Terminating an employment agreement


There are many reasons why an employer and employee may want an employment relationship to end.  If the termination of the relationship is at the initiative of the employee, and the employee resigns, there is usually not any significant risk to an employer that there will be resulting claims by the employee, but this is not always the case. In this article, we examine the manner in which the relationship can be terminated and the associated risks, and how these risks may be obviated.

For employers, even despite their best efforts to ensure the termination of an employee’s employment is conducted in a manner that is fair and reasonable, and conforms to the prevailing legal requirements, the employee may still be entitled to bring some type of claim. The real issue is whether the employer has done enough to ensure they can successfully defend the claim. For the most part, the best insurance for employers is to ensure that they have been diligent in their people management practices throughout the employment.

Unfair Dismissal
The unfair dismissal regime is probably the most well known in the Australian community. In order for an employee to have access to this jurisdiction, they must:

  1. have completed a minimum of either:
    1. 6 months of continuous employment (includes regular casuals who have been employed on a regular and systematic basis and have an expectation of ongoing work); or
    2. 12 months of continuous employment if the employer is a small business (that is, an employer with less than 15 permanent employees but including permanent employees in the employ of “Associated Entities” as this term is defined in the Corporations Act 2001 (Cth)).
  2. be either:
    1. covered by a modern award;
    2. have an enterprise agreement apply to them; or
    3. earn less than the high income threshold.

Of course, once an employee has access to the unfair dismissal jurisdiction, they then need to show that the dismissal was unfair. In order to do so, they need to establish that either:

  1. there was no valid reason for the termination; or
  2. if their was a valid reason, the termination was either, harsh, unjust or unreasonable.

The Fair Work Commission’s (“FWC”) decisions regarding what is considered “harsh, unjust or unreasonable” will include a consideration of the following matters:

  • Whether the employee has been provided a fair process in conducting the termination. For performance based terminations, a fair process will include, providing the employee appropriate warnings regarding their performance and if appropriate, sufficiently reasonable time to demonstrate improvement. In this regard, the FWC will have regard to the reasonableness of the performance requirements, the warnings given, and the reasonableness of the time allowed to the employee to show improvement.
  • Fair process also needs to be provided in relation to the actual termination. As such, terminations over the phone, via text message and the like will generally be considered unfair. This means care must be taken to meet with the employee and explain the reasons for termination. It is also a good idea to offer the employee a support person for the meeting. If the employee requests a support person to be in attendance, the employer must allow the employee to have a support person (as long as the person is not a lawyer and is appropriate in the circumstances).
  • Consideration of the employee’s personal circumstance is also relevant and should be considered before making a decision to terminate, as matters such as the employee’s length of service, personal financial circumstances, family circumstances balanced with the reason for termination may lead the FWC to decide a lesser penalty would have been more appropriate.
  • In all circumstances the employee must be provided a proper opportunity to respond to the reasons for dismissal before the dismissal takes effect.

It is therefore important that in order to minimise the risk of an employee claiming that they have been unfairly dismissed, employers ensure they follow a few key steps prior to any dismissal.

How the FWC will look at a termination, and assess whether it was unfair or not, will depend on the reason for the termination. The criterion differs depending on whether the termination was a result of poor performance, improper conduct, or redundancy. As such, the steps required by an employer to protect itself from a claim differ depending on the reason for termination.

Performance Based Dismissals
Performance related matters include where the employee is not performing their role at the appropriate level, for example, they are not stacking boxes according to a newly instituted practice.  For performance related issues, employers should consider the following matters prior to making any decision to dismiss an employee:

  1. Is there a valid reason for dismissing the employee? Poor performance is a valid reason for termination; however it needs to be considered in the context of a proper process to allow the employee time and opportunity to improve after having received coaching as to how to achieve satisfactory performance;
  2. The period of time that the employee has been provided to improve their unsatisfactory performance;
  3. The number of prior warnings that have been provided to the employee;
  4. The seriousness of the performance issue/s and whether a dismissal for that issue would be an expected outcome of that performance issue/s taking into account any earlier warnings;
  5. The length of service of the employee (a longer period of employment, particularly without blemish would warrant a warning and weigh against a dismissal); and
  6. Has the employee been afforded an opportunity to respond to the alleged performance or other issues (i.e., is it possible that they may deny the allegations and substantiate their defence?).

In general terms, providing a proper process of coaching and a warning is recommended to avoid an unfair dismissal claim. However, from an organisational, people and culture perspective, the manner in which coaching occurs needs to be handled delicately and in such as manner as to promote the employee’s development and achievement of satisfactory performance outcomes.  Current research shows that backwards looking performance reviews are not conducive to improving performance, and that forward looking coaching and development discussions about how an employee can improve are more conducive to producing the desired outcome for both the employer and the employee.

