Michael Diver v Object Consulting Pty Limited and Anor

Industrial Relations Commission (NSW)|2003-06-26|Before: Schmidt J, Mr P

Industrial Relations Commission of New South Wales in Court Session

CITATION : Michael Diver v Object Consulting Pty Limited and Anor [2003] NSWIRComm 202 MICHAEL DIVER Applicant

OBJECT CONSULTING PTY LIMITED PARTIES : ACN 003 682 693 First Respondent

GERALD PATRICK ANTHONY CARROLL Second Respondent FILE NUMBER: IRC 5618 of 2000 CORAM: Schmidt J CATCHWORDS : Unfair contract - IT Industry - software engineering company - redundancy - short period of employment - no notice or warning given - one month's notice required - no contractual provision for redundancy - contract found to be unfair - five months notice and three months redundancy pay ordered - mitigation - no contractual provision for bonus in event of redundancy - pro rata bonus ordered - respondents to be made jointly and severally liable for orders made - interest from date of termination - costs as agreed or assessed LEGISLATION CITED : Industrial Relations Act 1996 Abboud v State of New South Wales (Department of School Education) (No 2) (2000) 99 IR 299 Brent v Bastian [2003] NSWIRComm 65 Brown v Rezitis (1970) 127 CLR 157 Fliedner v Phillips Electronics Australia Limited (2003) NSWIRComm 23 CASES CITED : Lavings v Barclay Mowlem Construction (NSW) Ltd (1994) 99 IR 247 Newton v Goodman Fielder Mills Ltd (1998) 81 IR 227 Payne v Foxboro L & N Pty Ltd (1998) 81 IR 404 Port Macquarie Golf Club v Stead and Anor (1996) 64 IR 53 Westfield Holdings v Adams (2002) 114 IR 241 Redundancy Awards Case (1994) 53 IR 419 HEARING DATES: 05/27/2003; 06/28/2003; 05/29/2003 DATE OF JUDGMENT: 06/26/2003

APPLICANT: Mr P Coleman of counsel SOLICITORS: Carroll & Associates LEGAL REPRESENTATIVES: RESPONDENTS: Mr C Magee of counsel SOLICITORS: Cowley Hearne

JUDGMENT: - 33 - INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES IN COURT SESSION

MATTER NUMBER 5618 OF 2000 MICHAEL DIVER v OBJECT CONSULTING PTY LIMITED AND ANOTHER Application under section 106 of the Industrial Relations Act 1996

1 This claim was brought by the applicant, Mr Michael Diver, against his former employer, the first respondent, Object Consulting Pty Limited ('Object'), under s106 of the Industrial Relations Act 1996 ('the Act'). The second respondent, Mr Gerald Carroll, was the chairman of the board of Object, its managing director and majority shareholder, having commenced the business in 1989. Object produces a range of software engineering services, including training, consulting and software development.

2 Without prior warning or any notice, the applicant was made redundant on 4 September 2000, having been recruited for his position in late 1998. He was paid one months salary as a redundancy payment. The relief claimed in the summons was: 1. An order declaring the contract of employment and arrangements (the contract) between the applicant and the respondents, unfair, harsh and unconscionable, and against the public interest.

An order declaring the said contract void from its commencement or some later time, save for money paid to the applicant pursuant to the contract.

In the alternative an order to vary the contract of employment so as to add the following terms: (a) Employment may be terminated by the employer on 12 months notice, or payment in lieu of notice of 12 months remuneration, plus notional bonus over the notice period.

(b) If employment is terminated by reason of redundancy, in addition to notice or payment in lieu of notice, the applicant is entitled to a severance payment of 6 months remuneration.

(d) If the employer is contemplating restructuring its organisation or making changes which could make the applicants position redundant, it will consult with the applicant well in advance of the final decision and discuss alternatives to termination of employment.

An order that the respondents pay to the applicant a sum representing 12 months remuneration in lieu of notice, 6 months remuneration as redundancy severance payment, and bonus of for the current year.

An order that the respondent pay to the applicant an amount for interest on the sum calculated from the date of termination of employment.

An order that the respondent pay to the applicant his costs of the proceedings.

Such further or other orders that the Commission in Court Session may consider just.

3 The applicant gave evidence and the respondents called evidence from Andrew Wood, Chief Financial Officer; Leslie Bognar, Director; and Gerald Carroll, second respondent and director of first respondent.

4 It was Mr Carroll's evidence that in 1997 he decided upon a restructure of Object and its associated businesses. He spent a year looking for a candidate for a new position, which would involve upgrading the organisation structure and culture of the business to achieve more professionalism and certainty in the management of software projects, especially those being done on a fixed price basis. He chose a UK based IT services company, Logica Pty Ltd ('Logica'), as a role model and set out to try and find a candidate with experience in working at that company.

5 Mr Carroll identified two people, who each declined his approach, but who both suggested Mr Diver to him. One of these people approached Mr Diver, who wasn't actively seeking alternative employment at the time, but was interested in exploring the opportunity raised with him. He made contact with Mr Carroll. Mr Diver had formerly worked at Logica in Sydney, where he managed that company's Sydney projects. He was then employed as General Manager Professional Services at Intergraph Corporation Pty Ltd ('Intergraph').

6 There was an issue in the proceedings as to what position in fact Mr Diver was recruited for. His understanding was that the position was general manager of Object and that he would, in the next few years, replace Mr Carroll as managing director of Object. Mr Carroll's position was that Mr Diver was not employed as the general manager of the whole of Object, but of a division and that he had not been promised that he would become managing director. In cross examination he denied that he held out the possibility that Mr Diver would become managing director, he had 'simply explained that in the future evolution of the business, with my intention to play a larger role in my entrepreneurial activities, a role would emerge which is a more comprehensive role, involving more people and more functions in the business and he would have a shot at that' and that Mr Diver was never anything other than a candidate for such a position. Mr Carroll also denied that he had a timeframe in mind, but his own notes of what he then had in mind, showed a timeframe of two years.

