FEDERAL COURT OF AUSTRALIA EMPLOYMENT LAW - Termination of employment - Claim of unlawful termination - Employer in serious financial position - Choice between terminating applicant or ceasing to use services of a casual employee - Choice made on assumption that applicant could not perform necessary duties - No consultation with, or notice to, applicant - Whether employer bound to give applicant opportunity to defend herself - Whether termination for a valid reason - Quantum of compensation. Industrial Relations Act 1988 (now Workplace Relations Act 1996) ss 170DC and 170DE(1). ADIS INTERNATIONAL PTY LIMITED v MARYANNE ALLEN NI95/3591R OF 1997 JUDGE: WILCOX J PLACE: SYDNEY DATE: 7 AUGUST 1997 IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) NI95/3591R of 1997 ) GENERAL DIVISION ) BETWEEN: ADIS INTERNATIONAL PTY LIMITED Applicant AND: MARYANNE ALLEN Respondent JUDGE(S): WILCOX J PLACE: SYDNEY DATED: 7 AUGUST 1997 MINUTES OF ORDER THE COURT ORDERS THAT: 1. The application for review of the order made by Judicial Registrar Locke on 7 April 1997 be dismissed. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) NI95/3591R of 1997 ) GENERAL DIVISION ) BETWEEN: ADIS INTERNATIONAL PTY LIMITED Applicant AND: MARYANNE ALLEN Respondent JUDGE(S): WILCOX J PLACE: SYDNEY DATED: 7 AUGUST 1997 REASONS FOR JUDGMENT This is an application by an employer, Adis International Pty Limited ("Adis"), for review of a decision of a Judicial Registrar upholding a claim by a former employee, Dr Maryanne Allen, of unlawful termination of employment and awarding her compensation in the sum of $12,700. In relation to the review, both parties were content to rely on the evidence adduced to the Judicial Registrar. No additional evidence was presented and there was no dispute about the primary facts. The issue between the parties was whether those facts disclosed a valid reason for Adis terminating Dr Allen's employment and, if so, whether it acted in contravention of s 170DC of the Industrial Relations Act 1988 (now the Workplace Relations Act 1996) in so doing. Adis is controlled from New Zealand. Its Australian activities include the publication of medical and pharmaceutical materials. The publications include "Current Therapeutics", a monthly journal distributed on a subscription basis to many pharmacists and sent free to many medical practitioners. No doubt because of its readership, pharmaceutical companies advertise extensively in the journal. The attraction of the publication is that it includes articles about current topics written by experts in the fields of medicine and pharmacology. On 21 November 1994, Dr Allen was appointed Medical Editor of "Current Therapeutics". The terms of her employment were set out in a letter, dated that day, from Richard Cobcroft, the General Manager of Adis. The appointment was on a part-time basis, it being agreed that Dr Allen would spend two full days (Monday and Tuesday) in the office each week but be available by telephone, fax or E-mail at other times as required "to maintain the smooth running of the journal". The remuneration was fixed at $40,000 per annum inclusive of company superannuation. The "initial contract period" was to be three months. But it was agreed that, subject to satisfactory performance, "the parties will negotiate with each other with a view to the contract period being extended indefinitely (subject to satisfactory performance)". Dr Allen immediately commenced duties. The three month "initial contract" period concluded without any further discussion about her employment. The parties acted on the basis that the agreement continued in effect, on the terms set out in the letter. Both counsel conducted their cases in this Court on that basis. During her evidence to the Judicial Registrar, Dr Allen described her duties as Medical Editor in this way: "The work which I was asked to undertake was described to me as commissioning articles, that is, locating potential authors for journal, eminent specialists, experts in particular fields and instructing them on writing articles for the journal. I was also to read through articles that had been provided by those authors to ensure that the medical content was essentially correct and accurate and to ensure that it was of a high quality and of interest to general practitioners. I was also asked to do occasional writing including continuing medical education questions and provide quizzes and case scenarios. In addition I was asked to attend editorial advisory meetings and to give advice on medical matters to other departments within Adis Medical Publishing in Sydney. This was a role which I was asked to do as the sole medical practitioner working for that organisation from about March onwards. Over the initial months of my employment I was encouraged and in fact asked to restrict my duties to commissioning articles for the journal. The reason given to me for that was that the journal was newly being published in Australia, that the commissioning deadlines were very much in arrears and there was a definite need to maintain forward commissioning. When