After the Warrnambool case, proceed with fairness

Our earlier article on the Supreme Court judgment that ordered the reinstatement of Warrnambool's CEO after he was dismissed by a majority of Councillors has generated a lot of comments and questions, especially after our Managing Partner, Tony Raunic, also appeared on VLGA Connect with Chris Eddy and Steve Cooper to talk about the case. We thought it would be useful to take a closer look at the way that CEO employment contracts can be lawfully terminated by Council, and how Councillors can avoid falling into the same traps as in the Warrnambool case. There are lessons here for CEOs and HR managers in Local Government as well, to apply to the performance management of Senior Officers and other staff.

Does this case spell the end of Councillor's democratic rights to decide the best leader of the organisation?

This is a question that has come up since our first article was published last week. The short answer is, "No, but the decision to dismiss a CEO must be underpinned by a reason and the CEO must be given the chance to comment before action is taken." In the Warrnambool case, the CEO's contract contained a clause that set out when the CEO's appointment could be terminated by Council.'  It is a term that is very common in CEO contracts throughout Local Government Councils in Victoria and similar terms regularly appear in Senior Officer contracts as well. The clause allowed Council to terminate the CEO's employment agreement and appointment immediately "for any reason" or "no reason" provided that Council paid the CEO an amount equivalent to a specified number of months' wages in lieu of notice. The Warrnambool majority relied on the "no reason" option. After they had apparently formed the view that Mr Schneider's tenure should not continue, they arranged a special meeting where four of the seven Councillors supported resolutions to dismiss him immediately for no reason (with payment of the required amount in lieu of notice). The exact terms of the relevant motions were:

a)'  to terminate the employment of the Chief Executive Officer, Mr Peter Schneider, effective immediately under the 'for no reason' provision in clause 14 of the Chief Executive Officer's contract of employment;

b)'  that in accordance with cl 14 of the Chief Executive Officer's Contract of Employment, pay to the Chief Executive Officer the equivalent of 12 months total gross remuneration package and all accrued entitlements;

c)'  to authorise the Mayor to immediately notify the Chief Executive Officer of the employment termination and take such steps and execute such documents as are necessary to give effect to the resolution; and

d)'  that Part 1(a) and 1(c) of the Resolution ceases to be confidential when the Mayor sends an email to all Councillors confirming that the Chief Executive Officer has been informed of its effect.

However, the Supreme Court held that the contractual clause to dismissal "for no reason" was inconsistent with the Council's statutory power to dismiss in the Local Government Act 1989 (Act).'  Due to the hierarchy of laws, legislation such as the Act must take precedence over the content of the employment contract to the extent of any inconsistency. The judge found that the Council's power to dismiss under the Act must follow the rules of natural justice.'  In this context the rules of natural justice meant that the CEO was entitled to know the reasons for the decision and be given the opportunity to respond before the Council made a final decision to dismiss.'  The contractual right to terminate immediately for "no reason" was irreconcilable with the principles of natural justice (which required that a reason be given).'  This meant the "no reason" term was invalid and the Council's attempt to rely on it to terminate the CEO's employment was ineffective. The judge was also critical of the four Councillors for deciding the CEO's fate in advance of the special meeting and stated that this was an example of the failure to follow procedural fairness.'  The judge pointed to statements by the Councillors in emails a month prior to the special meeting which showed that they had already made up their minds on the issue.

So what would a fair process have looked like?

While the "no reason" term was found to be invalid, the judge said that the other limb of the immediate termination clause did not offend natural justice.'  The term that stated Council could terminate immediately "at any time" was still valid.'  It only regulated "the time at which the power of termination may be exercised", not the procedure or grounds of termination. This means that Councils can still lawfully proceed "at any time" to immediately terminate a CEO's appointment, provided the rules of natural justice are followed. A fair process would require Council to:

• Clearly identify the reasons for wanting to dismiss and put these squarely to the CEO in writing;
• Provide the CEO with the reasonable opportunity to submit a response to the concerns;
• Remain open to alternative outcomes and not determine the issue in advance; and
• Consider the CEO's responses before voting of the motions to dismiss.

But the Warrnambool CEO was on notice of their concerns, wasn't he?