7 Mr Wood's evidence was that Object had six divisions and that Mr Diver was recruited as general manager of the delivery arm of the company, which he renamed Professional Services. There were problems of performance, job profitability and a lack of effective process in that area, which Mr Diver was to address. Mr Diver later took over contract negotiation from Mr Wood, because of the skill he displayed in that area. Mr Bognar's evidence was that at interview, he discussed with Mr Diver the possibility of he also taking over the sales force from him in a few years, if he performed well. Mr Diver was also required to be proactive in identifying business and facilitating sales people to become involved, even though he wasn't concerned with running the sales function. He was involved in pre-sale activities and contract negotiations, but his main focus was on managing all delivery functions and arranging support for sales people in bid preparation, by identifying resources to deliver the project, assisting in bid negotiations with costs or price and terms and contracts.

8 On 19 October 1998, Mr Carroll offered Mr Diver the position. The evidence showed that the recruitment process was a very careful and painstaking one. Mr Carroll had established an executive management team, comprising six senior employees, some of whom were the other minority shareholders in Object. Mr Diver met with each of them, as well as with Mr Carroll on several occasions, over a two-month period. Mr Carroll also had lunch with the managing director of Intergraph, to discuss Mr Diver. Mr Carroll was assured by his discussions with the people he contacted about Mr Diver, that he 'was the sort of person who could fill the sort of role I was looking for.'

9 Mr Carroll was also anxious to obtain from Mr Diver a commitment that he would remain at Object for some time and given the volatility of the IT industry, that he would not flit in and out of his business. While he agreed that five years might have come up in discussion, Mr Carroll denied that a five-year commitment was sought from Mr Diver, or that he made any commitment to Mr Diver, that he would have a job for such a period. If he had wanted such a commitment, he would have dealt with it expressly in the letter of appointment. Mr Carroll's position was, however, that if Mr Diver had not given the commitment he was seeking, he would not have been suitable for the job. Mr Carroll also agreed that this topic of Mr Diver's future was returned to in his later performance reviews.

10 Mr Carroll and Mr Diver had not discussed a remuneration package up to 19 October and they agreed to do so the next week. Both Mr Carroll and Mr Diver, nevertheless, regarded themselves as having agreed to the new employment that day. On 22 October they met again and agreed that Mr Diver's package would be similar to his Intergraph package, a base of $140,000 and a bonus of $60,000, with the last $20,000 described by Mr Carroll as payable 'only if my partners and I have reason to celebrate in public at the year's results'. Mr Diver and Mr Carroll agreed that the basis upon which the rest of the bonus would be paid, could be agreed after he commenced. In cross examination Mr Carroll emphasised that he informed Mr Diver that there 'would be a base component to the bonus that related to doing a good job, and that there be an extra part to the bonus, which is about doing an exceptional job'.

11 Mr Carroll denied, however, that this final part of the bonus was linked to financial performance. He explained that outcome was bigger than just financial results in the short term and that: 'I wouldn't confine it to company results because, sir, I head up a community of people and as a community, we have shared goals in terms of goals and some life goals. There are more things than just dollars. The dollars would be important but the business as performing well, that was very important to us. For example, if we were not losing money on any of the fixed price projects but were retaining contingency on fixed price projects that would be one of the grounds in a financial ground measure for us to celebrate but there have to be other issues as well.

One, that's critical to me as a leader of the community of people is harmony. There is a need on occasions to shake the tree but there has to be harmony and harmony, therefore, would have to be a part of that. At the end of the exercise, we all have been through that. That was an example of something of a non financial nature which was not met.'

12 Mr Diver received the letter of offer later on 22 October. It was said to be in standard terms, modified to reflect the position being offered and the bonus still to be agreed. Mr Diver signed and returned it straight away. It contained a provision as to termination upon one month's notice, which he noticed, but paid little regard to at the time, having made the long-term commitment to Object, which Mr Carroll had sought of him. Mr Carroll confirmed that the termination provision was in Object's standard terms.

13 In the meantime, Mr Diver had been made redundant by Intergraph. He had been given notice of his redundancy on his return from annual leave on 20 October. While unexpected, Mr Diver was not troubled by this turn of events, having already made the decision to take up a new position with Object and expecting himself shortly to give Intergraph his notice. He continued working at Intergraph for the balance of that week and was then bound by the terms of a deed of release, in respect of the payments made to him on termination.

14 Mr Diver commenced at Object on 9 November. The bonus arrangements were not settled in five days, as Mr Carroll had promised. They were not finalised until the following March, although Mr Diver's evidence was that the details of the criteria by which the agreed aspects of his performance would be measured, were never finalised. Mr Carroll had determined on five criteria, project management, people management, repeat business, bid management and management of other costs. Mr Diver accepted these and a weighting was also agreed. The bonus criteria were not documented, nor were any particular goals agreed. In April 1999, Mr Carroll determined to pay Mr Diver a bonus of $10,000, in advance of any entitlement. It was also agreed to align payment of bonus to the financial year.

15 The evidence showed that Mr Diver was employed to introduce very significant changes in the way Object did business with its customers. Those changes impacted upon its technical staff, and its sales staff, as well as the consulting staff for whom Mr Diver became responsible. Mr Carroll reorganised Object, so that senior technical staff, important to the success of the company, reported direct to him, so as to remove their involvement in the changes Mr Diver had to manage. They were appointed to a 'technical board'. In cross examination Mr Carroll explained that the source of the problem Mr Diver was employed to fix was 'that there wasn't an expectancy amongst the technical people of the need for as much order as I think that's needed in the project'. Mr Carroll also explained that he knew that 'some of the senior technical people would find it hard to accept the disciplines we wish to have to be put in place and consequently I wanted to give Mick Diver every chance possible to implement these changes effectively and for me to be able to manage any such problems directly, hence the members of the technical board reported directly to me'. Mr Carroll's long-term aim was to develop new subsidiary businesses, where he could find homes for these people, because 'I felt that most of them have now grown beyond the machine line operation which we require to do fixed price projects'.

16 Object's small sales team were supervised by Mr Bognar, although long-term it was envisaged that Mr Diver would assume responsibility for them too. Mr Diver, Mr Bognar and the other members of the executive team also reported to Mr Carroll. Mr Carroll explained that his real concern was to ensure that there was 'adequate interaction between both delivery and sales' and that hence it was important to get new bid procedures in place, which Mr Bognar and Mr Diver developed, with the result that more discipline was introduced. Prior to Mr Diver's employment Object had had some bad experiences with fixed price contracts and was seeking to address a risk that one bad fixed price project undid the good work done on other projects.

