Managing Underperformance and Avoiding Unfair Dismissal

In this article, we address the key matters that you should consider when managing underperforming employees. We also explain why a failure to correctly manage an underperforming employee before terminating their employment can result in a claim being brought against the employer, including for unfair dismissal, and we address common pitfalls for employers to consider when going through the process of terminating an employee’s employment to mitigate the risk of a potential claim being made.

Unfair Dismissal

The Fair Work Act 2009 (Cth) (FWA) provides protections for employees against being unfairly dismissed by their employer.

Section 385 of the FWA provides that unfair dismissal occurs where an employee is dismissed and that dismissal is harsh, unjust or unreasonable, was inconsistent with the Small Business Fair Dismissal Code, or was not a case of a genuine redundancy. Whether the termination of an employee’s employment was inconsistent with the Small Business Fair Dismissal Code or was a case of genuine redundancy often turns on the specific facts of a dismissal, so they are not the focus of this article.  

When an employer is deciding whether to dismiss an employee for underperformance, they should be careful to ensure that the dismissal was not “harsh, unjust or unreasonable”.

The terms “harsh”, “unjust” and“ unreasonable” are not terms that are easily capable of definition. They are not defined in the FWA. It may be that a dismissal is harsh but not unjust or unreasonable, unjust but not harsh or unreasonable, or unreasonable but not harsh or unjust. Further, it may be the case that an employer considers that the termination of an employee’s employment for underperformance does not meet the s 387 criteria, however, the Fair Work Commission (FWC) or a court of competent jurisdiction may view the dismissal in these terms.

When considering whether a dismissal fits one of these categories, the FWC will consider a broad range of factors listed in s 387 of the FWA, which include:

· whether there was a valid reason for the dismissal related to the person’s capacity or conduct;

· whether the person was notified of that reason;

· whether the person was given the opportunity to respond to any reason related to the capacity or conduct of the person;

· any unreasonable refusal by the employer to allow the person to have a support person present in discussions related to the dismissal;

· if the dismissal related to unsatisfactory performance by the person, whether the person had been warned about that unsatisfactory performance before the dismissal;

· the degree to which the size of the employer’s enterprise would be likely to impact on the procedures followed in effecting the dismissal;

· the degree to which the absence of dedicated human resource management specialists or expertise in the enterprise would be likely to impact on the procedures followed in effecting the dismissal; and

· any other matters that the FWC considers relevant.

To ensure that employees are treated fairly, justly and reasonably, the Fair Work Ombudsman has published a best practice guide for managing underperforming employees, which outlines what steps employers can take to fairly treat underperforming employees.

Below, we set out several key matters that employers should consider when deciding whether to take action, or in taking action, against an underperforming employee. The below is a general list only, and employers should seek advice from an appropriately qualified solicitor about how best to approach underperforming employees.

1. Warnings

Warnings often play a critical role in managing underperforming employees and avoiding potential liability from an unfair dismissal claim. While there is no fixed rule as to the number of warnings, when warnings should be given or the form of warnings, the FWC and the courts frequently emphasise that an employee must be clearly informed of the aspects of their performance that are unsatisfactory, that their job is at risk if they do not improve and that they are given a genuine opportunity to improve.

In Crozier v Palazzo Corporation Pty Ltd (2000) 98 IR 137, the Full Bench of the Australian Industrial Relations Commission made clear that procedural fairness requires more than a perfunctory warning given after a termination decision has effectively been made, underscoring that warnings must be timely, specific and meaningful. Having said that, warnings alone often will not render a dismissal fair. Where warnings are vague, unsupported by guidance or unrealistic in their expectations, or where they are not accompanied by a real opportunity for improvement, they will likely carry very little weight in a determination of whether a dismissal was harsh, unjust or unreasonable.

The FWC and the courts repeatedly adopt a holistic approach to assessing warnings. They are considered in the broader context of the employer’s overall performance management process rather than being treated as a standalone procedural “checklist” item. This underscores the importance of using warnings as part of a genuine and structured effort to address underperformance, rather than as a precursor to a predetermined termination.

2. Performance Improvement Plans

A Performance Improvement Plan (PIP) can help to ensure that an employee is on notice of the aspects of their performance that require attention and improvement. Importantly, the plan should make clear that continued underperformance may result in disciplinary action being taken against the employee, including the termination of their employment. The FWC provides a template PIP on its website, which can be accessed here.

It is important that there is a (or several) good reason for an employee to be placed on a PIP. An employer should implement a PIP in good faith and treat it as a genuine attempt to improve an employee’s performance, rather than a box-ticking exercise before the employee’s employment is terminated. Employers should ensure that the targets set out by a PIP are achievable and can be reached within a reasonable timeframe. Setting impossible expectations for employees in PIPs or “moving the goal posts” on a PIP may result in adverse findings being made against the employer: see, for example, Pezzimenti v Rotary International [2019] FCCA 1854.

As with warnings, the FWC and the courts adopt a holistic approach when assessing a PIP in the context of a business’s overall performance management framework and whether it provided a genuine opportunity for an employee to improve their underperformance before their employment was terminated.

3. Document Everything

If a claim for unfair dismissal is brought, the employee must establish that their dismissal was harsh, unjust or unreasonable. However, where an employer terminates an employee’s employment on the basis of the employee’s (mis)conduct, then the employer will have the onus of proving that the asserted (mis)conduct took place. It is often, therefore, critical that employers keep accurate contemporaneous records of meetings held, conversations had, correspondence exchanged and documents issued to employees. This includes taking file notes of meetings and informal interactions (which often end up being the most important documents in an unfair dismissal case), and documenting all warnings and performance management actions. Without proper documentation of the performance management process, an employer may not be able to justify their decision to terminate an employee’s employment, even if they had genuine grounds to do so.

Key Takeaways

Lawfully and properly managing underperforming employees is a minefield that can cause countless, and often costly, problems for employers. While timely and reliable legal advice often mitigates the risks which businesses face when managing underperforming employees, proper planning before lawyers are engaged can avoid those risks altogether.

When managing an underperforming employee, employers should ensure that they:

1. give proper written warnings;

2. if appropriate, implement a PIP; and

3. document everything.

While those steps alone will not eliminate the risk that an employee may bring an unfair dismissal claim, they go a long way towards setting a good foundation for defending any such claim.

Watson Webb is well equipped to assist employers navigate the quagmire of underperforming employees and unfair dismissal, including by providing advice at the pre- and post-termination stage, drafting and implementing policies and procedures, and defending unfair dismissal and related claims. If you run a business and are having difficulty with underperforming employees, please get in touch with our employment, advisory and disputes team to discuss how we might be able to assist.

Disclaimer

The above is general commentary only and is not legal advice. It is also not an exhaustive statement of the law, nor is it specific to your circumstances. If you are considering implementing performance policies and procedures in your business, want to terminate an employee for under performance, or believe you have been unfairly terminated, you should seek proper and tailored independent legal advice.