The mere existence of a restraint clause in an employment contract, and failure to follow performance management and procedural steps, has resulted in a dismissal being unfair and compensation awarded to an employee. With the Fair Work Commission (“FWC”) taking this view about the existence of a restraint clause, it is important for employers to consider carefully the utility of restraints and the options available when an employee’s employment is ending.
The facts
The case involved an employee who was dismissed for failing to meet sales targets, and for a continuous decline in performance. The employer met regularly with the employee to discuss his targets and underperformance, and also reduced the employee’s sales target from $4m to $2.8m. However, despite the employee being at only a fraction of the revised sales target, no formal performance management process was undertaken. The employee was not informed that his employment was at risk should his performance fail to improve.
The employee was eventually dismissed and subsequently brought an unfair dismissal claim.
The decision
While the FWC accepted that the sustained underperformance created a valid reason for dismissal, the FWC still found the dismissal to be harsh, unjust and ultimately unfair due to procedural deficiencies and the existence of a 12 month post-employment restraint in the employee’s contract.
The procedural deficiencies included that:
the employee was not warned that his employment was at risk;
the employee was not given the opportunity to respond prior to the termination of his employment; and
notification of dismissal was given via a short phone call, without any opportunity for the employee to have a support person present.
The existence of the restraint clause also contributed to the unfair dismissal finding. This was not a clause that was being disputed and the enforceability of the restraint was not considered by the FWC. However, the mere existence of the restraint clause was found to negatively impact the employee’s future employment and contributed to the harshness of the dismissal.
The restraint was found to create the unlikelihood of future employment due to the employee having a fear of litigation should they attempt to gain employment with a competitor.
The FWC awarded the employee compensation equivalent to 12 weeks’ salary.
Restraint considerations on termination
Many employers will have restraint clauses as part of their employment contracts with best practice dictating that these restraints are tailored for individual employees so that they go no further than is reasonably necessary. What this case highlights is the importance of not viewing restraints as something to “set and forget”, but rather something to be aware of throughout employment and when employment is ending.
Where an employee is being managed for poor performance, an employer should turn their mind to the actual threat posed by the employee post-employment. Had the employer confirmed that they would not enforce the restraint it would have assisted the employer in arguing the dismissal was fair.
Employers should proactively consider restraints as part of termination discussions, and their appetite to enforce them noting that the existence of a restraint will be a relevant factor for the FWC in assessing the harshness of a dismissal.
Meaningful performance management
When it comes to performance management, the case demonstrates that regular performance discussions are not enough. Even in circumstances where it is clear that an employee is falling well below performance requirements, an employer must explicitly warn an employee that continued underperformance may result in the termination of their employment.
Ongoing performance conversations must also translate into a meaningful performance management process which is documented, considers improvement measures (such as additional training) and provides an employee with a reasonable period of time to demonstrate improvement. This is required even when the poor performance is clear and the numbers speak for themselves.
