Executive payout more costly for employer than proper performance management

By Shae McCartney, Bianca Mendelson

05 Sep 2019
The Pezzimenti case demonstrates the risks in creating a performance management plan based on form rather than substance.

Historically an aggrieved executive would seek to move on quietly, perhaps favoring their reputation and employability over litigating an acrimonious parting. With rare exception, disputes are over bonus or share schemes rather than performance and termination. However, with executive positions being harder to come by and a change in society's approach, executives are now exploring their legal options.

The recent case of Pezzimenti v Rotary International [2019] FCCA 1854 is a timely reminder that just because an employee earns over the unfair dismissal threshold or is at an executive level does not mean that they do not have avenues to challenge a termination that is alleged to be spurious, and that employers must manage executive performance management with the same care and rigor as they do for all their staff.

Mr Pezzimenti's performance is reviewed

Frank Pezzimenti was employed by the charity Rotary International in an executive position. His new manager, Mr Huerta, had some concerns about his work performance and placed him on a performance plan (PIP), which set out four performance objectives to be met.

The PIP commenced on 28 October 2016 and was scheduled to run until 28 February 2017.

On 13 December 2016, Mr Pezzimenti made a formal complaint of bullying by Mr Huerta in relation to his placement on the PIP. Nonetheless, Mr Huerta continued to implement the PIP and meet with Mr Pezzimenti without any notable concern.

By 28 February 2017, one deliverable not been satisfactorily completed and was still outstanding. Mr Pezzimenti continued to progress this deliverable.

On 5 April, Mr Huerta and Mr Pezzimenti met to discuss the outcome of the PIP. Mr Huerta stated that he was unable to assess Mr Pezzimenti's progress on one deliverable and that Mr Pezzimenti had failed to achieve the other three deliverables. The meeting lasted for approximately 15 minutes after which Mr Pezzimenti's employment was suspended and he was asked to leave the office immediately.

On 11 April, Mr Pezzimenti commenced proceedings in the Federal Circuit Court of Australia alleging a breach of the general protections provisions of the Fair Work Act 2009 (Cth).

Immediately after that, Rotary made a number of inquiries into Mr Pezzimenti’s leave records, his email account and his attendance at work, made three allegations about his conduct, and issued Mr Pezzimenti with two show cause notices. The second notice required Mr Pezzimenti to attend a Skype meeting on 27 June to show cause as to why his employment should not be terminated. He failed to attend that meeting and Rotary terminated Mr Pezzimenti’s employment based on the three allegations and his alleged failure to meet the PIP within the specified time frame as the reasons for dismissal.

Mr Pezzimenti then amended his original application to the Court and alleged three instances of adverse action:

  • his placement by Mr Huerta onto the PIP;
  • Rotary's requirement to attend the show cause meeting on 27 June; and
  • his termination of employment on 30 June.

Performance managed or set up to fail?

The Court held that Rotary failed to discharge the reverse onus of proof that it did not take adverse actions against Mr Pezzimenti by dismissing him because he exercised a workplace right.

The Court stated that Rotary had justified concerns about the performance of Mr Pezzimenti. Rotary appropriately placed him on the PIP. However, it was apparent that there was a change of attitude by the Rotary decision-makers following Mr Pezzimenti’s bullying complaint against Mr Huerta and the commencement of the Court proceedings in April 2017.

The Court accepted Mr Huerta's evidence that his views did not change significantly following the bullying complaint, but the Court considered that his views did change following the Mr Pezzimenti's commencement of the Court proceedings. Mr Huerta was unable to persuade the Court that there was any reason for that change of attitude other than the commencement of proceedings. The Court stated that goalposts of the PIP changed and it was as if "Mr Pezzimenti was from that point set up to fail."

After Mr Pezzimenti commenced the proceedings, the Court said that:

"Rotary went looking for additional reasons to dismiss Mr Pezzimenti, and thought it had found it in the so-called breach of confidence. That was the charge Mr Pezzimenti was called to answer and he was dismissed when he failed to do so. The charge has the air of artificiality to it. While Mr Huerta may have been embarrassed by Mr Pezzimenti’s communication with [the Rotary director] it is very hard to accept the proposition that the communication of a concern by the International Office Manager of Rotary [Mr Pezzimenti] to the Rotary regional director responsible for that office involves a breach of confidence."

The Court awarded Mr Pezzimenti 12 months' wages as damages, which amounted to $205,000.

The Court stated that it was more probable than not that the outcome of the PIP would have been the redundancy of Mr Pezzimenti's position, or a managed exit of Mr Pezzimenti. Had Rotary and Mr Pezzimenti negotiated an exit plan, he could have sought alternative employment while still holding his position with Rotary, instead of seeking alternative employment while unemployed.

Managing an employee's performance

The case demonstrates the risks in creating a performance management plan based on form rather than substance.

Even though high-income employees are not protected by the unfair dismissal provisions that focus heavily on procedural fairness, employers must still ensure they have sound and legitimate reasons for dismissal and follow a fair and reasonable process.

Where an employer embarks on a performance management process, the reasons for doing so must be justified. The employer in this case did have justifiable concerns about the employee's performance and rightfully placed him on a PIP. However, it was found to have deviated from is reasonable performance management process when the employee commenced Court proceedings and the employer acted to expedite the employee's dismissal.

Employers should always use best practice performance management processes (throughout the entire process) which generally include:

  • meeting with the employee to clearly and specifically explain the performance shortfalls (provide tangible examples where possible) and expected standard of performance;
  • devising a PIP with clear, achievable and measurable performance targets and timeframe to meet these targets;
  • having regular check-ins with the employee to monitor performance and provide feedback;
  • where performance improves – close out the PIP process and continue monitor performance as usual; and
  • where performance does not improve:
    • addressing any non-compliance with the PIP when it arises;
    • reinforcing the expected performance standards; and
    • warning the employee of the potential consequences of failing to satisfactorily improve their performance (i.e. disciplinary action).

In the event the employee makes a complaint or otherwise asserts a workplace right, employers ought to be mindful any performance management it takes will be viewed through the prism of that complaint or workplace right. Therefore the decision-maker must carefully consider its reasons for taking the action to ensure it is not for a prohibited reason.

It is important to remember that in the event of a general protections application, the relevant decision-makers will be required to give evidence as to their reasons for taking the action in order to discharge the reverse onus of proof. It is recommended the decision-makers keep file notes of the performance management process and the reasons why actions were taken to assist in demonstrating action was not taken for a prohibited reason.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.