Termination of the Employment Relationship

In our final publication of the Back-to-Basics Series, we look at the ways in which an employment relationship can be concluded and the specific steps to follow in order to avoid seeing the inside of a courtroom and/or making substantial unplanned financial contributions to the outbound employee’s bank balance. Furthermore, careful management when bringing an employment relationship to an end, for whatever reason, can be achieved so that the departing employee does not leave disgruntled and likely to damage the business’ reputation.

We examine each of the ways an employment relationship might come to an end below.

Termination at the initiative of the Employee

Resignation
One of two ways an employee can bring the employment relationship to an end is by resignation, the other is abandonment. An effective termination of the relationship by resignation occurs when the employee resigns from their employment giving notice in accordance with the terms of their contract of employment. Whilst an employer may not necessarily be thrilled at losing a valued employee, it is usually beneficial that the employer respects the employee’s decision and treat the notice period as a way to ensure that there is a proper handover and the employee leaves on good terms.

In some circumstances, the employer will require the employee to serve out their notice period, or possibly negotiate an extension to the notice period to ensure a smooth transition of business operations. The treatment of notice is an important element in protecting the Company’s goodwill.

In circumstances where an employee resigns and gives notice, the employer is able to direct that the individual leave immediately provided a payment in lieu of notice is made, or in the alternative, the parties can explore the prospect of waiving the notice period entirely, albeit this can only be done by mutual agreement. This will allow the employee to leave, and the employer will not need to make any payment in lieu of the unworked notice period.

Abandonment
The employment relationship may also be terminated by the employee if the employee simply abandons their employment. This usually occurs when the employee fails to turn up for work without explanation (or suitable explanation). However, employers need to be careful to ensure that the employee can properly be considered to have abandoned their employment, and not act with haste in this regard. If the employee did not intend to abandon, and the employer prematurely treats the employment as terminated, it will be taken as a termination at the initiative of the employer and will then create significant legal difficulties for the employer.

As such, if abandonment is an issue, it behoves a responsible employer to make proper enquiries as to the intentions of the employee and take all reasonable steps to contact the employee to determine whether the employee intends to return to work, before taking any steps to treat the employment as at an end as a result of abandonment.

Termination at the initiative of the Employer

Redundancy
This has been somewhat of a hot button topic in recent times as many employers’ businesses suffered during the COVID pandemic and, in many cases, needed to cut costs by reducing staff headcount. To that end, it is important to note that a redundancy occurs when an employer decides they no longer need an employee’s job to be done by anyone. This can occur because of a structural change in the business, a downturn in the economic fortunes of the employer, technological change, sale of the business and finally the failure of the business. It is not the case that the ‘employee is redundant’ and redundancy necessitating the termination of employment, neither should this decision be based on the employee’s performance or suitability for the role, but rather that there is no longer a role for the employee to perform at all.

As with any termination at the initiative of the employer, fair treatment of the employee concerned is important. It is important for a number of reasons, chief of which is the fact that the loss of employment is a life changing event, and it behoves a responsible employer to treat such occasions with respect and sensitivity. In addition, the failure to do so is likely to give the employee a legal claim they can pursue, which may be costly for the employer.

In the case of redundancy, there are a number of procedural requirements that must be followed. We also set out the best practice requirements, which for employees able to bring an unfair dismissal claim, are necessary to prevent such claims. The requirements to terminate the employment relationship on the basis of redundancy are as follows:

• consultation;
• notice; and
• redundancy payment (if applicable).

For employees who would otherwise have a right to bring an unfair dismissal claim, if the termination is a valid redundancy, they will be prevented from doing so. We discuss the issue of unfair dismissal claims in more detail below.

In our previous publications, we discussed modern awards and enterprise agreements and where an employee is covered under a modern award or enterprise agreement. It is important to note that an employer must follow proper consultation processes outlined in those industrial instruments. It will not be a case of genuine redundancy if an employer does not comply with any relevant obligation in a modern award or enterprise agreement to consult about the redundancy. This does not impose an absolute obligation on an employer to consult about the redundancy but does require the employer to fulfil obligations under an award or agreement if the dismissal is to be considered a genuine redundancy.

The Fair Work Act 2009 (Cth) (“FW Act”) provides that in order for a termination to be excluded from the unfair dismissal jurisdiction and qualify as a genuine redundancy, the following must apply:

• The role performed by the employee is no longer required to be performed by anyone (a valid redundancy);
• The employer has consulted with the employee, and done so in accordance with any applicable award or enterprise agreement requirements; and
• The employer has considered suitable alternative roles for the employee.