17 Mr Diver understood that Mr Carroll's long-term aim was to give Mr Diver responsibility for all of the Object operations, including sales, marketing, corporate services and financial management. This would enable Mr Carroll to spend more time on entrepreneurial activities, developing other businesses, which could eventually be sold in order to raise further capital. Mr Carroll denied that he had such firm plans for Mr Diver or had held out such prospects.

18 Bonus was again discussed by Mr Carroll and Mr Diver after the end of the financial year in 1999. Mr Carroll had conducted a 360 degree review of Mr Diver's performance, with the members of the management team. The end result was that Mr Diver was paid $20,000 bonus, in total, for the period of his employment to 30 June 1999. The bonus was discretionary, but Mr Diver made no complaint in these proceedings as to how the discretion was exercised.

19 While there was an issue as to all that was discussed at the meeting, it was common ground that one of the things discussed was Mr Diver's long-term ambitions. During the initial interview process, Mr Carroll had been anxious to be assured that Mr Diver was prepared to make a long-term commitment to Object. In cross examination, Mr Carroll's evidence was that in the absence of such a commitment, he would not have employed Mr Diver. In 1999, Mr Carroll recorded that Mr Diver's goal was to be managing director of a larger Object, in ten years time.

20 There was a further performance review in 2000, a few weeks prior to the termination of his employment, when again Mr Diver's long-term goals were discussed. There was also disagreement as to precisely what else was discussed at this meeting. It was common ground that the review was successful, with the base $40,000 bonus being paid and a further $5,000, of the final $20,000 bonus, also paid. Mr Diver understood that this reflected the shareholders' satisfaction with his performance in terms of Object's results.

21 Mr Carroll disagreed. His evidence was that he had not approached the assessment on this occasion, in the same way as he had the preceding year, by involving the members of the executive team in a formal discussion. He had relied on his frequent informal discussions with them. Mr Carroll's evidence was that in the 1999 review he had discussed with Mr Diver the reservations which he had about his people management skills and how this area needed improvement. On Mr Carroll's evidence, by the time of the second review in 2000, he had some more reservations as to Mr Diver's people management skills and that the $5,000 payment was an incentive, in order to encourage improvement in that area. Mr Diver denied that such reservations had been discussed at either review.

22 Mr Carroll's notes of his review showed that he had altered the weightings for the five agreed criteria and that he had scored Mr Diver as having achieved a 'high' in all areas except in project management, where he had scored a 'very high'. The weighting of the people management criteria had increased from 20% to 30%. Next to the people management marking of high, were some handwritten notes, which on Mr Carroll's evidence were matters which had been discussed. Mr Diver disagreed.

23 Mr Carroll's evidence was that by that time, he had developed concerns about Mr Diver's interpersonal skills, because while he expected him to introduce significant cultural change at Object, he expected it to be done harmoniously. He saw problems develop over time with sales staff, middle ranking technical people and members of the technical board. Mr Carroll also received complaints from various members of staff about Mr Diver and threats of resignation, if Mr Diver were not dismissed.

24 There was an issue in the proceedings as to how deep Mr Carroll's concerns about these matters were. Mr Diver did not understand them to be as Mr Carroll portrayed them and denied that they had been raised, or discussed with him, either in 1999 or 2000. His evidence was that given his role, it was inevitable that there would be some dissatisfaction over the changes he introduced, especially amongst sales staff. The new bid procedures for example, reduced the likelihood that unprofitable sales could be made. There had been such sales in the past and the sales force commission structure provided for payment of commission, even if the business proved to be unprofitable. Despite the inevitable resistance to the changes introduced, there were no significant or unresolved personnel issues which resulted. Mr Carroll disagreed.

25 There was, however, no doubt that over the course of his employment Mr Diver had been instrumental in successfully introducing various changes at Object, as well as managing the consulting arm of the business. These changes included new bid procedures, introduced in conjunction with Mr Bognar, who had responsibility for Object's sales force; Mr Diver taking over the review and negotiation of all contracts; involvement in the pursuit of various successful business opportunities; Mr Diver taking on responsibility for the human resources department and increasing Object's fee rates by 30%. The size of the consulting arm also increased from something in the order of 45 staff to over 100, reflective of the repeat and new business obtained. Mr Carroll did not deny that Mr Diver had been successful in these areas, but took the view that Mr Diver had not been solely responsible for these successes.

26 In late July there was a sales meeting at a café attended by Mr Carroll, Mr Bognar and three sales staff. Complaints were made to Mr Carroll about Mr Diver's approach to sales staff and customers. Mr Carroll agreed to take these complaints on board. Sales staff had also referred to Mr Diver as the 'sales prevention department'. Mr Diver was aware of this and understood it to have been a well known term in the IT industry, used in a jocular sense by the five staff reporting to Mr Bognar, rather than a serious one, reflective of the fact that sales staff were paid remuneration by results and had an interest in securing business, even if it was unprofitable. The result of the disciplines he introduced, inevitably led to some tensions with sales staff.

27 Mr Bognar's evidence was that the complaints brought forward at the meeting concerned Mr Diver's focus on delivery problems, not solving customer problems and that the controls implemented were difficult to work with. A junior member of the sales staff also complained that she needed more support from Mr Diver's staff, given her inexperience. Mr Bognar agreed that the controls introduced by Mr Diver lowered the risk of business done, but resulted in complaints about the rigidity of the new procedures. He agreed, however, that better profit resulted. Mr Bognar was also aware of some customer dissatisfaction with the outcome of negotiations led by Mr Diver, which were otherwise successful from Object's point of view.

28 Mr Wood also confirmed that prior to Mr Diver's employment Object had been involved in a number of unprofitable contracts and that improvements resulted from the changes Mr Driver introduced.

29 In cross examination, Mr Carroll agreed that at the time these complaints came forward, business was good and some significant sales were being made. He was concerned, however, that business was not as good as he expected it to be and that was why he spoke to the sales staff.

30 In July 2000, Mr Carroll also asked Mr Diver to take over the Internet Solution Centre ('ISC'), a non profitable business being managed by Mr Greg De Laine, with the 13 ISC sales personnel transferring to Mr Bognar's control. Integration of ISC into Object commenced on 24 August, after an acrimonious meeting between Mr Diver, Mr De Laine and Mr Bognar.

