Constructive Dismissal: Why Your Resignation May Not Leave You Snookered

June 30, 2016

Man playing snooker with a bomb as the ball

Recently we have been seeing a rise in higher-end employment disputes involving employees who have resigned in precarious circumstances, and often abruptly. Typically, the employee has reached the point where they simply cannot take it anymore, and has resigned before discussing and solidifying their payout. The employer will then shut them down when they go to claim their outstanding entitlements, incentives or some form of severance, citing their resignation as an absolute disentitling factor. More often than not, emotions are raw and this leads to a dispute and even litigation, so we thought we would bust a common myth with the hope that both sides might avoid that.

The fact that an employee has resigned is a common argument raised by employers in defence of any post-termination entitlement claims. In matters involving senior executives or employees, this is especially problematic for the employee, as salaries are much higher and there are also often other incentives the employee narrowly missed out on. For example, they may have been just shy of time worked to qualify for a profit share at the time of resignation, or commissions already earned but not yet payable might be contingent on them still being employed at the time they fall due for payment. Sometimes, on the face of a contract alone, this may seem like an acceptable and perfectly legal stance for the employer to take, but that is not always the case.

The Fair Work Act 2009 (Cth) (“the Act”), which is the major legislative instrument covering most employment situations in Australia, defines the term “dismissed” to include a situation where the employee ‘has resigned from his or her employment, but was forced to do so because of conduct, or a course of conduct, engaged in by his or her employer’. Immediately, we now see that a resignation is not, of itself, an absolute bar to an action for unfair dismissal, for example. In any such situation, the matter will turn on the operative words ‘forced’ and ‘conduct’. In other words, in order to succeed on such an action, it must be a true case of having no option but to resign, and it must have been attributable to the employer. Each case will turn on its own facts and circumstances, but suffice it to say that each case must be serious.

There are a few problems an employee may face (and therefore a few advantages for an employer) in practice at the outset. The first is that, for the average worker, the legal fees associated with running a successful statutory unfair dismissal case under the Act through to the end may be prohibitive, given that there are caps on the amounts they can be awarded, and these caps are generally a proportion of their salary. At the other end of the spectrum, the high-income earners who may find such an action commercially viable are typically excluded from protection because their income is too high. Similar exclusions apply for the high-income earners for other similar actions, such as wrongful termination, as the Fair Work Commission does not always have the power to grant the exact remedy they seek, or to the extent that they claim. There may be some joy for those in the middle ground, although even for the high-income earners, there are other situations where this situation is still actionable.

The first thing to note is that the legislation is not the only source of law that governs the employment relationship. Much like general commercial contract disputes, for example, the common law (principles developed through case law) also applies, along with Modern Awards, employment contracts themselves and several other sources depending on the precise scenario. At common law, certain terms are implied into the contract of employment, even if they are not expressly stated. The major implied terms are the common law duties both the employee and the employer have to each other. From the employee’s perspective, some of the most common duties of the employer include the duty to ensure mutual trust and confidence and the duty of care to avoid exposing employees to unnecessary risk of injury, among others. The employee also has a right to refuse an employer’s request to carry out any illegal or unreasonable act. More importantly for present purposes, an employer has a duty to act reasonably, which includes avoiding the occurrence of a constructive dismissal, which at common law, is defined very similarly to the definition discussed above involving forced resignation.

These common law duties or implied terms take effect as provisions of the employment contract, in much the same way as any express, written terms. In contract law, generally speaking, where one party conducts itself in a manner that shows it is unwilling to comply with its obligations, it is called a “repudiation”. A repudiation can entitle the other party to terminate the contract, and to seek damages. The purpose of damages is to place the party not in breach in the position they would have been in had the other party performed their obligations. A similar situation exists in the employment context, where the damages are generally expectation based.

Unfortunately, often what we see in practice is a situation where an employer has over-promised in the beginning of the relationship, or failed to see the potential of the employee to achieve the targets set for them. When the employee starts to achieve those targets and the employer realises they will have to pay up, in an effort to get rid of the employee before the entitlements crystallise, and with a view to avoiding firing the employee and exposing themselves to what they see as the only potential claim that can be made against them, they start to create an environment so unbearable that the employee cannot continue, and has to resign. They then sight the resignation as grounds for excluding the employee for everything beyond their notice period and statutory entitlements.

In such a situation, the employee might have grounds to commence actual Court proceedings, as opposed to a Fair Work Commission application. This is especially problematic for the employer, because of the general rule that costs follow the event.  Whereas, in the Fair Work Commission, an order that the loser pays the winner’s costs is unusual, in Court, it is the norm. The stakes are therefore higher for the employer. Add to this the fact that full-scale proceedings will generally costs a lot more to run, and that the powers a Court has in terms of employee awards are much greater and the employer could be in real trouble. The employee, on the other hand, is in a far better position, provided of course their case is strong.

Ultimately, a resignation will not automatically disentitle an employee from a remedy involving dismissal, such as wrongful termination, provided they were effectively forced to resign by reason of the conduct of the employer. In terms of what constitutes such conduct, a clear and material breach of an employer’s common law duties can be sufficient. By way of example, in the past we have dealt with cases involving employees bullied by managers to the point of manifest health problems, employers trying to force employees into illegal conduct (from a regulatory perspective, as opposed to full-scale criminal conduct), and even employers threatening employees with physical violence or even poor employment references if they did not resign. The claims have involved those outstanding commissions, missed profit shares, years’ worth of salary and even, in the most severe cases, exemplary or punitive damages.

As always, this should not be taken as specific advice. Each case will depend on its own facts and circumstances. Feel free to contact us about this or similar issues.


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