Employees behaving badly: How bad is bad enough to summarily dismiss?

Melbourne Stadiums Limited v Nicholas Sautner [2015] FCAFC 20 (26 February 2015)

WHAT YOU NEED TO KNOW

• An employer may summarily terminate an employee's employment for serious misconduct where the employee's conduct results in the destruction of the relationship of trust between the employer and the employee.
• The employee's position, responsibilities and the terms of any employer policies and procedures will be relevant to determining whether the misconduct constitutes 'serious misconduct'.
• An employer cannot rely on misconduct which is discovered after termination of the employment contract to terminate the contract a second time on different grounds (for example, where the contract was initially terminated by payment in lieu of notice). However, an employer may rely on evidence of serious misconduct after termination for the purposes of defending a claim for wrongful dismissal.
• Where claims brought by an employee (including common law claims) comprise a single 'proceeding' for the purposes of section 570(1) of the Fair Work Act 2009, there is no jurisdiction to make an order for the recovery of costs in the proceedings unless the employer has acted unreasonably and caused the employee to incur costs.

WHAT YOU NEED TO DO

• Employers should review their existing employment contracts and include a term that expressly permits the recovery of payments made to an employee on termination where the employer subsequently becomes aware of breaches of the employment contract or misconduct by the employee.
• Employers should be cautious and seek legal advice before terminating an employment contract without notice for serious misconduct. This will help to reduce the risk of breach of contract claims.

Summary

In a recent decision, five judges of Full Federal Court of Australia considered the complex question of when an employer will be entitled to summarily dismiss an employee. The Court also considered the circumstances in which an employer may rely on misconduct that comes to light after a dismissal to justify termination of employment

A majority of the Full Federal Court of Australia (Tracey J, Gilmour J, Jagot J and Beach J) upheld the employer's appeal from the Victorian County Court. The Full Court found the former employee had engaged in serious misconduct that resulted in the 'destruction of the relationship of trust' between the employee and the employer.

A few weeks before the summary dismissal, the employer had notified the employee of its intention to terminate the contract by providing payment in lieu of notice. The majority held that in the circumstances, the employer was entitled to later exercise its right to summarily dismiss the employee. This was because the earlier termination had not taken effect and so the contract remained on foot at the relevant time. Although it was not necessary to decide the point, the majority held that it was not possible to lawfully terminate an employment contract twice. Where a contract has been terminated by notice or payment in lieu of notice, it cannot later be re-terminated on the basis of serious misconduct.

The proceedings

On 3 June 2013, the employer notified the employee of its intention to terminate the employment contract by payment of six months' salary in lieu of notice and payment of a redundancy package (in excess of the employee's entitlement under the Fair Work Act 2009). The employer required the arrangement be subject to a deed of release signed by the employee. However, no deed was executed and no payment was made by the employer.

Subsequently, the employer became aware of various instances of misconduct by the employee. On 20 June 2013, the employer summarily terminated the employee's employment for serious misconduct. The employee contended that the employer was not entitled to summarily terminate his employment, having previously exercised its right to terminate under clause 7.1 of the contract by giving six months' notice in writing (or payment in lieu of notice).

The employee commenced proceedings in the County Court of Victoria claiming a redundancy payment under the FW Act , imposition of a civil penalty and damages for breach of contract.

At first instance, the trial judge held that the misconduct did not constitute 'serious misconduct' as alleged, and the employee was entitled to payment of the six months' notice and to a redundancy payment pursuant to the FW Act. The trial judge also made orders for costs against the employer in respect of the employee's common law claim. The employer appealed.

The misconduct

The employee had been employed in the senior management position of Director, Commercial Business, and was responsible for all ticketing matters at Melbourne stadium.

One of the key issues on appeal was whether the following instances of misconduct constituted 'serious misconduct' warranting summary dismissal:

• The employee used staff tickets to the Medallion Club area of the stadium as a form of cash to barter for goods and services for his personal benefit (including payment for locksmith services, gym membership, shopping vouchers and passes to the Qantas club);
• The employee directed one of his subordinates to issue him with family tickets (in total, 36 tickets) to a rugby match in circumstances where only four tickets were available to each staff member and the general public. The employee directed his subordinate to print the tickets so that the names of the purchaser did not appear on the tickets;
• The employee communicated disparaging, disrespectful and derogatory comments about the CEO to others, including a senior employee of the main sponsor of his employer;
• The employee breached the CEO's express direction that he not be involved with the Perth Stadium Project when he arranged and conducted two stadium tours for a tenderer on the project.