I met the initially stated forward commissioning targets and requested that my job be more broadened to include those other tasks which I felt that I had been initially recruited to perform, I was asked to advance the forward commissioning even further. The reason given to me for this was that the authors were not getting their articles on time or that the quality of the articles or the nature of the articles didn't suit the journal's needs at that time and that the managing editor and editorial director wanted there to be a pool of articles to choose from to make the journal of a higher quality. Some months after I met that target I asked again to be allowed to read through the medical articles before they went into the journal and the journal commissioning was pushed forward yet again. So in essence my job became one of providing medical advice to other departments within the company and commissioning articles for the journal. But I was actively discouraged from reading through the medical journals and doing other work. I was told that this was not a priority for the journal." Dr Allen said she achieved the first commissioning target in March 1995. By that time, "we were commissioning something like three to four months in advance". The second target (eight months in advance) was achieved in July 1995. In July 1995 the management of Adis received preliminary information about the company's trading results to 30 June 1995. The information was disturbing. The preliminary figures showed an overall local operating loss for the year of $357,000, as compared with a budgeted profit of $24,000. The June monthly figures were a local operating loss of $99,000 rather than a profit of $60,000. The degree of variance between budget and actuality differed widely between the company's various ventures. "Current Therapeutics" showed the best result of them all; the journal was profitable, although well below budget. The company's financial situation was discussed at a management meeting in the last week of July 1995. Mr Cobcroft presented a document proposing staff changes. He suggested six people be made redundant and one person not have his contract renewed. The persons proposed for redundancy included Dr Allen, in relation to whom Mr Cobcroft made this comment: "Very expensive, has served purpose in getting commissioning up to date & stable. Has no technical editing skills & out put to salary level at 2 days a week is not in proportion. Replace with a technical editor who will also commissiion [sic]." Mr Cobcroft did not give evidence but Dr Gordon Mallarkey did. Dr Mallarkey, a pharmacologist, is Editorial Director of Adis. "Current Therapeutics" was one of the publications under his supervision. Dr Mallarkey did not challenge Dr Allen's description of her role but he expanded on it. He said that, when articles were accepted, "they go to a technical editor and that is someone that can look at the manuscripts for technical accuracy ... to correct pharmacology, the information about drugs and dosages and also relevance for GPs". He said it "is often a case of writing down the articles a bit because specialists tend to write above the heads of GPs". He said he did some of the technical editing. Some was done by a freelance technical editor, Dr Roger Olney. During the course of his cross-examination, Dr Mallarkey gave some additional evidence about Dr Olney. Like the applicant, Dr Olney has qualifications in the field of medicine, not pharmacology; although, of course, pharmacology is a unit in a medical course. Dr Olney is a New Zealander. At one stage he worked full-time for the company but for some time before August 1995 he had been employed on a freelance basis; that is, a casual basis performing such work as might be required of him. The company's 1995-96 budget allocated $35,000 for Dr Olney's work on behalf of "Current Therapeutics". Dr Mallarkey said this was all for technical editing for the journal, which Dr Olney still does on a freelance basis in New Zealand. Dr Mallarkey said he treated Mr Cobcroft's July 1995 document as a "worst case scenario"; he did not want any redundancies and considered whether to reduce Dr Allen to an average of one day per week. In the days that followed the management meeting, Dr Mallarkey produced some file notes but did not take any further action until after receiving a memorandum from Mr Cobcroft dated 13 August 1995. The July financial results were bad and Mr Cobcroft now proposed the termination of eight employees, and work reductions for several others. The latter group included Dr Allen. It was proposed that her hours be reduced to one day every two weeks, and apparently confined to the task of commissioning articles. This memorandum was discussed at a management meeting on 15 August. The suggestion in relation to Dr Allen was not accepted; Dr Mallarkey ruled out one day per fortnight on practical grounds. The meeting agreed there was a need to cut costs to a greater degree than had previously been supposed. Dr Mallarkey said he thought the only way he could further save costs "was to rationalise