If the redundancy is not considered a genuine redundancy, or the redundancy is ‘shambolic’ (in circumstances where the employee’s role is re-filled shortly after the redundancy because the role was always a required role), the employee made redundant may be able to bring a claim for unfair dismissal in the Fair Work Commission (“FWC”).

However, in cases where a redundancy is genuine, the outgoing employee may be entitled to redundancy pay under s 119 of the FW Act Broadly speaking, redundancy pay is not payable in circumstances where:

• the employee’s period of continuous service with the employer (other than periods of employment as a casual employee of the employer) is less than 12 months;
• the employer employs less than 15 employees across all its business activities and subsidiaries (“Small Business Employer”); or
• the employee is a casual employee.

It should be noted that irrespective of whether or not a redundancy payment is payable under s119 of the FW Act, any unpaid wages, accrued but unused statutory leave entitlements, and any crystalised and/or pro-rata long service leave (per relevant State legislation), is due and payable.

Termination on notice
Unless the employee is able to bring an unfair dismissal claim, an employer can terminate the employment relationship for any lawful reason, as long as the employer provides the employee notice of the termination. In other words, an employer can terminate the employment relationship for any reason on giving the requisite amount of notice. The quantum of notice required to terminate the relationship is usually provided in the contract of employment but cannot be less that the minimum notice period set out in a relevant modern award, enterprise agreement or the NES.

If, however, the contract of employment is silent on the period of notice, the law will imply a reasonable period of notice. What is reasonable will depend on the circumstances of each employee, but matters such as length of service, age, seniority and likelihood of finding alternative employment are all relevant. It is not uncommon for Courts to find up to 12 months is reasonable for some senior long serving employees. A written contract of employment setting out the notice period, can therefore be a very efficient way of saving an employer considerable pain.

If the employee, however, is entitled to commence an unfair dismissal claim, then the manner in which the termination occurs and the reason for the termination become important, and termination on notice without considering these matters can be costly. In these circumstances, where an employer decides to terminate the employment relationship with an employee, it will almost always be required to have a ‘valid reason’ to terminate; whether on performance grounds, for failure to fulfil the inherent requirements of the position, for misconduct, or for other conduct that fatally injures the trust and confidence between the parties.

Termination without notice
In circumstances of serious misconduct by an employee, the employer can move to immediate dismissal without providing notice of termination or going through the procedural steps that may otherwise be required. A termination for serious misconduct will only be valid if the conduct in question is so egregious that it is incompatible with the continuation of the employment relationship. Typical circumstances where the employee has engaged in serious and wilful misconduct which give rise to dismissal for serious misconduct include (but are not limited to):

• theft;
• physical or (serious) verbal assault of a fellow employee;
• engaging in threatening or discriminatory behaviour;
• sexual harassment;
• refusal to follow a lawful and reasonable direction;
• attendance at work under the influence of alcohol and/or illicit drugs;
• deliberate disclosure or misuse of confidential information;
• any conduct that has the potential to cause monetary or reputational harm to the employer; or
• any conduct (inside or outside of the workplace) that could be subject to criminal prosecution.

In circumstances of serious misconduct, the employer is obliged to make payment of any unpaid wages and accrued but unused statutory leave entitlement, including any crystalised but untaken long service leave entitlements, but is not obliged to make payment in lieu of notice, nor is it obliged to make payment of any pro-rata long service leave entitlements (per relevant State legislation).

Notice periods

As discussed above, in order to effectively terminate the contract of employment, the terminating party must provide notice other than in the case of summary dismissal. The quantum of notice is set out in the contract itself but must not be less than the statutory minimum as provided by the NES or relevant industrial instrument. If the contract is silent on the issue of notice, for example there is no written contract, the law will imply a reasonable period of notice. Often what would be reasonable in such circumstances is the same as the minimum notice period set out in the legislation, however this is not always the case, and could be substantially more. For this reason alone, it is really important to have a proper written contract of employment which clearly sets out the notice period required to terminate the contract.

The next relevant issue regarding notice, is whether the employee can be asked to work the notice, or be required to leave immediately, and the consequences that follow. If an employer wishes to terminate the employment and does not want the employee to continue to come to work then it can either make a payment in lieu of the notice period, which will bring the employment to an end immediately, or it can direct the employee to take gardening leave. This essentially means the employee remains away from the employer’s place of business, does not perform any work but remains employed and continues to be paid for the duration of the notice period. Gardening leave is an effective method to protect the business from employees who may cause trouble but also prevent the employee from commencing employment elsewhere until the notice period has expired. Gardening leave is therefore a useful mechanism where the employer harbours genuine fear that the employee might cause the business harm by soliciting custom or clients from their outgoing employer to a new employer or might deliberately disclose or misuse confidential information.

