In awarding termination payments in excess of $1 million to a dismissed employee, the Supreme Court of New South Wales has provided employers with guidance as to what constitutes reasonable notice when terminating an employee’s employment, highlighted the need to take care when structuring salaries and clarified what remuneration components are to be included in calculating “ordinary pay” for the purposes of long service leave (LSL) entitlements in NSW.

Implications for employers

In terminating employees (particularly highly paid employees), employers must consider a number of factors, including:

  • the potential for a claim of reasonable notice and the factors relevant to calculating reasonable notice;
  • the composition of an employee’s salary when calculating termination payments, and in particular how bonuses should be addressed; and
  • the appropriate calculation of LSL, having regard to the terms of the relevant statute. In particular, in NSW it should be kept in mind that superannuation will not form part of salary and there is potential for bonuses to substantially inflate the value of LSL entitlements.

Employers should ensure they have express notice of termination provisions in employees’ employment contracts and that employment contracts keep pace with changes in employees’ employment (such as promotions), so as to avoid reasonable notice claims.

Employers may also wish to consider how they structure salary arrangements, particularly for highly paid employees, so as to clarify whether bonuses form part of salary and minimise LSL liabilities.

Background

Ms Ma had worked as a financial controller for Expeditors International Pty Ltd (Expeditors) and its predecessor for over 23 years prior to her employment being terminated.

The terms of Ms Ma’s employment were contained in a 2002 letter from Expeditors, which provided for a salary of $70,000 per annum plus a monthly bonus of 13% of the total South Pacific Branch Bonus, allowances for a car and medical insurance, and superannuation. In practice, Ms Ma’s bonuses were substantial, giving her gross remuneration of between $540,000 and $945,000 for the five years prior to her termination.

There was no express notice of termination provision in the 2002 letter.

Ms Ma’s long-term supervisor retired in 2010. Her new supervisor sought to change the terms of her employment. The proposal included a change to her job description and a 50% reduction to her monthly bonus. When Ms Ma and her new supervisor could not reach agreement, Ms Ma’s employment was terminated immediately upon payment in lieu of notice. She was paid 5 weeks’ base salary and accrued leave entitlements, calculated without considering bonuses or allowances.

Ms Ma brought proceedings, claiming that Expeditors had breached an implied term of her employment contract by failing to provide reasonable notice of termination. She argued that a reasonable period of notice was 12 months from the date of termination. Further, Ms Ma claimed a pro rata bonus amount, and long service leave entitlements in excess of $265,000.

In response, Expeditors counter-claimed that Ms Ma was guilty of misconduct (discovered after her termination) justifying immediate termination without notice in the form of an alleged conflict of interest due to Ms Ma’s brother’s involvement with a company who provided cleaning services to Expeditors.

Decision

Introduction

Acting Justice Nicholas was required to determine:

  • the reasonable period of notice in the circumstances;
  • whether Ms Ma should be entitled to a pro rata bonus amount;
  • the correct long service leave entitlement; and
  • whether Ms Ma had engaged in misconduct so as to allow for her employment to be summarily terminated.

For the reasons set out below, Acting Justice Nicholas ultimately found in favour of Ms Ma and Expeditors were ordered to pay Ms Ma damages based on the proper period of notice being 10 months, a pro rata bonus in the amount of $8,138.87 and long service leave entitlements in the amount of $265,272.44. The final award of damages was over $1 million.

Reasonable period of notice

Acting Justice Nicholas agreed that in the absence of an express term as to notice, Expeditors was required to give Ms Ma reasonable notice. He observed that:

  • what amounts to a reasonable period of notice to be given when terminating employment depends on the facts of the case in light of all relevant circumstances;
  • it should be kept in mind that the primary purpose of notice is to enable an employee to find similar employment elsewhere; and
  • factors to be taken into account in determining reasonable notice include the:
    • seniority and importance of the position;
    • size of the salary;
    • nature of the employment;
    • length of service;
    • professional standing;
    • age, qualifications and experience; and
    • expected period of time to find alternative employment.

In Ms Ma’s case, she was 49 years old, had been a loyal employee of Expeditors for over 24 years, held a position of significant seniority and received a substantial remuneration package indicative of the level of responsibility. It was also relevant that she was unlikely to get a favourable reference for future employment, based on her abrupt dismissal.

Acting Justice Nicholas found that Ms Ma had attempted to mitigate her loss by actively seeking employment. Taking into account all these factors, His Honour determined that the proper period of notice was 10 months.

Pro rata bonus claim

Ms Ma’s bonus claim turned on the proper construction of “salary” as used in the letter of termination and whether her bonus formed part of the salary. The letter stated “You will be paid … for salary accrued to today”.

Acting Justice Nicholas found that the parties had intended that Ms Ma’s remuneration be linked to performance. There was no reason to recognise an entitlement to a proportionate part of her annual salary, but not to the monthly bonus. Therefore, she was entitled to payment of the pro rata accrued bonus.

Long service leave claim

The Long Service Leave Act 1995 (NSW) (NSW LSL Act) provides that an employee’s LSL entitlements are to be calculated with reference to the employee’s “ordinary pay”.

Under the Long Service Leave Regulations 2011 (NSW), ordinary pay does not include bonuses if the employee’s ordinary pay (excluding bonuses) exceeds $144,000. Conversely, where an employee’s ordinary pay is under $144,000, bonuses will be included in the calculation of long service leave entitlements.

Expeditors paid Ms Ma $28,530 for LSL on termination, on the basis that her “ordinary pay” was above the threshold amount of $144,000 and, as a result, bonuses should not to be included in determining her LSL.

However, Ms Ma’s “ordinary pay” was only over the threshold amount if superannuation contributions were taken into account. Ms Ma argued that her “ordinary pay” did not include superannuation but rather consisted only of her salary of $70,000 plus allowances. This brought her well under the threshold amount. As such, she claimed that she was entitled to over $290,000 in LSL entitlements, based on her remuneration consisting of her average salary, allowances and bonuses.

Acting Justice Nicholas considered statutory interpretation principles and determined that Ms Ma’s “ordinary pay” was the “average of amounts received by [her] each week”. He concluded that because an employee cannot access the benefits derived from superannuation contributions, those contributions are not part of the employee’s ordinary pay. Accordingly, Ms Ma’s “ordinary pay” was below the $144,000 threshold and bonus amounts were to be included in calculating her LSL entitlements. Given that the notice period was determined to be 10 months, Acting Justice Nicholas found that Ms Ma was entitled to $265,373.44 with respect to LSL.

Misconduct counter-claim

Acting Justice Nicholas dismissed Expeditors’ counter-claim that Ms Ma was guilty of misconduct justifying termination in relation to Ms Ma’s brother’s cleaning company, on the basis that:

  • Expeditors was at all times fully aware of the relationship between Ms Ma and her brother;
  • Ms Ma’s involvement was limited to introducing her long-term supervisor to her brother and there was no actual or potential conflict of interest; and
  • there was no related party transaction requiring disclosure by Ms Ma, as the only transaction was the cleaning contract between Ms Ma’s brother and Expeditors.

Susanna Ma v Expeditors International Pty Ltd; Susanna Ma v Expeditors Pty Limited [2014] NSWSC 859