the medical editor position because it was a function that could be picked up by other people within the editorial group". Some time between 15 and 18 August, he advised Mr Cobcroft to make Dr Allen redundant. Apparently Mr Cobcroft immediately accepted this advice. He needed the approval of his superiors in New Zealand, but this was quickly obtained. Mr Cobcroft notified Dr Mallarkey of the approval on about 22 August. But Dr Mallarkey did not advise Dr Allen of the decision until 29 August, when he wrote to her in these terms: "I regret to inform you that your position as Medical Editor, Current Therapeutics is no longer required. The reason for this retrenchment is based purely on financial reasons and is is [sic] no way related to your performance. We have been looking closely at the ongoing viability of the journal and have concluded that we can no longer support the position of Medical Editor. We will be restructuring internally and sourcing medical input to the journal using our existing editorial board. Your position will not be replaced. I am sorry that this has had to happen. Your input to the journal has been invaluable and we shall miss that. Enclosed is a cheque that covers your retrenchment settlement. I would prefer that you leave immediately. You will of course receive 4 weeks pay from today. I hope this gives you some time to pursue other avenues of work. Thank you for your contribution to the journal. It is very much appreciated." Dr Mallarkey conceded there was no discussion with Dr Allen before the decision to terminate her employment. He said it was Mr Cobcroft who made the decision not to tell Dr Allen about the decision before 29 August, but Dr Mallarkey made it clear he supported that decision. He said in evidence: "We were making the job a redundancy. If we had reached a conclusion that we could keep the job in some shape or form then the best option would have been to fully discuss the options with the applicant. The other reason was just from a confidential nature that we didn't want to sort of alert the opposition because it's such a sensitive market." Mr Ian Neil, counsel for Dr Allen, asked Dr Mallarkey whether he considered the possibility that his client might do technical editing. He said he did, although he did not discuss the possibility with Dr Allen. The reason, he said, was that "Maryanne hasn't got the skills for technical editing or writing". When asked the basis of this belief, he said that technical editing was not in her curriculum vitae. Asked about the skills he had in mind, he said: "Being able to take a manuscript when it comes in and edit it down so that it is suitable for GP use and then also look at the drugs that are being mentioned and verify that they are correct and also the drug dosages are correct." Mr Neil asked Dr Mallarkey to agree that Dr Allen's knowledge would be as good as that of Dr Olney. He said: "For basic knowledge, yes". He agreed he did not ask Dr Allen about her qualifications for technical editing; he made a number of assumptions about that. The evidence went on: "Those assumptions being that she was not sufficiently qualified to do the work, being in effect that she was not sufficiently qualified to do the work, that is right, is not it?---Yes. And having made those assumptions you came to the decision that you have expressed a number of times in your evidence, that she was not in fact sufficiently qualified to do the work and did not have the requisite skills, is not that right?---By 'qualified' I don't mean that she does not have the right degree I mean that it's experience - that she didn't have any experience in technical writing and editing. ... You now say that you thought the applicant was sufficiently qualified to do the work of technical editing but you did not think she had the requisite experience, is that right?---No, it was just terminologies. By 'qualified' I think anyone who has a medical or pharmacology background can in theory become a technical editor or writer. You see, Mr Mallarkey, I am just trying to understand what your evidence is. You said a number of times in your evidence-in-chief and at least once while being cross-examined, that the applicant did not have the skills necessary to do the work of technical editing. And when you were asked what those skills were, you said, at least twice, that the skills were: qualifications in pharmacology and the mechanical skills of actually editing the manuscript?---Yes. Now, are we to understand your evidence now to be that you have recognised that of those skills the applicant had at least one, namely, qualifications in pharmacology?---Basic qualifications in pharmacology. Well you say basic, what inquiries did you make to ascertain the nature of the qualifications in pharmacology?---Well, I know what they are for a medical degree, the extent of pharmacological knowledge. But did you ask the applicant about it?---No. Did you ask the applicant about the extent of the pharmacological knowledge that she had acquired as a medical practitioner?---No. You are not a medical practitioner yourself, are you?