Improper Conduct
Improper conduct matters include where the employee has engaged in misconduct which is of such a nature that it warrants dismissal. It is relevant to note that serious misconduct such as assault, theft, fraud and the like may warrant summary termination where there is no doubt that the employee seriously misconducted themselves. If this is the case, then the usual requirements (discussed below) will not prevent an immediate termination (but are still recommended where there would be utility in conducting an investigation or at least providing the employee with an opportunity to respond to the allegations.

For conduct related issues, employers should consider taking the following steps prior to making any decision to dismiss an employee:

  1. Conduct an investigation to determine whether the allegation can be substantiated; or
  2. At minimum if a full investigation is not able to be resourced:
    1. put the allegation in clear and plain terms to the employee and allow them an opportunity to respond to the allegation of improper conduct; and
    2. Take into account their response to the allegation and consider whether further inquiries need to be made to substantiate the improper conduct and make those additional inquiries (including of the employee concerned again should further allegations come to light).

For both performance related and misconduct related dismissals, employers should consider the following matters prior to finally making any decision to dismiss an employee.

  1. Has the employee been provided notice of the reason for possible termination and been provided with an opportunity to show cause as to why they should not be dismissed (for improper conduct matters, this would be after the investigation to establish that they did in fact engage in the misconduct)?
  2. The employee’s age (i.e. what are their prospects of finding other work or retraining into another occupation should they be terminated);
  3. The employee’s personal circumstances (i.e. do they have a family, are they the only bread winner, do they have children or other dependents, what would be the impact upon them and their family);
  4. For organisations with Human Resources expertise in-house, has HR been consulted about the proposed dismissal; and
  5. For small businesses, has the Small Business Fair Dismissal Code been followed.

For dismissals arising out of a position being made redundant, if the procedure followed by the employer complies with the requirements prescribed for a “genuine redundancy” under the Fair Work Act 2009 (Cth) (“Fair Work Act”) employers will be able to raise a jurisdictional objection to any unfair dismissal claim. However, in order for an employer to successfully claim this jurisdictional objection to an application they must:

  1. Confirm that the job is no longer required to be done by anyone and is genuinely redundant.  This doesn’t necessarily mean that some parts of the person’s role will not be done by anyone, for example where the role is broken up and redistributed;
  2. Ensure compliance with any consultation steps or requirements which exist in any applicable modern award or enterprise agreement; and
  3. Consider whether there are any positions that exist either within the employer’s enterprise or within any associated entity, to which the employee (whose job is redundant) might be suitably redeployed.

Genuine consultation with impacted employees and efforts to redeploy are also important from an organisational culture perspective, as they demonstrate to employees that the employer will listen to ideas and make efforts to retain staff where possible.  To this end, consultation and discussions around redeployment should be conducted in an open and considered manner to engender trust.

Types of Orders
Reinstatement is the primary remedy, and the FWC may order the employee to be reinstated, and payment of lost income may also be ordered. However, in most circumstances, the usual order is an order for compensation. The maximum compensation that may be ordered by the FWC where a dismissal is found to be unfair, is capped at 26 weeks’ pay or half of the high income threshold, currently $153,600 (whichever is the lesser).  Under the FW Act, compensation is only awarded where re-instatement is found to be inappropriate in the circumstances.

General Protections
General Protection claims are not as well known in the community and are designed to ensure that employers cannot take adverse action against an employee (or independent contractor, although we will refer to an employee in this article for simplicity) for exercising any workplace rights, or because they have a particular attribute that is protected by the adverse action provisions in the FW Act.

All employees in Australia regardless of their length of service, remuneration or position are able to rely on the general protection provisions. Although, there are a myrid number of matters that may constitute “adverse action” for the purpose of this article we concentrate on dismissal. As such, it is uncontroversial that dismissing an employee clearly constitutes “adverse action” for the purposes of the FW Act.

If an employer is intending to dismiss an employee, they should ensure that none of the reasons for the dismissal include:

  1. That an employee exercised or did not exercise a workplace right (the meaning of “workplace right” will be discussed further below); or
  2. That an employee participated or did not participate in industrial activity (which in general terms includes activities associated with union membership or organised by a union); or
  3. An employee’s protected attributed such as: race, colour, sex, sexual orientation, age, physical or mental disability, marital status, family or carer’s responsibilities, pregnancy, religion, political opinion, national extraction or social origin.

Ability to make a complaint or inquiry in relation to employment is a workplace right
The concept of a “workplace right” is fairly broad and includes the right by the employee to make a complaint or enquiry in relation to the employee’s employment.

An employee is able to make a complaint or inquiry in relation to their employment and the employer is prohibited from dismissing that employee because they made that complaint or inquiry.  Although, there is currently some debate in the law, as to whether the “complaint or enquiry” must arise from a defined source of law, for example a written contract of employment or legislation. There is a countervailing view that all that is needed is the existence of a complaint or enquiry in relation to the employee’s employment. The most recent cases on this point have differed, but even those that prefer the requirement that there must be some reference to a prevailing source of law, have cast the net very widely and said the source may be as broad as the common law. We focus on the broader interpretation and what this means in the context of dismissal.

