment contract were complied with.

It is therefore not surprising that the number of senior, and highly paid, individuals commencing adverse action claims to challenge their dismissal is continuing to trend upwards. So, what are adverse action claims and how can an employer protect itself against these risks?

What are ‘adverse action claims’?

Adverse action claims can be brought under s 340 of the FW Act by an employee of most employers[1] where the employee alleges they were subjected to some form of detriment by their employer, such as being placed on a performance improvement plan, or not receiving a promotion or bonus, or being dismissed, because they had, or exercised, or were intending to exercise, a ‘workplace right’.

A ‘workplace right’ is broadly defined[2] and includes any entitlement to a benefit under a workplace law (such as annual leave, sick leave and parental leave) or being able to make a complaint or inquiry either in relation to your employment OR to certain workplace law-related external bodies, such as the Fair Work Ombudsman or Equal Opportunity Commission. So, an executive who, for example, makes a bullying complaint, either internally or externally, would be exercising a workplace right. If that executive is subsequently dismissed, they may claim their dismissal was because they had exercised a workplace right, and then the employer must prove this was not a factor in the decision to dismiss the executive.

Often, one of the main drivers for the dismissal of a senior executive is the breakdown in key stakeholder relationships. In this environment, the executive will likely have made some type of complaint pertaining to their employment, perhaps to the CEO or HR or the Board. If the employer has decided the executive must go, it must proceed carefully to minimise the risk of a successful adverse action claim.

Minimising the risks

There are five key steps an employer can and should take, when dismissing a senior executive for performance or conduct reasons, to minimise the risk of a successful adverse action claim.

1. Follow due process – even though the senior executive may be unable to bring an unfair dismissal claim, or is unlikely to do so because of the limit on compensation, the employer should still try to ensure that the dismissal is effected in a procedurally fair manner. This may mean no more than providing the reasons for the proposed termination, giving the executive a fair opportunity to respond, and weighing up that response before proceeding to terminate.
2. In the lead up to the decision to terminate, create accurate contemporaneous notes of meetings and conversations that will provide evidence of the reason/s for the decision to terminate.
3. Provide reasons for the decision to terminate to the executive so the executive cannot rely on the absence of a stated reason to mount their case that the termination must have been because they had exercised a workplace right.
4. Comply with the terms of the employment contract and any relevant policy – do not cut corners or unduly rush the process, as this could give the appearance of there being something untoward.
5. Ensure the person who makes the decision to terminate can give credible evidence about why they made their decision. Their decision must be based only on relevant and legitimate information and not irrelevant or potentially unlawful material. This means any information provided to the decision-maker by the person who is recommending dismissal must not be tainted by the fact that the executive had exercised a workplace right. This is important because it enables the decision-maker to give credible evidence at trial (should it come to that) of the reason/s for dismissal and, in particular, that the reason/s did not include a prohibited reason, but were genuine reasons pertaining to the executive’s conduct or performance or the company’s business needs.

Recent cases attest to how critical contemporaneous evidence is and the high costs for an employer who gets it wrong.

Recent adverse action claims by senior managers

In March 2019, the Federal Circuit Court ordered the reinstatement of a senior Australian-based regional leader of a global company, with back-pay of $1.1m. The Court found, following a 7 day hearing that commenced in August 2017, adverse action had been taken against the manager (comprising an ethics investigation, performance improvement plan, suspension and dismissal) because he had exercised various workplace rights (including making complaints about how he was treated, taking paid personal leave and initiating a proceeding).[3]

In June 2019, the Federal Court of Australia handed down two decisions on adverse action claims brought by a COO and CEO respectively.

In Steven Tran v Kodari Securities Pty Ltd[4], the Chief Operations Manager of a company was given a new contract to sign which reduced his role, but not his salary. The manager initially signed the contract, then tore it up and asked for time to allow his lawyer to review it. The company refused and subsequently treated the manager’s refusal to sign as his ‘resignation’.

The Court held the manager was simply asserting his workplace right to have the new contract reviewed and this was the reason for the company dismissing him. The manager was awarded six months’ pay as compensation, plus a further $10,000 for hurt and humiliation, and the company was fined $35,000 for taking the unlawful adverse action (and further penalties for coercion).

The Court paid careful attention to the candour and responsiveness of the witnesses in assessing their respective credibility and reliability, particularly how each witness gave evidence under cross-examination. This led to the Court finding Mr Tran to be a more credible and reliable witness on the key issues in dispute than either George Kodari or Michael Kodari.

In contrast, in The Environmental Group Ltd v Peter Bowd[5], a CEO claimed he was subjected to an investigation into his alleged misconduct, suspended and then sacked because he was a ‘whistle-blower’ – he had raised concerns in a report to the Board, and then lodged a complaint with ASIC, about alleged financial irregularities. However, the company was able to provide contemporaneous emails and text messages as evidence of the Board’s genuine concerns about the CEO’s performance and his treatment of staff. Three members of the Board also gave evidence, accepted by the court, that it was these concerns that led to the decision to terminate the CEO’s employment.

The Court also found the CEO’s complaint to ASIC, while made in connection to his employment, was not made in good faith, but as a device to prevent the termination of his employment due to the Board’s genuine concerns about his performance. For this reason it did not amount to the exercise of a workplace right.

In summary

The above decisions demonstrate the ease with which adverse action claims may be brought, the importance of having credible evidence to support the reason for dismissal, and the high potential costs for an employer who does take unlawful adverse action.

[1] Employees of employers who are not in the federal workplace relations system, such as small unincorporated businesses or partnerships, cannot bring adverse action claims.

[2] Section 341 Fair Work Act 2009.

[3] Keenan v Cummins South Pacific Pty Ltd (No. 2) [2019] FCCA 523; Keenan v Cummins South Pacific Pty Ltd [2018] FCCA 2600

[4] [2019] FCA 968

[5] [2019] FCA 951