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Focus: Workplace relations

March 2015

In this issue: we look at recent important decisions concerning calculating payment of accrued leave on termination; redundancy of senior executives; the redundancy risk posed by attempts to forcibly relocate employees; 'disaggregating' lawful and unlawful reasons in adverse action termination claims; and how an employer with a valid reason for dismissing an employee may still be liable under unfair dismissal laws.



Paying out annual leave on termination


Paying out annual leave on termination

In brief: Pending any appeal, the Federal Court has answered one of the Fair Work Act's most debated questions: how much should an employee be paid out for their untaken annual leave when their employment ends? Senior Associate Andrew Stirling reports.

How does it affect you?

  • When an employee's employment ends, the employer must pay out any accrued but untaken annual leave.
  • Untaken annual leave must be paid out at the same rate that the employee would have been paid had the employee actually taken the leave during their employment. This includes any applicable annual leave loading, shift loadings and other penalties that would have been paid if the employee had taken the leave while employed.

Background

The Fair Work Act says that when an employee's employment ends and the employee has accrued annual leave, the employer must pay the employee the amount that would have been payable to the employee had the employee taken the leave. There are two ways to interpret this:

  • Payment should be calculated using the employee's base rate, since that is the rate that the Fair Work Act prescribes for payment during annual leave. This interpretation has been adopted by the Fair Work Commission when approving enterprise agreements.
  • Payment should be calculated using the same rate that the employee would have been paid if they had actually taken the leave. This might be the employee's base rate, but it might also include annual leave loading, shift loadings and other penalties, depending on the employee's terms and conditions. This interpretation has been preferred by the Fair Work Ombudsman.
The case

Centennial Northern Mining Services Pty Ltd has an enterprise agreement that requires employees taking annual leave to be paid the greater of:

  • their ordinary weekly rate plus a 20 per cent loading; or
  • their ordinary weekly rate plus rostered overtime, shift allowance, weekend penalty rates and bonus.

However, the enterprise agreement also says that on termination of employment an employee is paid for accrued but untaken annual leave based on their ordinary weekly rate of pay plus a bonus.

The court was asked to declare that the enterprise agreement's rate of payment for annual leave on termination complied with the Fair Work Act. To make the declaration, the court needed to decide that the Fair Work Act required annual leave to be paid out at the employee's base rate.

The court refused to make the declaration.1 It interpreted the Fair Work Act as requiring annual leave to be paid out using the same rate that the employee would have been paid had the employee actually taken the leave during their employment. In this case, this was the greater of the ordinary weekly rate plus the 20 per cent loading or the ordinary weekly rate plus rostered overtime, shift allowance, weekend penalty rates and bonus.

Given the ambiguity in the Fair Work Act, it would not surprise us if the matter was appealed. We will keep you updated if an appeal occurs.

When does a senior executive position become redundant?

In brief: The NSW Court of Appeal has provided valuable guidance on when changes to a senior role will result in that position becoming redundant. The court has also considered what conditions, if any, will apply to the exercise of a discretion that is expressed to be absolute and unfettered. Partner Peter Arthur and Senior Associate Tristan Garcia report on the decision.

How does it affect you?

  • Reallocation of certain responsibilities to other employees does not necessarily mean a position is redundant.
  • Courts may imply a condition into an otherwise unfettered discretion that it be exercised honestly and not arbitrarily or capriciously.


Facts

Mr Janik had been employed since 1987 by the predecessor company to UGL Rail Services Pty Ltd (UGL). In 2003, he informed his manager that he was thinking of leaving UGL. The company wanted to retain him and negotiations took place over his role and remuneration.

A new contract provided that a recommendation would be made to the CEO of UGL for Mr Janik to be granted 40,000 options. This recommendation was made but not followed, with the result that Mr Janik was granted only 7200 options.

Several years later, UGL undertook an organisational restructure. As a consequence, Mr Janik was informed that his employment would come to an end and that another UGL employee would perform the main functions of his role. Mr Janik claimed redundancy and the balance of the options.

Decision

At first instance, the trial judge found that Mr Janik was entitled to redundancy pay but dismissed the claim with respect to the grant of the options. UGL appealed the redundancy point and Mr Janik cross-appealed with respect to the options.2

On the redundancy point, the court compared the duties performed by Mr Janik with those of his successor and held that, despite a number of changes having been made to the role, those changes were not sufficient to justify a finding that his position had been made redundant. The changes included a different job title and the reallocation of certain responsibilities to other employees within the company. However, overall at least 70 per cent of the functions previously performed by Mr Janik continued to be performed by his replacement.