31 This disagreement proved to be a very significant development. Mr Carroll's evidence was that ISC had initially been run by Ms Helen Cram, who had earlier done a good job of managing the Object training business. She failed. ISC made no profit and Ms Cram left Object. The problem identified by the executive management team was the low rates at which the services in question were being sold. Mr De Laine, an experienced sales person, was recruited to take over ISC and make it profitable. He, too, failed. It was decided that ISC could not be run as a separate business and the decision was made to fold it back into the business and to become more selective about the work undertaken, with fewer small jobs and more complex jobs of the kind being undertaken in the core business to be pursued. Mr Carroll's evidence was that Mr De Laine and the sales team were reassigned to Mr Bognar, some delivery staff were let go and the rest went to Mr Diver to manage.

32 There was an issue between Mr Diver and Mr Carroll as to whether or not he was told that the aim was for him to run the ISC business profitably. In cross examination, Mr Carroll's evidence was that his main aim was to stem the flow of bleeding from an unsuccessful subsidiary business and to restructure it, including by throwing some business away, in order to make something useful out of it.

33 Mr Diver's evidence as to what was said at the meeting between he, Mr Bognar and Mr De Laine was: "Why do you think you can quadruple your turnover without changing any of your management methods. These approaches are the ones which have caused a loss which equals the turnover." Greg: (quietly): "CT" Les: "We just need to work through it to find out where the faults are." Me: "Given the performance of the group to date, I do not think that this business plan is achievable." Greg: "You guys work it out, I have to go to another meeting" Me: "Greg, you are they(sic) only guy who has called me a ct all year. Greg: "You must be talking about the financial year!" This caused some laughter for all parties. Greg De Laine then left the room to attend another meeting he had arranged. I continued to talk to Les Bognar and we had a conversation to the following effect: Les: "I didn't hear Greg call you a "c**t!" Me: "Don't worry about it - he was only getting upset about my criticism over the numbers" Me: "Les, that business plan cannot possibly be real" Les: I agree, it is not achievable, the numbers have not been accepted by the company" Me: "Surely the sale guys there should be moved and the "end-to-end" messages delivered to the market place?" Les: "I agree."

34 Mr Bognar denied aspects of this account of the conversation. Mr Bognar's version of what he said was 'That's getting hit between the eyes Mick'. Mr Bognar reported this disagreement to Mr Carroll, who discussed it with Mr Diver. On his evidence, Mr Carroll was extremely concerned about what had happened, although that was plainly not communicated to Mr Diver. Mr Carroll regarded Mr De Laine as a volatile person, but did not regard his behaviour as reflecting badly upon him. Rather, he was concerned that Mr Diver had been undiplomatic; that it had been unnecessary for him to have provoked Mr De Laine; that it had been a very counterproductive move, which would 'affect all of us in the Executive Management Team' and that it showed that Mr Diver had such poor people management skills, that he could not be allowed to take over management of Object and that he did not have what it took to fill a senior executive role. In cross examination, Mr Carroll explained that, in his view, the directing of a swear word at a person raised the heat of the conversation, in such a way that the meeting was no longer functional.

35 Given Mr De Laine's history of employment and failure with ISC and the decision made as to its future, it has to be said that these views seemed entirely inexplicable. ISC had been a failure, as Mr Carroll's evidence in cross examination made clear. Object's core business had not been. It had grown and was operating profitably under Mr Diver's management. Mr Carroll had no concerns about the way in which Mr Diver managed those who reported to Mr Diver. Mr Carroll's concerns revolved around Mr Diver's interaction with people who did not report to him, but to Mr Carroll. Mr Carroll's explanation of his concerns about the community of workers which he was leading, did not explain at all the apparent deep concern about Mr Diver, to which Mr De Laine's outburst gave rise in Mr Carroll's mind.

36 Mr Diver's 2000 performance review followed these events. At this time, Mr Carroll explained in cross examination, there were other elements of the business which required rationalisation and which he could not possibly proceed with Mr Diver, after having seen how badly the ISC business was handled. The executive committee and Mr Carroll had been considering a significant restructure of Object for some time, at that point. With Mr Diver's departure, Mr Carroll wanted to complete the integration which he had been working on. On the evidence, nothing of this kind was raised with Mr Diver. To the contrary, the performance review appeared to reflect entirely satisfactory performance.

37 In cross examination, Mr Carroll explained that the $40,000 bonus which he decided to pay for the 1999/2000 year, reflected the good job Mr Diver had done. He insisted, however, that the extra $5,000 was not paid as the result of Mr Diver's success, but 'being my intention to try as an incentive for him to overcome the major hurdle which was holding us all back from achieving our goal and that hurdle was his inability to communicate and manage effectively the communications with middle technical people, sales people and senior technical people, and I made that very very clear'. Mr Carroll also expressed the view that Mr Diver impacted negatively on sales people, leading to a reduced pipeline for work and a volatile sales force. He explained that at this time he was very weary of his attempts to make a success of Mr Diver, but was desperate to make it happen.

38 Mr Diver denied that Mr Carroll had told him anything of such reservations, or that they were an accurate reflection of the state of the Object business at the time, or of his performance. As well as his successful performance review, Mr Diver also relied upon a management consultant's report commissioned by Mr Carroll in April 2000, where the observations made included that additional sales staff need to be recruited, attention should be paid to identified sales management areas and that: 'Relationships between sales and operations, normally a fraught area in development based companies, are working reasonably well. If anything it seems that operation do not have sufficient spare capacity at this time to cope with further growth in demands.

39 Mr Carroll explained that he did not accept the report as accurate. While the consultant had met with Mr Bognar, Mr Diver, consultants, managers and sales staff, before making the report, in Mr Carroll's view the investigation was superficial and of short duration, with insufficient detailed discussion as to what was happening, so as to recognise the depth of the problems lying between sales and delivery at Object.

40 Within a few weeks of the performance review, Mr Carroll's concerns led him to consult another management consultant, who described himself as a corporate problem solver. Mr Carroll had been attracted to this consultant by some promotional material which he had received. Mr Carroll liked the way this material was pitched and so spoke to this consultant about Mr Diver, reflected on his advice over the weekend and came to the conclusion that Mr Diver was unable to change his behaviour and that he would have to let him go. The consultant had never met Mr Diver and spoke to no one other than Mr Carroll, about the matters he raised. Mr Carroll's evidence was that the consultant's mode of operation was to identify behaviour patterns in management and to give advice as to fixing unproductive behavioural patterns. His advice was that Mr Carroll get rid of Mr Diver. Mr Carroll accepted the advice and informed the members of the Executive Management team of his decision. He did not discuss these concerns, or what he was contemplating, with Mr Diver.