As such, employees that raise concerns or inquires for example regarding bullying, performance management, management decisions, activities of workmates that relate to their employment, salary outcomes or increases etc (essentially any matter raised that can be viewed as a “complaint or inquiry”) will constitute the exercise of a workplace right. Such a complaint or inquiry may come as an affront to management, but could be found by a court to be a workplace right protected from dismissal.

As a general rule of thumb, it is important that any complaints or inquiries about issues raised by employees are dealt with and resolved by an employer separately from and before any considerations about their ongoing employment. As such, it becomes vital for the employer to follow and document a proper termination procedure, so they are able to demonstrate that the termination was for reasons other than any alleged complaint or enquiry.

Other workplace rights are listed in the FW Act and generally include:

  1. rights, entitlements and benefits under workplace instruments or workplace laws; and
  2. the right to initiate or participate in processes under workplace instruments or laws, such as:
    1. requesting flexible work arrangements;
    2. commencing proceedings, or initiating dispute settlement procedures under a modern award; or
    3. making an application to the court for underpayment of wages.

What constitutes a “workplace law,” has been found to include rights conferred under the FW Act and related legislation, Independent Contractors Act 2006 (Cth), anti-discrimination laws, Work, Health and Safety laws and workers’ compensation laws.  A “workplace instrument,” would include a modern award, or enterprise agreement, but presently the Courts have found it does not include a common law employment contract.

In short, an employee’s ability to initiate or participate in any process or proceeding under a workplace law or instrument is a workplace right.

Damages and compensation which may be awarded, and this regime is uncapped. Penalties may also be ordered in addition to orders for compensation of damages suffered by the employee. Directors and employees involved in the alleged contravention may also be personally liable for penalties and damages orders under the FW Act accessorial liability provisions.

Given the breadth and scope of the regime, and the fact that employees are able to commence proceedings immediately and notwithstanding any probation period, we recommend employers take the following steps prior to any termination:

  1. articulate in writing why a decision has been made to terminate the employment (care needs to be taken to ensure the reason does not include the exercise by the employee of a workplace right or because of a protected attribute);
  2. separate any decision to terminate and the reason for this decision from any ‘complaint or inquiry” made by the employee;
  3. be able to demonstrate that the exercise by the employee of any workplace right had nothing to do with the decision to terminate the employment;
  4. ensure there is a valid and demonstrable reason for the termination of employment; and
  5. inform the employee of the reason for termination in clear terms.

It is important to document the decision in such a way as the Courts have considered in some decisions that an employer will not able to discharge the reverse onus of proof, if the decision maker does not give evidence about the reasons for the dismissal.  If evidence is required, the documentation will assist an employer to defend against the claim by providing direct evidence about the reasons for the dismissal.

Discrimination Laws
Various State and Federal Anti-discrimination laws also provide protection from dismissal for protected attributes including age, race, sex, gender, sexual orientation, marital status, pregnancy, family responsibility, and physical or mental disability.

The major difference for employees and employers is that while dismissal related unfair dismissal and general protections applications must be lodged by an employee with the FWC within 21 days from their dismissal, federal discrimination applications may be lodged with the Australian Human Rights Commission anytime within 6 months of the dismissal.  In NSW, applications lodged with the NSW Anti-Discrimination Board are only required to be lodged within 12 months of the dismissal.

Similarly, employers when dismissing an employee should ensure that the reason(s) for dismissal do not include any protected attribute.

Whistleblower Protections / Parliamentary Privilege
There are also a range of whistleblower protections which protect an employee from dismissal because they have engaged in whistleblower activities protected by the particular whistleblower protection regime that may be applicable to their employment.  For employers that are corporations, the Corporations Act 2001 (Cth), provides for a very strong whistle blower protection regime for any employee who wishes to disclose information, protected by that regime.   Employer’s that dismiss employees as a result of a whistleblower disclosure would be in breach of the legislation and would be subject to penalties and compensation orders.
The scope of this article is not sufficient to deal in any detail with all of the Whistleblower protections. However, if an employer follows the practices and processes suggested below, it can greatly minimise the risk of a breach of these provisions.

Our Recommendations
As is evident from the discussion above, the termination of an employee’s employment is fraught with potential difficulties, the consequence of which may lead the employee to make a claim. The best way to protect the business from claims is to ensure that to the extent possible the business:

  • develop a culture of trust and confidence;
  • develop and implement a robust and transparent performance management system that is applied fairly, consistently and objectively;
  • train the managers to manage performance and issues with a view to improvement and growth, rather than criticism and defeat; and
  • when it is clear termination is inevitable – be honest, transparent, and fair to the employee concerned. This includes providing a fair and reasonable process for the termination.

We regularly advise clients on all matters touching upon the employment relationship. Please contact us should you require any such advice or assistance.

This client alert should not be treated as, and is not intended to, constitute legal advice.

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