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Wednesday 27th May 2015
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Could a complex employee
performance scheme end up
costing you money?
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In today's Workplace Bulletin:
- Case law: Ex-employee awarded $70,000 after performance appraisal scheme not correctly implemented
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Dear Reader,
In my first job after finishing university, the employment contract I signed had a brief clause saying there would be an annual performance appraisal.
It was a small organisation. Chances are, any performance appraisal meeting would have been a 30-minute chat over coffee with my general manager (hopefully, his shout). |
And given the size of the organisation, any bonus that came out of it would have probably amounted to a cup of coffee a week.
As it was, I didn’t mind. The role was an excellent stepping stone. The thing is, I could have pointed to that clause at any time and demanded that it be enforced as a matter of contract law.
That should be a wake-up call for the innumerable businesses out there that have employment contracts stipulating performance reviews.
But the more complex your performance appraisal scheme, the more scope there is for it to be misapplied – and the more scope there is for an employee to claim the employment contract was breached.
Today, we look at a Federal Circuit Court case where an employee sought bonus payments after his position was retrenched. Unlike ordinary earnings, you might see bonuses as being something entirely up to your own discretion. But if you’ve clearly failed to follow your own process, that might not be the case.
And as you’ll read, it could certainly cost more than a takeaway long black… |
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Case Law: Ex-employee awarded
$70,000 after performance
appraisal scheme not correctly
implemented
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In Russo v Westpac Banking Corporation (2015), a former employee of Westpac, Mr Russo, made a claim in respect of an unpaid bonus entitlement. He claimed that the failure to pay the bonus amounted to a breach of express contractual terms of the agreement.
Westpac argued that it did not act dishonestly or improperly in deciding not to exercise its discretion to make a bonus payment to Mr Russo, and that it made a business judgment it was open to make on the available information.
Furthermore, Westpac argued that employer and employee had agreed under the main employment agreement that such matters would be at the absolute and complete discretion of Westpac.
The background
Mr Russo was a senior sales manager in Westpac’s general insurance division, a position he had held since 2009. He participated in a “General Investment Incentive Plan” as part of his employment.
It set out an annual performance period between Westpac’s financial year of 1 October and 30 September.
The elaborate performance assessment involved four stages, with ongoing formulation of objectives, updating of a database scorecard, and ranking and moderation of employee performance.
He received an incentive payment under this scheme of $70,000 in the 2009/10 financial year. In May 2011, he participated in a mid-year performance review with his direct line manager. In September 2011, he was made redundant.
Any performance-based bonus would have usually been paid on 1 December 2011 – however Westpac acknowledged it had the discretion to make an ex gratia payment to an employee in respect of the payment under its redundancy policy.
Mr Russo’s direct line manager said he had considered a payment under the redundancy policy, but had decided that Mr Russo’s performance in the 2010/11 financial year did not warrant payment.
However, Mr Russo argued that his manager’s specific criticisms of his performance were unfounded, and that notwithstanding those criticisms he had been given a high-enough rating on the criteria in his mid-year review to justify a payment.
The decision
Westpac disputed Mr Russo’s claim that there was a breach of contract, arguing that:
- the terms he alleged were breached were not in the employment agreement, but instead in a mixture of other documents and policies, and;
- the employment agreement itself stated that those documents and policies would not form part of the contract of employment.
However, cross-examination of Mr Russo’s former line manager revealed that the line manager had breached established processes and taken into account impermissible factors when evaluating Mr Russo’s performance.
By his own admission, he had not complied with Westpac’s redundancy policy or performance appraisal plan – and therefore, Westpac had breached its own policies.
It was further determined that although Westpac had stated in the employment agreement that those documents and policies did not form part of the contract of employment, the employment agreement also stated that Westpac would comply with its redundancy and performance appraisal policies in the event of termination of employment.
The Court found that this meant that these policies would have contractual effect for the purpose of determining Mr Russo’s termination entitlements.
The result
The Court noted that the “matrix of documents” that made up Westpac’s performance appraisal scheme was highly complex, and not fully understood beyond its human resources department.
It also accepted that had Westpac properly performed its contractual obligations it would have been more likely than not that Mr Russo would have received his full entitlement to a bonus.
Mr Russo was awarded the full ex gratia payment he would have otherwise received as a bonus - $70,000.
This case has repercussions for employers that use performance review processes. Firstly, the more complicated your performance appraisal policy is, the greater the risk is that your managers will misapply it.
Because of this, you should go back to your performance policy on an ongoing basis to assess its effectiveness, but also whether or not your managers and employees can actually follow it.
It’s true that bonuses are generally a matter of the employer’s prerogative – but if you’ve acted capriciously, arbitrarily or unreasonably in exercising your discretion, you may still open yourself up to challenge later on.
The same goes where performance review and appraisal is used to discipline or dismiss an employee.
A good bonus scheme that creates an ‘at-risk’ salary component can be a big incentive for high-performing staff – just make sure you’re not shouldering more risk yourself.
Joseph Nunweek
Editor, Workplace Bulletin
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