---No, I'm a pharmacologist. You did not ask the applicant about the extent of the pharmacological knowledge she had applied while prescribing drugs?---No. Or accepting the legal responsibility for her decisions to prescribe drugs?---No. About the extent of her reading in the area?---No. About the nature of the interest that she held in the area?---No. You did not ask her about any of those things?---No." When asked why he did not give Dr Allen the chance to persuade him that she might be able to do the work as well as Dr Olney, Dr Mallarkey said: "within time limits the role that Maryanne was performing was commissioning only". He agreed the effect of his decision was to make a permanent part-time employee redundant while continuing to offer casual work to Dr Olney in New Zealand. His evidence went on: "And you did not think you might as an employer have some higher degree of obligation to the permanent part-time employee than to the casual employee?---No, because I saw it as two different job functions. Two different job functions. See, the case is this is it not, Dr Mallarkey, you saw the applicant as a person whose function was to commission articles, and that once you decided that that function was to be distributed amongst other people that was it for the applicant. It necessarily followed in your mind that she had to go. That is right is it not?---Yes. You did not explore any other possibilities?---I considered Maryanne filling positions but again she was taken on in a specialised role of commissioning which does not exist anywhere else within the group. Do you accept, Dr Mallarkey, that that answer illustrates precisely the proposition that I am putting to you. You considered her filling other positions but because those positions did not include commissioning you excluded her from those positions, is that not right?---Yes, yes." Right at the end of his evidence, Dr Mallarkey made the comment that Dr Allen "wasn't trained to edit". He said he knew this "because she did edit some material for us". He added: "We didn't ask for that editorial to be done, it was commissioning, but I think there was maybe two articles done that needed editing afterwards". He said he did not discuss this with Dr Allen at the time. It is not clear to me whether, in making this latter observation, Dr Mallarkey was referring to what he had previously described as "technical editing"; that is, checking drug dosages etc and doing any "writing down" necessary for general practitioner comprehension of articles. He may have been speaking about settling the style and format of the articles. Dr Allen was not trained to this task. Neither was Dr Olney, although he may have picked up some knowledge about it during his association with Adis. There is no doubt that Adis was in a serious financial position in August 1995. Something had to be done to reduce costs or increase income, or both. Although the financial performance of "Current Therapeutics" was not as bad as that of other company enterprises, it was reasonable for the management of the company to look for savings wherever they could be made; including on the staff of "Current Therapeutics". Therefore it was reasonable to put Dr Allen's position under review. If, after a proper consideration of her position vis-a-vis others, management had decided that the appropriate course was to make Dr Allen redundant, I would have little difficulty in concluding there was a valid reason for the termination of her employment. Although it is conceivable the company could have restored its financial health by other means, as by expanding its activities and revenues or cutting costs in other areas, it was plainly open to management to conclude it was necessary to reduce the cost of staff. Mr Neil argued a termination could not be for a valid reason if the employer had failed first to consult the employee about the existence of any alternative course of action. I think this submission goes too far. I would not endorse that statement as a general rule, applicable in all cases. However, failure to consult will often impose a practical difficulty upon an employer seeking to demonstrate the termination was for a valid reason; the employer may be left unable to demonstrate the lack of a viable alternative. I think this is the situation in the present case. It is possible that, on a fair and informed consideration of the matter, Dr Mallarkey might have reached a defensible judgment that Dr Olney could better serve the company's needs in relation to technical editing than Dr Allen. If so, it would have to be concluded that, having regard to its financial situation, Adis had a valid reason for terminating Dr Allen's employment. It seems the company could get along with either Dr Allen or Dr Olney; it did not really need them both. And in making a choice between the two people, Dr Mallarkey was entitled to put the company's interests at the forefront. If Dr Mallarkey had made an informed decision that, from Adis' point of view, Dr Olney was the better choice, this would have constituted a valid reason for dispensing