The Full Court of the Federal Court of Australia has clarified the circumstances in which an employer can justify the summary dismissal of an employee by reference to information that was only discovered after the dismissal took place.

Facts

The employee (who was the respondent in the proceedings before the Full Court) was employed in a senior executive position by the appellant company.

On 3 June 2013, the managing director of the company told the respondent that his position was no longer required and there was no suitable vacant position to which he could be redeployed. The respondent was told that he would be given six month’s pay in lieu of notice of termination (his written contract of employment stipulated a six month notice period) and 12 weeks’ redundancy pay.

The respondent left his employment on that day and there followed a course of correspondence over the terms of a deed of release.

On 20 June 2013, the solicitors for the company wrote to the employee setting out certain “additional material” that had come to light since the termination of employment. This material related to four episodes of alleged misconduct.

The appellant company took the position that it was entitled to summarily terminate the employment on the basis of the additional material. As a consequence the employee was not given six month’s pay in lieu of notice or the redundancy payment.

He brought proceedings in the Victorian County Court to recover those payments on the basis that there was no justification for summarily terminating his employment.

First instance proceedings

The Victorian County Court had to determine whether the appellant company was entitled to rely on the “additional material’, given that it had come to light after the respondent’s employment was terminated for redundancy. This required consideration of the so called “Shepherd principle”, named after the case of Shepherd v Felton Textiles of Australia Limited. In that case the High Court of Australia held that the dismissal of an employee may be justified by reference to grounds on which the employer did not act and of which the employer was unaware when the employee was dismissed.

The trial judge found that, properly construed, the contract of employment embodied concurrent rights of termination – summarily in the case of serious misconduct or with written notice or payment in lieu of notice. Consequently the Shepherd principle applied and the company could justify the termination by reference to the additional material.

In considering the additional material, the trial judge found that the evidence did not establish serious misconduct sufficient to justify summary termination. The employee was awarded damages equivalent to six month’s pay, plus redundancy pay.

The company brought an appeal to the Full Court of the Federal Court. The employee cross appealed in relation to the finding that the additional material could be brought into account in justifying the termination.

Appeal to the Full Court

The Full Court concluded that the Shepherd principle had been interpreted too broadly by the trial judge.

There was an important distinction between the facts of this case and the facts in Shepherd and related cases. In the present case there had been an actual contractual termination, not a mere purported termination upon inadequate grounds. Furthermore the actual termination was not based on any breach.

Because the employee’s contract was terminated upon proper notice or payment in lieu according to its terms, the employer was not entitled to later use otherwise available grounds to justify the summary dismissal of the employee. The Shepherd principle does not extend to a situation where a party has lawfully terminated a contract on proper notice.

Significance

The case marks quite a clear limit to the operation of the Shepherd principle. Once an employer enacts the termination of an employee on notice and without cause it is not possible to reverse that outcome if the employer later discovers that the employee had committed serious misconduct.

The fact that the misconduct may have been deliberately hidden by the employee would, seemingly, make no difference. The issue of principle is that the contract had already been terminated on notice and financial obligations crystallised, meaning that no change to the situation could be legally permitted.

A copy of the case can be accessed by pressing this link.