Mr Janik's contract made clear that the company had no obligation to actually grant the options and the relevant option plan stated that the company had an 'absolute and unfettered discretion' about the granting of options. The court accepted Mr Janik's argument that the discretion could not be exercised arbitrarily or capriciously; rather it must be done honestly and in conformity with the scope and content of the relevant agreement. However, the court found that the recommendation had been transmitted to the CEO as required by the contract and the decision not to follow the recommendation was not made arbitrarily or capriciously.


Relocating employees – beware redundancy risk

In brief: The Full Bench of the Fair Work Commission has found that a contractual relocation term can be displaced and inoperative due to inconsistency with the terms of an enterprise agreement. Senior Associate Emily Harvey reports.

How does it affect you?

  • Employers should ensure that enterprise agreements provide an express exemption from the obligation to pay redundancy pay if an employee is offered acceptable alternative employment

Background

When Darrell Lea went into voluntary administration, the Quinn family purchased the assets of the business and it was necessary for a number of employees to continue to work in the business. These employees were offered employment by DLE, a company owned by the Quinn family. The offer of employment was of the same position on the same terms as their employment with Darrell Lea and their service with Darrell Lea would be recognised. In addition, the offer letter included a term to the effect that the initial location was Kogarah but that the employee could be required to work at another location in the future. The relevant enterprise agreement did not contain any specific provision regarding relocating employees.

Some time later, DLE effectively directed employees to transfer from Kogarah to Ingleburn, some 34 kilometres away. DLE informed the employees who refused to relocate that their employment with DLE would end. The AMWU lodged a dispute and argued that positions of the employees at the Kogarah site were redundant and that the employees were entitled to redundancy pay, including because the offer of employment at Ingleburn was not acceptable alternative employment.

Interaction between the enterprise agreement and the contracts

The Full Bench of the Fair Work Commission found that the agreement did not permit DLE to transfer employees to a different location because:3

  • the enterprise agreement did not expressly permit DLE to direct an employee to transfer to a different location; and
  • various clauses in the agreement indicated that the parties did not contemplate the relocation of employees.

The enterprise agreement contained an unusual provision (the Employment Terms Clause), which provided that 'the employer and the unions agree that no employee, including apprentices and trainees, shall be employed other than under the terms of this agreement'. This term meant that DLE could not engage employees on terms that were inconsistent with the terms of the enterprise agreement.

The contractual location term purported to confer on DLE a right that was inconsistent with the terms of the enterprise agreement (that is, the right to transfer an employee to a different location). The Full Bench found that the contractual location term was displaced by the Employment Terms Clause, and rendered inoperative. As a result, DLE was prohibited from engaging employees on the basis that the contractual relocation term applied.

Entitlement to redundancy pay

The Full Bench found that the proposed change of location meant positions were redundant. The Full Bench did not determine whether the employees had been offered acceptable alternative employment because the agreement contained no such exemption from the obligation to pay redundancy pay. In fact, the enterprise agreement permitted employees who were offered alternative positions, within the same site, to elect to be retrenched instead. Not surprisingly, the Full Bench refused to imply into the enterprise agreement a term that would absolve DLE of the obligation to pay redundancy pay in circumstances where it obtained acceptable alternative employment.


No adverse action found in dismissal of employee with mental disability

In brief: The Full Court of the Federal Court of Australia has overturned a Federal Circuit Court decision which held that an employer had taken adverse action by dismissing an employee with a mental disability. Senior Associate Sikeli Ratu and Associate Tarsha Gavin report.

How does it affect you?

  • Employers may successfully defend adverse action claims even where there is a close relationship between the adverse action and a prohibited reason.
  • The evidence of the decision-maker is of central importance for an employer in discharging the onus on them to establish that a termination decision was not made for a prohibited reason.


Background

Mr Grant, a solicitor with the Victorian Office of Public Prosecutions (OPP), was dismissed in early 2012 following a long history of repeated absences and an investigation into misconduct, which found that he had disobeyed lawful directions to complete work tasks and provide notification of his absences.

Before the misconduct investigation, Mr Grant had informed his supervisor, and provided a supporting medical report, which indicated that he had a long-term anxiety condition that had been exacerbated by excessive alcohol consumption and bouts of depression.

Mr Grant brought a claim against the OPP alleging that by terminating his employment it had taken adverse action against him because of his mental disability.

Mr Grant successful at first instance

The Federal Circuit Court found that the OPP had taken unlawful adverse action against Mr Grant. The court held that his misconduct was 'completely interwoven' with his mental illness. The court did not accept the evidence of the manager who terminated Mr Grant's employment, and who said that he excluded Mr Grant's ill health from his decision-making. Instead, the court held that the manager had knowledge of Mr Grant's mental illness and the facts of the matter indicated that Mr Grant's conduct arose wholly out of his medical condition and that therefore the illness and conduct could not be disaggregated. The court found that the manager's knowledge necessarily featured (even if only subconsciously) in his decision to terminate Mr Grant.