41 On 4 September, Mr Diver met with Mr Carroll. Mr Diver was expecting to be given written confirmation of his bonus payment. Instead, he was given a letter of termination, advising him of a restructure which involved his redundancy. In cross examination, Mr Carroll explained that this was something which he and the executive team had been considering for some months. Mr Diver was unaware of the consideration which had been given to this restructure and had no prior warning of his impending redundancy. Mr Diver was then escorted to his office by Mr Andrew Wood, Object's financial controller, given a short time to gather his belongings and to surrender his phone, laptop and keys, before being escorted from the building.

42 Unsurprisingly, Mr Diver's evidence was that the redundancy came as a shock to him, given the role for which he was employed, the success he had achieved, his recent performance review and bonus and the profitable business which he had in hand.

43 Mr Carroll explained that he had not intended that Mr Diver be treated rudely, or unfairly on the termination, but his reasons for adopting the process followed were that "the applicant was a very strong man who had been given control over the heart of the operation of our business, he was undoubtedly very unhappy about being let go as he had such a rock solid belief in his own capabilities and I was fearful of what damage he might do to the morale of our people in any protracted departure".

44 Through personal contacts in the IT industry, Mr Diver found new employment some six weeks later. His new package was valued at $220,000. A year or so later that business encountered financial difficulties, with the result that Mr Diver agreed to a pay cut. The company went into liquidation some time later and Mr Diver was unemployed at the time of the hearing.

45 The parties agreed on the principal issues for resolution in the case as: 1) Principal Issues for resolution

a. Whether the contract of employment between the Applicant and Respondent was an unfair contract as defined in s.105 of the Industrial Relations Act?

b. Was the contract of employment and/or the conduct of the Respondent unfair in terminating the contract of employment without the provision of notice?

c. If the answer to 1(b) is yes, what is fair notice?

d. For the purposes of establishing remuneration for the purpose of notice, what elements of the Applicant's remuneration package should be included in such notice?

e. Whether the doctrine of mitigation should apply in relation to any payment in lieu of notice?

f. If the answer to 1(e) is yes, whether the Applicant has mitigated his loss in whole or in part.

g. Was the contract of employment and/or the conduct of the Respondent unfair in terminating the contract of employment for redundancy with the payment of one months' redundancy to the Applicant?

h. If the answer to 1(g) is yes, what is fair redundancy payment?

i. For the purposes of establishing remuneration for the purpose of redundancy what elements of the Applicant's remuneration should be included in such redundancy payment?

j. Was it unfair that the Applicant did not receive payment on termination in respect of a pro-rata bonus payment.

k. If the answer to 1(j) is yes what payment should be made in respect of bonus.

46 The case advanced for the applicant by Mr Coleman of counsel was that the contract was unfair, as formed and performed. While there had been a relatively short period of employment, the circumstances in which Mr Diver had come to be recruited by the respondents and was later made redundant, led to the conclusion that fairness required longer notice and higher redundancy payments, than might otherwise be the case. The respondents' failure to give Mr Diver any notice of his termination, would also assist that conclusion being reached.

47 It was submitted that the evidence demonstrated that Mr Diver was recruited to the general manger's role, with the aim of becoming managing director in the short term. The document used by Mr Carroll to brief Object's senior managers reflected this. There was no reason to disbelieve Mr Diver's evidence that the same representations were made to him in his discussions with Mr Carroll. It would also be accepted that the respondents sought and obtained from Mr Diver, the commitment to the business which was sought and that he then performed his job well, as his performance appraisals and bonus payments demonstrated.

48 In these circumstances, the failure to apply even the standard termination provision to Mr Diver on termination was plainly unfair. In the circumstances of this employment, the standard term was, in any event, unfair, both as to notice and the failure to make any provision at all for redundancy. It was also unfair that the extraordinary power vested in the respondents under the bonus scheme resulted in the applicant receiving no bonus payments for the period of the year preceding the termination of his employment. A substantial part of the package, nearly a third, was payable by way of bonus. The evidence demonstrated good performance by the applicant in that period and it followed that the failure to pay bonus for part of a year in the case of redundancy, was unfair.

49 As to the evidence of poor performance, it was submitted that this contradicted the assessments as to performance made by Mr Carroll only weeks before the termination and would not be accepted as accurately reflecting what had occurred.

50 In relation to payments ordered for notice and redundancy pay, it was argued that account would be taken of the various elements of the package. Notice should be assessed at twelve months and redundancy at six. Reliance was placed upon the assessment in Westfield Holdings v Adams (2002) 114 IR 241, where in addition to the three months notice given, six months redundancy pay was ordered, after about three years employment.

51 The package had three elements, salary, bonus and superannuation. In Brent v Bastian [2003] NSWIRComm 65, the Full Bench took the view that it was not appropriate to take account of all elements of the package there in question, which involved an overseas posting. In Payne v Foxboro L & N Pty Ltd (1998) 81 IR 404, Hill J took the view that both car allowance and superannuation elements should be included. In Fliedner v Phillips Electronics Australia Limited (2003) NSWIRComm 23, Marks J included bonus in the calculation of redundancy payments.

52 As to the amount of the redundancy pay, it was accepted that regard would be had, as a starting point, to the minimum scale fixed in the Redundancy Awards Case (1994) 53 IR 419, which provided 8.75 weeks for two years. In this regard, account would be taken of the commitment here obtained by Object from Mr Diver. It was submitted that such a commitment had to operate two ways and Mr Diver was entitled to rely upon what had not been forthcoming to him from the respondents.

53 The concept of mitigation was accepted as arising for consideration in relation to any notice period. It was submitted, however, that account would be taken of the fact that while Mr Diver obtained employment within a relatively short period, it ended after a couple of years and there was no evidence that it had the same prospects for advancement as was here represented to Mr Diver. He had been unemployed since the failure of that business. It followed that a purely mathematical approach to the mitigation should not here be adopted.