with the services of Dr Allen. The difficulty, however, is that Dr Mallarkey's failure to discuss the situation with Dr Allen meant he failed to obtain the information necessary to enable him to make an informed recommendation to Mr Cobcroft; and nobody else in the company repaired the omission. As he conceded in evidence, Dr Mallarkey simply made a series of assumptions about the critical issue: Dr Allen's lack of technical editing skills. It is curious that he did so. Dr Allen's formal qualifications were the same as those of Dr Olney. She had received the same pharmacological training as Dr Olney; namely, as part of an undergraduate medical course. Dr Mallarkey did not explain why Dr Allen would have been less competent to check drug dosages than Dr Olney or any less able to "write down" specialist language for the benefit of general practitioners. And this, on his own definition, is all he meant by the term "technical skills". Indeed it might have been thought Dr Allen would have some advantage over Dr Olney in writing down for Australian general practitioners. She had been a general practitioner for four years from October 1988 to July 1992 and, since then, had held a part-time position as Director of Clinical Training at Illawarra Regional Hospital. I emphasise that I do not make a finding that Dr Mallarkey should have preferred Dr Allen. The Court does not have the evidence necessary to enable a choice to be made; anyway it was the company's prerogative to make the choice. All I am saying is that it was not self-evident that Dr Allen lacked the requisite skills; indeed her curriculum vitae suggested the contrary. Under those circumstances, if there was to be a valid reason for terminating her employment rather than dispensing with the casual services of Dr Olney, it was necessary to inquire about Dr Allen's skills and experience. It is not possible to regard as a valid reason one that is founded on a series of assumptions whose validity could easily have been, but were not, checked. The impression I gain from Dr Mallarkey's evidence is that, first, he was used to working with Dr Olney and comfortable in doing so; second, he failed to consider offering Dr Allen the work of technical editing because he associated her only with the commissioning of articles; and, third, Dr Allen paid the price of having carried out her commissioning work too well. As Mr Cobcroft said in his July document, she had "served (her) purpose in getting commissioning up to date & stable". She was now dispensable, notwithstanding that commissioning was only part of her duties, according to her job description, and possibly only part of the functions she could usefully do for the company. I think this case is governed by comments made by the Full Court of the Industrial Relations Court of Australia in Kenefick v Australian Submarine Corporation (1996) 65 IR 366. That case concerned terminations arising out of an excess of labour capacity. It was accepted that it was reasonable for the employer to reduce its workforce, including the number of welders in the hull shop. But the applicant employees argued that a termination was not for a valid reason if it reflected a selection of some employees for redundancy without a prior comparison between their performance and that of their workmates. They also said any comparison necessarily involves the assessment of the employee's conduct or performance, so s 170DC of the Act applies to require the employee to give the employee an opportunity to defend himself or herself against any adverse allegations. The Full Court (Ryan, Beazley and North JJ) upheld these submissions. At 371 their Honours said: "It would be anomalous if s 170DC can be construed as providing an opportunity to an employee to defend himself or herself against allegations of misconduct or inadequate performance made in isolation but as denying the same opportunity to an employee against whom similar allegations are made in the context of a need to select a few employees for termination from a larger pool because of an excess of labour. In both cases an assessment is made by the employer of performance and conduct. In both cases the assessment determines whether or not the employee's employment is terminated. There is an equal need for the employee to have an opportunity to respond because, in each case a convincing defence to the allegations may persuade the employer not to terminate the employment of that employee." At 372 their Honours commented that their decision: "does not mean that s 170DC will apply to all redundancies. It is for the employer to choose the basis for selection for redundancy from the pool of eligible employees. It is only if the employer chooses by reference to conduct or performance criteria that s 170DC will apply". If, in making his choice between Dr Allen and Dr Olney, Dr Mallarkey took into account the matter mentioned at the end of his evidence, that Dr Allen edited "maybe two articles ... that needed editing afterwards", the decision plainly contravened s 170DC. The suggested poor editing performance was never raised