Warrnambool argued that there had been a meeting on 21 February 2020 (four months before the special meeting resolving to dismiss) between six Councillors and Mr Schneider where he was told of dissatisfaction with his work performance. However, the minutes of this meeting did not reflect that Mr Schneider was told that if his work performance did not improve his employment would be terminated.'  Council also endorsed his performance review in March 2020 and increased his salary, which the judge said was inconsistent with Mr Schneider being on notice of the imminent termination of his employment.

The CEO received 12 months' pay in lieu of notice '€“ doesn't that remedy the situation?

This is probably the aspect of this case which causes the most confusion. The contract clearly stated that the Council was allowed to dismiss the CEO "for no reason" provided that it paid him 12 months' remuneration in lieu of notice. Surely the payment of such a generous amount, as allowed in the contract, meant that the process was fair? The issue here, again, is the conflict between the right to terminate under the employment contract and the right to terminate under the Local Government Act 1989.'  It is the right to terminate under the Act which required the Council to apply the rules of natural justice and provide reasons for the decision. Since this didn't happen, the process (even taking account of the payment) was not lawful. If this scenario had played out in a corporate boardroom, i.e. in a private company where the Local Government Act or another statute did not regulate the appointment of the CEO, then a dismissal which complied with the employment contract would have been valid. The corporate "rules of the jungle" (if it's not too much of a stretch to refer to the common law on employment contracts in this way) did not apply in the Warrnambool case because of the additional layer of regulation imposed by the Local Government Act 1989.

Procedural fairness and the Fair Work Act

Having said that, there is a range of other workplace relations legislation which needs to be considered when dismissing employees at all levels.'  For example, under the unfair dismissal provisions in the Fair Work Act 2009, factors going to whether a dismissal is fair or unfair include:

• whether the employee has been notified of the reason for dismissal;
• whether the employee has been given the opportunity to respond to the reason; and
• whether the employee was warned about unsatisfactory performance before dismissal.

Unfair dismissal laws do not apply to employees who earn over a certain threshold and who are not covered by any modern award or enterprise agreement, so common law employment contracts usually set the dismissal rules for high-flying executives such as CEOs. Indeed, Council CEOs usually earn above the high income threshold and they are often excluded from enterprise agreement coverage.'  This means that Council CEOs generally cannot bring unfair dismissal claims and therefore cannot be reinstated by the Fair Work Commission. This is another reason why the Warrnambool case, which Mr Schneider brought in the Supreme Court, and its outcome, which saw him reinstated to his position, is so interesting.

Does this case apply to employment contracts for Senior Officers and other staff?

While the Warrnambool case involved a CEO, the judge's reasoning - that the rules of natural justice must be followed when making a decision to dismiss - must be applied to all Senior Officers and all other Council staff, because all of them have been appointed under either the Local Government Act 1989 or the Local Government Act 2020. It is also relatively common to see "no reason" terms in contracts for Senior Officers (and perhaps other staff).'  So applying this case, any such clauses in SO contracts and others should also be treated as invalid and not relied upon. Again, fair process should always be followed if it becomes necessary to dismiss a CEO, senior officer or any other Council staff member. This is true because the rules of natural justice apply, but also, for most employees, because of the risk of an unfair dismissal claim under the Fair Work Act 2009. On this point, we consider that this case could see an increase in the number of claims in the Courts by ex-Council employees who either do not qualify to bring an unfair dismissal claim or may have missed the 21-day deadline to bring a claim in the Fair Work Commission. However, the decision is less significant for Council staff below CEO level as the legal obligations on Councils under the Fair Work Act to afford procedural fairness to employees in the dismissal process already apply in most cases.

What should Councils do next?

This case identifies common clauses which feature in many existing Council employment contracts as being invalid and unenforceable.'  While the temptation might be to redraft them and replace them, on one level this is impractical. Councillors and human resources managers in Local Government need to be aware of this case and make sure that the rules of procedural fairness are followed when decisions are made surrounding the performance management and dismissal of all staff, from the CEO down.'  This will limit the risk of reinstatement orders in the Fair Work Commission and in the Courts based on a flaw in the termination process. Hunt & Hunt's employment law and local government specialists can help guide councils and councillors through the procedural fairness process and help mitigate this risk. Contact our team below.

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~ with Michelle Nguyen, Lawyer