The New South Wales (NSW) Court of Appeal recently handed down its decision confirming an employee’s entitlement to the payment of a “special bonus” following the termination of his employment.

PCS successfully acted for the employee in both his proceedings before the Supreme Court of New South Wales and the recent appeal proceedings brought by his former employer, ‘BFSA’, in the NSW Court of Appeal. Both decisions highlight the critical importance of undertaking workplace investigations and ensuring that any subsequent decisions made with respect to employees are based on a sound and justifiable decision making process.

The Facts

Proceedings commenced in the Supreme Court arose from the termination of the employee’s contract on the grounds of serious misconduct. The employee was employed as a Sales Director of BFSA from 2002 to 2009. Shortly before BFSA terminated the employee’s contract, allegations were made that the employee had engaged in sexual harassment including inappropriate touching, inappropriate comments and unwelcome attention. As a result of the allegations BFSA commenced an investigation. The NSW Supreme Court found that a number of features of BFSA’s investigation were remarkable and demonstrated that the investigation was seriously and fatally deficient.

Despite BFSA concluding that the employee had engaged in conduct that was “unbecoming of a director”, none of the witnesses corroborated the allegations, only one witness gave “some small support” to the allegations and most remarkably, the employee was not interviewed, the allegations were not put to him and at no time prior to the termination of his employment was he given an opportunity to respond. The Court also noted BFSA’s failure to follow its own grievance procedure as a further feature of the investigation that demonstrated its inadequacy.

“Critical importance of undertaking workplace investigations”

Despite the lack of evidence supporting the allegations, the employee was called into a meeting on 4 February 2009 and advised that his employment was to be terminated on notice. The employee was invited to consider resigning and sent a deed of release with an offer of notice and a pro-rata amount of his “special bonus” valued at $1.4 million, which was due to be paid shortly after the termination of his employment. Following discussions regarding the employee’s termination, which ultimately broke down, BFSA then purported to terminate his employment contract for serious misconduct without paying his notice or special bonus.

The Court’s view

At first instance, and reaffirmed on appeal, BFSA was held to have elected to terminate the employee’s employment with immediate effect at the meeting on 4 February 2009 and therefore, could not later elect to terminate the employee’s employment for serious misconduct. The Court held that BFSA terminated the employee’s employment in full knowledge of the allegations yet choose not to rely on them, preferring to terminate the employee’s employment on notice to “save some unpleasantness”. As a result, the employee was entitled to six months’ notice (his contractual notice period) and payment of the special bonus. The Court of Appeal upheld this finding concluding that the effective date of termination was 4 February 2009 and:

“…what occurred after 4 February 2009 is that [BFSA] became impatient with [the employee’s] failure to accept the offer contained in the draft Deed of Release, which provided for substantial payments to be made by [BFSA]to [the employee], and then engaged in a purported cl13.5 process in an attempt to disqualify [the employee] from any entitlement to the Special Bonus or payment in lieu of notice.”

With respect to BFSA’s argument that regardless of a finding that the employee was terminated on notice, BFSA was entitled to rely on the employee’s conduct as constituting serious misconduct justifying termination for cause, this argument was rejected. On appeal the Court held BFSA did not have a valid right of termination. The Court held that the employee was entitled to procedural fairness before any decision was made by BFSA to terminate his employment for cause, relying upon the allegations of serious misconduct. The Court further held that BFSA was “…obliged to make its final decision in good faith taking into account the factual material before it…”, including the employee’s response. After considering the specific allegations against the employee the Court held that two of the allegations had not been proved and the remaining three, even if proved “…did not amount to serious misconduct that would warrant dismissal.”