with Dr Allen, either at the time or when Dr Mallarkey was considering the matter of redundancy. Perhaps Dr Mallarkey did not take this into account; perhaps he thought it was irrelevant to the task of "technical editing", or the alleged deficiencies in editing so minor as to be unworthy of consideration. I prefer to approach the matter on that basis. After all, Dr Mallarkey told Dr Allen in his letter of termination that it was based purely on financial reasons and was in no way related to her performance; and there is no reason to doubt his sincerity. Even so, it seems to me, s 170DC applies to this case. The retrenchment decision was not made by reference to an abstract principle - such as "last-on first-off" - but by making a judgment as to which of two people could best satisfy the company's need for technical editing services for "Current Therapeutics". It involved a comparison of the performance of Dr Allen and Dr Olney, a comparison that determined whose employment would be terminated. It is clear no opportunity was given to Dr Allen to participate in the comparison or to defend herself against the perception that she lacked the skills and experience necessary for technical editing. Accordingly, if s 170DC applies to the case, the termination was unlawful on that ground. Even if s 170DC does not apply, it seems to me that Dr Mallarkey's failure to ascertain the facts about Dr Allen's skills and experience necessarily means the termination was not for a valid reason. As Northrop J said in Selvachandran v Peteron Plastics Pty Ltd (1995) 62 IR 371 at 373: "In its context in s 170DE(1), the adjective 'valid' should be given the meaning of sound, defensible or well founded. A reason which is capricious, fanciful, spiteful or prejudiced could never be a valid reason for the purposes of s 170DE(1)." I would not describe the reasoning employed by Dr Mallarkey in this case as "fanciful, spiteful or prejudiced". But a decision based on assumptions that were unverified, though easily verifiable, could never be regarded as "sound, defensible or well founded". The termination of Dr Allen contravened s 170DE(1) of the Act. In addition to resisting Mr Neil's submissions on unlawfulness, counsel for Adis, Mr Phillip Coleman, argued the compensation allowed by the Judicial Registrar was excessive. He put two submissions. First, he said the relevant industrial award provided no redundancy benefit to an employee terminated within the first twelve months of service; as Dr Allen was still in her first twelve months, compensation should be assessed at nil. This argument is clearly untenable. The whole purpose of Division 3 of Part VIA of the Industrial Relations Act was to provide benefits, additional to award benefits, to employees who were terminated in specified circumstances. Mr Coleman's second submission is that the Court should take into account the fact that, on 26 August 1995, Dr Allen wrote to Mr Cobcroft proposing a variation of her employment agreement whereby she would become a consultant working under contract. This letter was written after the date when Mr Cobcroft had decided on her termination but without Dr Allen being aware of that fact. Dr Mallarkey said he considered and rejected the proposal before communicating the termination decision; but he did not tell Dr Allen he had done so. Mr Coleman argued I should proceed on the basis that, if there had been no decision to terminate, Adis would have accepted this proposal, or some variant of it, and Dr Allen would have resigned her position; accordingly, any compensation should be a nominal sum. There are two difficulties about this submission, in my opinion. The first is that Dr Mallarkey gave reasons why Dr Allen's proposal was unacceptable, from Adis' point of view. These were reasons of practicability. They had nothing to do with her imminent termination. Under those circumstances, it is doubtful that a consultancy agreement would have been reached, if she had not been terminated. Secondly, it seems probable that any consultancy agreement would have been so framed as to operate for an initial fixed period, possibly with a provision for extension. The length of that period is a matter of speculation but I would think it unlikely it would be less than the three month "initial contract" period agreed when Dr Allen commenced as an employee. And it would probably have taken some weeks to negotiate. On these assumptions, Dr Allen would probably have continued to earn at not less than her existing rate for the period of sixteen weeks that was adopted by the Judicial Registrar for the purposes of calculating compensation. I do not think her assessment was excessive. The application for review must be dismissed. I certify that this and the preceding fifteen (15) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Wilcox Associate: Dated: 7 August 1997 Counsel for the Applicant: Mr I Neil Solicitor for the Applicant: Russell McLelland & Brown Counsel for the Respondent: Mr P Coleman Solicitor for the Respondent: Hunt & Hunt Date of Hearing: 18 July 1997 Date of Judgment: 7 August 1997