54 The case advanced for the respondents by Mr Magee of counsel was that it was conceded that the failure to give Mr Diver any notice of the termination of his employment was unfair and that the time to determine what notice was required, was the time of termination, not formation of the contract. The proper elements to be taken into account were those discussed by Hill J in Lavings v Barclay Mowlem Construction (NSW) Ltd (1994) 99 IR 247, as applied in Port Macquarie Golf Club v Stead and Anor (1996) 64 IR 53. It was accepted that concerns about the applicant's performance were not relevant to assessing the period of notice, but it was submitted that the period of one month's notice which the parties had agreed upon, was relevant to be considered. Having all those factors in mind, unfair notice would be assessed at 2 months.

55 As to the calculation of any payment to be made to Mr Diver in respect of notice, it was submitted that no account should be taken either of the bonus or superannuation elements of Mr Diver's package. The bonus in this case was performance based and the Court would not embark upon a process of second guessing that performance and Mr Diver's ability to achieve the agreed criteria in 2000/2001. This followed especially in a case such as this, where there had been but a short period of employment and so limited history of bonus payments. If a contrary view were taken, at the least, the bonus should be averaged over the time of the employment.

56 In the calculation of any money orders, account should also be taken of the concept of mitigation, given the new employment which Mr Diver obtained 6 weeks after his termination. (See Adams at p275)

57 It was also conceded that a failure to make any payment in respect of redundancy would make a contract unfair, both in its terms and operation. Note would here be taken of the one month's redundancy payment made on termination. It was argued that this payment was not unfair, having regard to the applicant's length of service. There was no evidence of any redundancy policy operated by Object, or any industry standard. Regard could be had to the standard established in the Redundancy Awards Case, which would entitle the applicant to five weeks pay. It was submitted that the maximum order which would be made was six weeks pay, having regard to the purposes of redundancy pay, as discussed in Adams at p275. Here, the short period of service meant that the applicant had lost little, in terms of non-transferable benefits such as sick leave and long service leave. Matters such as seniority, salary and the size of the position were not relevant to assessing redundancy pay.

58 As to the basis upon which the redundancy pay should be calculated, it was submitted that given the nature and rationale for such payments, elements such as bonus and superannuation should not be taken into account. This was consistent with the Redundancy Awards Case. In addition, special circumstances here existed which would make it appropriate to have regard to the concept of mitigation, in relation to redundancy pay as well as the notice payment. (See Adams at p276.) Any interest awarded should be calculated from the date of the application in November 2000 and Mr Carroll should not be made jointly or severally liable for any orders made. The necessary connection had not been established, so as to provide a foundation for such orders.

59 On the evidence, there is no doubt that the applicant demonstrated that the contract here in question was relevantly unfair. Mr Carroll's evidence put beyond doubt the senior position for which the applicant had been recruited, after a painstaking recruitment process, involving all members of the executive team, as well as an interview with Mr Diver's current employer. Mr Carroll was also anxious to obtain assurances from the applicant as to his long-term commitment to Object. Had that assurance not been forthcoming, Mr Carroll would not have entertained employing Mr Diver at all. Mr Carroll sought further assurances from the applicant as to that ongoing commitment, in the ensuing performance reviews, which were both positive, reflective of the undoubted success which Mr Diver achieved in his employment, as Mr Carroll conceded.

60 A similar long-term commitment was not forthcoming to Mr Diver from the respondents. Nor was the treatment which Mr Diver received during the respondents' consideration of the further restructure of Object, which led to the termination of his employment, commensurate with the careful approach which the respondents had adopted to the recruitment process which resulted in Mr Diver's employment. There was not even adherence by the respondents to the standard terms of the contract which had been agreed, which required the giving of one month's notice of termination.

61 Rather, there was a summary dismissal in circumstances where Object had no right, or reason, so to proceed. The explanation given by Mr Carroll for the treatment meted out to Mr Diver, once the decision had been made to restructure Object, plainly had no basis in either Mr Diver's conduct in his employment, or in his performance of his work. The respondents adduced no evidence to establish any basis for the concern expressed by Mr Carroll, said to explain the treatment given. I accept Mr Diver's evidence about these events. The treatment which he received was plainly both unwarranted and demeaning.

62 As Hill J observed in Newton v Goodman Fielder Mills Ltd (1998) 81 IR 227 at p233, "Views may differ as to the appropriate approach to be adopted in terminating the employment of employees in a redundancy situation consequent upon 'restructuring' ". Nevertheless, dealing with the matter "peremptorily, as it was here, by a summary dismissal in the exercise of 'managerial prerogative', without any prior discussion, warning, consultation or notice - about anything", is an approach only likely to result in unfairness. So it was in this case.

63 This contract made no provision at all for the eventuality of redundancy. As the respondents conceded, there was ample basis in the evidence for the conclusion that the contract was unfair, in failing to do so. The contract provided for the giving of one month notice of termination. No notice was given at all. Mr Carroll's evidence was that he understood that the contractual term permitted him to pay Mr Diver a month's salary in lieu of giving any notice. He was wrong in that understanding. Further, the termination letter did not suggest that any payment at all was being made in respect of notice, rather, a month's redundancy pay was noted in the calculations accompanying the letter of termination, as having been paid. Given all of the evidence, it must be concluded that the payment was made in lieu of notice, but for tax purposes was treated as a redundancy payment, given the reasons for termination, namely redundancy.

64 The respondents led detailed evidence in their case as to the respondents' concerns about Mr Diver's performance. There was an issue as to whether they, in fact, existed. Mr Carroll's evidence was that the reorganisation which Object implemented after Mr Diver's dismissal, had been the subject of consideration by he and the executive team for some months, albeit unbeknownst to Mr Diver. In submissions, it was accepted for the respondents that concerns about aspects of Mr Diver's performance were not relevant to a determination of whether the agreed notice, or absence of any contractual provision as to redundancy, were unfair.

65 Given the case pressed for the respondents, it must be concluded that the evidence led as to concerns about Mr Diver's performance, was a part of an ex-post facto rationalisation of the decision to restructure Object and to make Mr Diver redundant, in an effort to downplay the senior role for which he had originally been recruited and to resist the claims here advanced. I was not at all convinced that there was any real basis for the concerns, as they were expressed in these proceedings.

66 Mr Diver's evidence as to the general manager's position for which he was recruited, with the long-term aim that he would replace Mr Carroll as managing director, so that he could turn his attention to the development of further entrepreneurial business opportunities in the IT industry, was entirely consistent with Mr Carroll's notes of what he was proposing at the time. He also discussed these ideas with the members of Object's executive team. Mr Carroll's evidence in cross examination conceded that these matters were also the subject of discussion between he and Mr Diver, in the interview. He, nevertheless, insisted that no promises were made to Mr Diver about his future at Object and that his advancement to managing director always depended on his performance. Mr Carroll, himself, never had a firm plan to resign from that role.