Appeal court finds in employer's favour

The Full Bench of the Federal Court overturned the Federal Circuit Court's decision, holding that there had been no adverse action taken by the OPP.4

In its decision, the Federal Court applied some of the key principles laid down by the High Court in the Barclay decision (for more detail, see our Client Update: High Court guidance on adverse action claims). In particular, the court confirmed that merely because there is a close relationship between the adverse action and a prohibited reason does not mean that the two cannot be disaggregated.

On the facts of the case, the court held that Mr Grant's illness and misconduct were not 'completely interwoven' and could in fact be disaggregated. The medical report provided by Mr Grant did not expressly or impliedly attribute the instances of misconduct to Mr Grant's illness, and there were several other explanations for aspects of the misconduct that were unrelated to his mental condition.

The court also applied the High Court's statement that reliable evidence from a decision-maker about the actual reasons for their decision can discharge the onus on the employer to establish that a decision was not made for a prohibited reason.

The court held that the manager's knowledge of Mr Grant's mental illness did not by itself mean his evidence on the reasons for the termination were unreliable, and found that, in fact, the decision to terminate had not been made because of Mr Grant's mental illness.


Long service trumps valid reasons for dismissal

In brief: The Fair Work Commission has provided further guidance on the matters that will be considered in assessing the harshness of an employee's dismissal. Senior Associate John Naughton and Lawyer Laura Miller report.

How does it affect you?

  • Employers must act promptly to investigate allegations against employees, and, where serious allegations are made, consider appropriate steps, such as suspension, during the investigation.
  • An employee must be provided with an appropriate length of time to respond to a show cause notice, having regard to the length of time taken by the employer to conduct any investigations, and an employer must genuinely consider any response provided by the employee.
  • Even where the employer has a valid reason for dismissal, the dismissal can still be unfair, especially if the employee has a long period of service.

Background

IBM terminated the employment of Mr Camilleri for breaching policies by making inappropriate expense claims. The claims were:

  • 141 daily allowance claims for days he was not in Melbourne on IBM business;
  • air travel to the Gold Coast from Melbourne for a personal trip; and
  • using his personal credit card to make payments for accommodation that should have been placed on an IBM credit card.

These expense claims were made between October 2011 and September 2012. Mr Camilleri's termination eventually occurred after extensive investigation, consultation and a show cause process, which only began in May 2013.

Mr Camilleri brought an unfair dismissal claim against IBM alleging that the expenses claimed were an honest mistake without intent to defraud IBM. He also argued that the process followed by IBM was unfair.

The decision

The Fair Work Commission found that Mr Camilleri's failure to comply with policies in respect of his substantial daily allowance claims was of such a magnitude as to constitute a valid reason for termination of his employment.5

Despite this, the Commission considered that Mr Camilleri's dismissal was unfair. The Commission placed significant emphasis on Mr Camilleri's long unblemished record of service with IBM and his offer to reimburse the company for the inappropriate expense claims. In considering the harshness of the dismissal, the Commission also highlighted:

  • the short period of time that Mr Camilleri was afforded to respond to IBM's show cause notice, in view of the significant length of time taken by IBM to investigate the allegations against him;
  • that the decision to terminate had been pre-determined before Mr Camilleri's show cause response and was only provided to the primary decision maker in summary form;
  • the extraordinarily long delay (of nearly three years) between the first inappropriate claim and termination of his employment; and
  • the failure of IBM to take any action to suspend Mr Camilleri pending conclusion of its investigation did not reconcile with IBM's position that it had lost trust and confidence in him.

The Commission followed earlier authority and ordered Mr Camilleri's reinstatement, observing that as long as restitution of the amount inappropriately claimed was made, IBM's lack of trust and confidence in Mr Camilleri was not enough to deny the primary remedy.

Footnotes
  1. Centennial Northern Mining Services Pty Ltd v Construction, Forestry, Mining and Energy Union (No 2) [2015] FCA 136 (27 February 2015).
  2. UGL Rail Services Pty Limited v Janik [2014] NSWCA 436 (19 December 2014).
  3. DL Employment Pty Ltd v AMWU [2014] FWCFB 7946 (1 December 2014)
  4. State of Victoria (Office of Public Prosecutions) v Grant [2014] FCAFC 184.
  5. Camilleri v IBM Australia Limited [2014] FWC 5894 (10 September 2014).

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