Factors relevant to the severity of the misconduct

In deciding whether the employee's actions constituted serious misconduct, the Court considered:

• The employer's ticketing policy and the requirement that employees use tickets for personal and business use. The majority found that although not expressly included in the policy, it went without saying that the terms of the policy did not permit bartering staff tickets for personal benefits (which in effect supplemented the employee's income);
• That the employee was responsible for ticketing at the stadium, his awareness of the policy and his knowledge that his actions were wrong;
• The express terms of the ticketing policy that noncompliance would be considered 'a serious breach of terms of employment';
• The employee's knowledge that his actions were a flagrant breach of the Australian Rugby Union ticketing policy agreed between the employer and the ARU;
• That the employee had exploited his position of seniority to get his subordinate to do something that she knew was wrong;
• That the employee had taken photographs of his immediate superior, the CEO, without the CEO's knowledge or consent, and used those photos deliberately with the sole intention of undermining the reputation of the CEO. This was more serious conduct than mere "tea room discussions" in which employees express their opinions about their superiors; and
• That the employee had disobeyed (although there was no evidence that this was done deliberately) the express and clear directions of the CEO not to have any involvement with the Perth Stadium Project, in breach of the express terms of his employment contract.

The joint judgement held that the primary judge had erred in:

• failing to focus on the conduct of the employee, instead focussing on what the employer could have done better, such as clarifying the ticketing policy; and
• failing to consider properly the destruction of the relationship of trust (which was essential to the employment relationship) that the employee's misconduct caused

The joint judgement went on to find that, other than in respect of the failure to follow the CEO's direction, each of the instances of misconduct was deliberate, involved elements of dishonesty, and by their very nature, struck at the heart of the relationship of trust between the parties.

All five judges (including Justice White) agreed that each of these three incidents of misconduct, either individually or when taken together, constituted serious misconduct justifying summary dismissal.

When can an employer rely on evidence of misconduct not known at the time of termination?

Having established that the employee had engaged in serious misconduct, the Court went on to consider whether the employer could validly terminate the employment contract on 20 June 2013 for serious misconduct. The employee argued that the employer could not do so because the contract had already been terminated by the employer on 3 June 2013.

The Court considered the scope of the authority in Shepherd v Feld & Textiles of Australia (1931) 45 CLR 359, and the ability of an employer to rely on subsequently discovered misconduct to justify an earlier dismissal. The principle in Shepherd was previously expressed by Mason J in Sunbird Plaza Pty Ltd v Maloney (1989) 166 CLR 245 as follows:

Shepherd v Felt & Textiles of Australia stands as authority for the general proposition that a termination of a contract may be justified by reference to any ground that was valid at the time of termination, even though it was not relied on at the time and even though the ground actually relied on is found to be without substance.

Justices Tracey, Gilmour, Jagot and Beach held that the principle in Shepherd could not be applied such that an agreement that had been lawfully terminated on one basis (such as by payment in lieu of notice), could, once terminated, be "resuscitated and reterminated" on the basis of another ground not known at the time of termination (such as serious misconduct).

Despite this finding, the joint judgement held that on the facts of this case the employer was entitled to rely on the employee's serious misconduct as grounds to terminate the employment contract. This was because the employer's actions on 3 June 2014, did not, as a matter of contractual construction, have the effect of terminating the employment contract. Their Honours agreed that termination under clause 7.1 of the contract required, to be effective, payment of the six months' notice period. As this never occurred, there was no termination of the employment contract under clause 7.1 and so the employer was entitled to later summarily terminate the employee's employment for serious misconduct.

The majority noted that where an employee's employment has been terminated with payment in lieu of notice and the employer subsequently finds that the employee has engaged in serious misconduct, the employer cannot require the employee to repay the notice payment, unless the employment contract expressly provides for this.

In a separate judgement, White J found that the actions taken by the employer on 3 June 2013 to terminate the employment contract were not in accordance with clause 7.1 and therefore constituted a repudiation of the contract. White J observed that although the employer stated (in effect) that it would terminate by payment in lieu of notice, in reality, the employer made an offer of a 'severance package' to the employee, the acceptance of which was conditional upon an executed deed of release. Justice White held that the purported termination constituted a repudiation of the contract. However, the contract remained on foot until such time as the employee accepted the repudiation.

On this analysis, White J concluded that it was the employee's acceptance of the repudiation which resulted in termination of the contract and that the employee had a contractual claim for payment of a debt (being the six months remuneration) against the employer. By characterising the facts in this way, White J found that the principle in Shepherd applied and that the employer was entitled to rely on the subsequently discovered misconduct for the purpose of avoiding the consequences of its repudiation.

No jurisdiction to order costs

On the issue of costs, the Court unanimously agreed that the trial judge had erred in making an order for the employer to pay costs incurred by the employee.

The joint judgement noted that all three claims (including the common law claim) comprised a single 'proceeding' for the purposes of section 570(1) of the FW Act, and as such, section 570(1) applied to limit the Court's jurisdiction to make orders for costs.

The Court went on to find that the trial judge had no jurisdiction to make an order for the recovery of costs in the proceedings because it could not be said that the employer had acted unreasonably and caused the employee to incur costs.

MAKING THE CASE: Insights from Geoff Giudice

Whether employee behaviour is of a kind which entitles the employer to terminate the contract of employment summarily can be a vexed question. The reasons for decision in this case:

• provide a contemporary insight into the notion of serious misconduct;
• confirm that trust is central to the employment relationship;
• indicate that employee behaviour which strikes at the relationship of trust constitutes serious misconduct; and
• underline the importance of properly framed policies specifying how employees are to behave.