In some instances, it might be more advantageous for the employer to end the employment relationship immediately and make a payment to the employee in lieu of notice on the terms contained within the employment contract. An employer might opt to make payment in lieu of notice in circumstances where a disengaged or disinterested employee might simply cause trouble or interrupt smooth business operations whilst working out their notice.

In circumstances where an employee resigns, it is possible for the employer and employee to agree that the employer will waive the notice requirement such that the employee leaves immediately and there is no requirement for any payment. Such arrangement can only be achieved by mutual agreement, preferably in writing.

Legal claims

Unfair dismissal
One of the most common claims brought against employers following the termination of an employee’s employment, is an unfair dismissal claim.

Poorly managed terminations at the employer’s initiative can often lead to claims brought before the FWC. In circumstances where the employee feels that their employment was terminated for reasons that are not valid, or that the termination was harsh, unjust and unreasonable, they may bring a claim for unfair dismissal provided that:

• the employee has served at least 6 months with the employer or at least 12 months if the employer is a Small Business Employer;
• the employee earns less than the high-income threshold (currently $162,000 per annum excluding superannuation) or is otherwise covered under an enterprise agreement or modern award;
• the dismissal was not a case of genuine redundancy;
• the employee was actually dismissed and did not resign of their own accord; and
• the application is made within 21 days after the date the dismissal took effect.

Where an employee is failing to perform to the standard required by the employer, a series of steps ought to be taken by the prudent employer to ensure that any eventual termination of employment is conducted with procedural fairness and meets the standards required by the FW Act and FWC. This means that in circumstances of poor performance, if the employee is eligible to bring an unfair dismissal claim, the employer must ensure that it has:

• properly informed the employee of the performance concerns;
• provided the employee any relevant training to perform the role;
• provided the employee adequate opportunity to improve;
• provided the employee clear and explicit warnings regarding the performance issues and what is required for improvement; and
• the employee knows that failure to improve may result in the termination of employment.

The above steps should be done in a manner that is fair and transparent and notes of the meetings should be retained.

Provided these steps are genuinely taken, it is less likely the dismissed employee will be able to bring a successful claim before the FWC. However, these steps will certainly mitigate against any findings that the employer has acted unfairly or inappropriately.

Regardless of the reason for termination at the employer’s initiative, if the employee is able to make a claim for unfair dismissal, procedural fairness will be relevant, as will the reason for termination. In other words, if there is no valid reason for termination (poor performance with warnings; misconduct; redundancy) then regardless of the procedure adopted, the employee will have a claim. In the unfair dismissal jurisdiction, the fact that the employee does not get along with others, or the employer does not like the employee, is insufficient to provide a valid reason for termination. This is what the pre-employment period is for, to determine if the employee is a suitable fit. If not, then termination should occur within the first 6 months of employment, such that the employee is not able to make an unfair dismissal claim.

Breach of general protections
In addition to unfair dismissal, all employees are able to bring a claim for breach of the general protection provisions of the FW Act. These provisions provide that an employee who has exercised a workplace right, and as a result has suffered adverse action, is able to bring a claim. The termination of employment is the ultimate adverse action, and as such if it occurred as a result of the employee exercising (or not exercising/preventing an employee from exercising) a workplace right, then the employee will have a valid claim. It is, therefore, very important that the employer make explicit the reason for the termination and keeping proper records that can establish this (as long as it is not a prohibited reason) is very important.

For example, if an employee is dismissed for discriminatory reasons or where they have raised legitimate complaints or concerns regarding their employment, they can bring a claim under the general protections’ provisions of the FW Act. For such claims, there is no high-income threshold, nor is there a requirement to serve a minimum employment period, although as with claims for unfair dismissal, the employee must make the application within 21 days after the date the dismissal took effect.

Breach of contract
Finally, as the employment relationship is predicated upon a contract of employment, if the termination of employment is either a breach of the contract of employment or the manner of termination (for example, notice was not provided) constitutes a breach of the contract, then the employee will be able to commence proceedings and seek damages for breach of contract.

Key takeaways

The key learnings to keep top of mind in respect of this alert are the following:

• an appropriately drafted contract of employment is absolutely vital in order to protect the employer and employee with respect to their respective rights under the FW Act and at common law;
• appropriate management with respect to dismissals is key to mitigating against claims under the FW Act or other legislation; and
• it is always advisable to part ways amicably and to treat each other with respect and dignity.

We regularly provide our clients with advice on terminations, including the steps that need to be followed to ensure the termination is sound and defensible, in addition to assisting clients who find themselves in a court or tribunal because of a termination issue.

If you wish to discuss any aspect of this article or require our specialist advice or assistance in relation to an employment law matter, please do not hesitate to contact us.
This alert is not intended to constitute, and should not be treated as, legal advice.