67 In cases brought under s106, issues of credit often arise, which require determination. In this case, I am well satisfied that Mr Diver took as firm representations by Mr Carroll, ideas which in his mind were more fluid than what he conveyed to Mr Diver, in his enthusiasm for selling to Mr Diver the job then available at Object. Undoubtedly, advancement at Object was always going to be subject to Mr Diver's performance. Given the senior nature of the position being offered, it is quite understandable that this was well understood by both Mr Diver and Mr Carroll, without detailed discussion between them. It seems equally clear, however, that Mr Carroll 'sold' the position at Object to Mr Diver, on the basis that in the relatively near future, he had a clear path to the most senior position, that of managing director, a move which would allow Mr Carroll to concentrate his energies on developing new opportunities in the IT field. Mr Carroll had not made a final decision to relinquish that role. That was consistent with his ownership of the business and how it was operated by the shareholders. Mr Carroll plainly always reserved to himself the right to alter his plans. I am satisfied that this reservation was not one which was made clear to Mr Diver, perhaps unsurprisingly. It is difficult to imagine Mr Carroll being able to recruit anyone to such a senior role, the continuation of which was to be entirely subject to his whim.

68 There was no doubt that Mr Diver performed well in his employment. Not only did Mr Carroll concede this in his evidence, it was consistent with his assessment of Mr Diver's performance throughout his employment, as recognised by the bonus payments made to him and the documents Mr Carroll created, when judging that performance. I am well satisfied that Mr Carroll's evidence as to his concerns or reservations about Mr Diver's work, especially in relation to people management, were put on a basis in these proceedings, which did not entirely reflect the reality of what had transpired at the time.

69 Mr Carroll's evidence as to how Object was managed and how it pursued business opportunities in the IT industry in which it was operating, showed a very fluid approach, rapidly adaptable to changing circumstances. That reflected no doubt that Object was a business in the IT industry which Mr Carroll had developed and which was under his day to day control, as managing director and majority shareholder. While there were minority shareholders on the executive team who provided a sounding board for Mr Carroll, he was undoubtedly the directing mind of the operation. The reality, it seems to me on the evidence, was that contrary to the respondents' plans when Mr Diver was recruited, in 2001 they determined upon a restructure of Object, in which there was no place for Mr Diver. As I noted earlier, in these proceedings there was an attempt to rationalise what had occurred, having in mind the claims being advanced, in a way which cannot be accepted in light of all of the evidence.

70 The end result is that it can only be concluded that this contract was unfair in only providing for one month's notice upon termination of Mr Diver's employment. The offer letter contained Object's standard terms. The respondents altered other aspects of the letter, but not the termination provision and later, when the decision to make Mr Diver redundant was arrived at, no thought was given as to the fairness of the standard terms being applied, in the circumstances which then prevailed. The evidence also showed that there was no regard paid to the representations held out to Mr Diver, as to his role and future at Object, when he was recruited. Nor did the contract provide at all for the possibility of a restructure, which would lead to Mr Diver's redundancy. It follows that the contract, as it operated, was also unfair, given the failure by Object to give any notice to Mr Diver, or to make any payment to him, other than one month's pay, treated as a redundancy payment, upon such termination.

71 The question of what notice should have been given must next be considered. Given the question of mitigation which here arises, I am satisfied that in this case, it is necessary to consider notice separately from the question of redundancy.

72 I am satisfied that fairness required the giving of a relatively long period of notice, given Mr Diver's age, education and experience, the seniority of the position for which he was recruited and the representations made as to his career at Object, prior to his employment. The length of the employment and the circumstances in which the position was made redundant, the respondents not having delivered the long-term commitment to Mr Diver, which they had sought and obtained from him, were also relevant. I accept that fairness requires some mutuality in relation to such a commitment, in a case such as this. The industry in which the parties were operating must also be considered. The evidence confirmed that the IT industry in Australia continues to operate on a volatile basis. A long-term position in that industry, as was here held out, was a factor which tended to confirm the views which I had otherwise reached, that fairness required a substantial period of notice. I have concluded that five month's notice should have been required under the parties' contract, as a matter of fairness, in all of these circumstances.

73 The authorities make clear that questions of mitigation arise to be considered in circumstances such as these. The respondents had the good fortune to have terminated Mr Diver's employment at a point where his personal contacts led him to another position, within a relatively short period of time. He was not so fortunate when that company went into liquidation some time later. I take the view that it cannot be ignored that this occurred well after any notice period in respect of employment at Object would have expired. While the position which Mr Diver obtained also turned out not to have had a long-term future, I am also satisfied that it cannot here properly be overlooked that he obtained alternative employment, six weeks after termination of his employment by Object and on a package more generous than that which he had at Object. In calculating money orders just in the circumstances, account must also be taken of the one month salary already paid on termination. (See Adams.)

74 As to redundancy, I take the view that the contract was unfair in failing to make provision for this eventually and that three month's redundancy pay should be required, as a matter of fairness. The considerations which have led me to that conclusion include the purpose for which redundancy pay is provided; the minimum standard; the fact that the applicant had close to two years employment, in circumstances where the contract required notice of termination to be given; his age; the position for which he was recruited and the circumstances in which the employment was brought to an end.

75 Here, I am satisfied that fairness would not be achieved, were the bare test case minimum imposed. Given the way in which the applicant was recruited, the commitment sought and obtained from him, revisited even shortly prior to his termination and at a time when, apparently, the restructure was being considered by the respondents, unbeknownst to the applicant, all lead to a somewhat longer period of redundancy, than might otherwise have been awarded. I have assessed this at 3 months.

76 I am also well satisfied that in this case, mitigation does not properly arise for consideration as to the orders made in relation to redundancy pay. There was nothing in the circumstances of this case which called for a departure from the approach outlined in Adams.

77 I turn then to the claim for a pro rata bonus payment for part of the 2000/2001 financial year, prior to the termination of Mr Diver's employment. This bonus scheme was discretionary, assessed on performance at the end of the financial year. The criteria were agreed and the applicant made no complaint as to the way in which the discretion was exercised by the respondents.

78 The scheme did not provide for any proportional bonus, in the event of termination part way during a year. The applicant argued that the scheme was unfair in not providing for such a payment, in the event of redundancy. I am unable to agree entirely. As was conceded for the applicant, there is nothing conceptually unfair in a performance based bonus scheme, assessed annually. This must especially follow in a case such as this, where the employment package was an annual one, agreed by a senior employee, well capable of appreciating the consequences of agreeing to put at risk, a substantial part of his package.

79 In such a scheme, if employment comes to an end part way during such a year, all of the work upon which such an assessment is to be based, will not have been performed. Work performance can wax and wane over the course of a year, as can other factors which may impact upon assessment of a bonus. Under such a scheme, the assessment of the bonus to be paid arises in the context of the employee's performance over that time. I have not been convinced, in any general way, that fairness requires that an assessment as to bonus be made, in the event that the employment is brought to an end part way through a financial year, in the event of redundancy in this case.

80 The principal reason for that conclusion is that the last $20,000 of this bonus was particularly tied to financial performance. While there was evidence as to Mr Diver's performance, there was no evidence upon which an assessment could be made as to Object's financial performance, particularly during the last period of his employment. I am not convinced that fairness requires that provision be made for a pro rata assessment of bonus dependent upon such a factor. It certainly could not be concluded that the respondents had reason to celebrate the results in public.

81 As to the other parts of the bonus scheme, I take the view that the representations held out to Mr Diver, as to his long-term future at Object, cannot be overlooked, nor can the long-term commitment sought from him. But for those factors, I would also have been inclined to refuse consideration of this aspect of the relief sought. The evidence showed, however, that this topic was revisited at each of Mr Diver's performance reviews. Despite this, the restructure which led to Mr Diver's unexpected redundancy, was not revealed to him and was not the subject of any warning or discussion. The result was that while for the period prior to the termination of his employment, he had performed the work which would later give rise to a consideration of bonus, his redundancy removed entirely from Mr Diver the opportunity to earn any part of the at risk portion of his remuneration, during this period. I am satisfied in all of these circumstances that fairness requires variation of the contract to permit consideration of a proportional bonus payment, in the event of such a redundancy.

82 As to money compensation, it is relevant that Mr Carroll's evidence was that the respondents had reservations as to one aspect of the applicant's performance, flowing from his people management. I have already dealt with my doubts as to Mr Carroll's evidence as to this aspect of Mr Diver's performance, including the evidence in relation to the disagreement with Mr De Laine. The evidence also showed that in the performance review conducted only weeks before Mr Diver's termination, those reservations did not preclude payment for the whole $40,000 bonus for the preceding year, even though people management represented 30% of the assessment being made. Mr Diver's performance in this area was judged to have been high. Other aspects were assessed at the same level, or higher.

83 Over the course of a year, it might, of course, be the case that reservations as to one aspect of an individual's performance would be outweighed by other aspects, or that there might properly be some adjustment in the bonus to be awarded in such circumstances. Here, given the assessment made so shortly prior to the termination of Mr Diver's employment, I am satisfied that a just approach to the assessment of money orders as to this matter, requires that Mr Diver be paid a proportion of the $40,000 bonus which reflects the part of the year which had passed, at the time of his termination. I am also satisfied on the approach of the Full Court in Adams, that mitigation is not a concept which arises for consideration as to this aspect of the claim.

84 The next question which arises is the basis upon which the applicant's notice and redundancy payments should be calculated. The parties agreed on a package of $200,000, $60,000 of which was at risk, having regard to work performance, including Object's financial performance in respect of the final $20,000. The applicant was made redundant. Even if he had been given notice of termination, he would not have been in employment for a sufficient period, in order to earn a bonus for the 2000/2001 year. I have already dealt with the claim for bonus in respect of the period prior to the termination of his employment. After some 6 weeks, Mr Diver obtained new employment in which his remuneration package was $220,000, plus an option scheme. Any work which he performed after termination, thereby became relevant to that new employment.

85 In all of these circumstances, I cannot conclude that fairness requires that payment of notice and redundancy, should be calculated having regard to the bonus aspect of the applicant's package. The same conclusion does not flow in relation to superannuation. The contractual obligation was to give notice. Had it been given, superannuation payments would have been attracted in that period. Accordingly, I take the view that the notice payment should have regard to the superannuation entitlement. I cannot come to the same conclusion in relation to redundancy pay.

86 I am also satisfied, that the circumstances in this case are such as to make appropriate an order for interest, calculated as from the date of termination of employment, rather than from some later date. This employment was brought to an end summarily, when there was plainly no proper basis for such a dismissal, flowing either from the parties' contract or from Mr Diver's conduct. The result was that the representations which I have dealt with, were not adhered to. I am satisfied that the unfairness which has been found, was such as to warrant an order for interest from the date of termination. (See Abboud v State of New South Wales (Department of School Education) (No 2) (2000) 99 IR 299 at p307.)

87 Finally, there was a disagreement as to whether any order should be made against Mr Carroll. The oft applied test is that discussed by the High Court in Brown v Rezitis (1970) 127 CLR 157. The evidence well demonstrated Mr Carroll's close connection and indeed, culpable association, with the contract and the unfairness demonstrated on the evidence. I am satisfied that a proper basis exists for the respondents to be made jointly and severally liable for the orders made in favour of the applicant.

88 I declare the applicant's contract of employment with Object unfair and make the following orders: 1. The contract is varied ab initio to require the giving of 5 months notice of the termination of employment and 3 months redundancy pay, in the event of termination arising in circumstances of redundancy.

The respondents are to pay the applicant: (a) 4 months base salary and 5 months superannuation, in respect of notice, less the salary earned by the applicant in his new employment in that period, plus (b) 3 months base salary, in respect of redundancy, plus (c) bonus calculated as a portion of $40,000 represented by the period of Mr Diver's employment between 30 June 2000 and the termination of his employment, and (d) interest thereupon, from the date of termination to the date of judgment.

89 The usual order as to costs would be that the respondents pay the applicant's costs, as agreed or assessed. In the event that the parties are unable to agree on a costs order, they have leave to have the matter restored to the list. That leave should be exercised within 28 days of the date of this judgment. ------------------------

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (119 paragraphs)

Parties

Cases Cited (9)

Cited By (2)