Caroline Dodson v Autistic Association of New South Wales [1998] FCA 31 (30 January 1998)

FEDERAL COURT OF AUSTRALIA

EMPLOYMENT LAW - Termination of employment - Alleged unlawful termination - Jurisdiction of Court to entertain claim - Income of applicant less than statutory maximum but value of her income allegedly increased by diversion of half of salary into home loan bank account - Whether tax "saving" to be taken into account in determining applicant's "relevant wages" - Lawfulness of termination - Whether employer had valid reason for terminating the employee's employment - Assessment of compensation.

Ardino v Count Financial Group Pty Limited (1994) 1 IRCR 221 discussed.

Industrial Relations Act 1988 (now Workplace Relations Act 1996 ) - ss 170CD and 170DE(1).

CAROLINE DODSON v AUTISTIC ASSOCIATION OF NEW SOUTH WALES

JUDGE: WILCOX J

PLACE: SYDNEY

DATE: 30 JANUARY 1998

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NI4333 of 1995

BETWEEN:	CAROLINE DODSON Applicant
AND:	AUTISTIC ASSOCIATION OF NEW SOUTH WALES Respondent
JUDGE:	WILCOX J
DATE OF ORDER:	30 JANUARY 1998
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. The orders made by Judicial Registrar Locke on 5 August 1997 be amended by substituting, in order 2, the figure "$12,500" for the figure "$23,739".

2. The application for review be otherwise 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	NI4333 of 1995

BETWEEN:	CAROLINE DODSON Applicant
AND:	AUTISTIC ASSOCIATION OF NEW SOUTH WALES Respondent

JUDGE:	WILCOX J
DATE:	30 JANUARY 1998
PLACE:	SYDNEY

REASONS FOR JUDGMENT

WILCOX J: Autistic Association of New South Wales seeks review of a decision of a Judicial Registrar in relation to a claim of unlawful termination of employment made by Caroline Dodson. Ms Dodson was employed by the Association as its Adult Services Manager from 9 July 1990 until her dismissal on 26 October 1995. In a letter dated 9 November 1995 to Ms Dodson, the Association's Secretary and Acting Chief Executive Officer, Brian Lomas, stated the dismissal was a consequence of a decision of the Board, on 25 October, to effect a management restructure of the Association that involved the replacement of three positions (Executive Officer Schools, Manager Client Services and Manager Adult Services) with the single position of Director of Services. The letter made clear this was the sole reason for Ms Dodson's termination of employment. There was no criticism of her conduct or performance.

The Judicial Registrar found the termination of employment contravened s 170DE(1) (but not s 170DC) of the Industrial Relations Act 1988 , as the legislation was then known. She assessed compensation in the sum of $23,739.

When the application for review came before me on 4 September 1997, the representatives of both parties said they were content to rely on the evidence adduced before the Judicial Registrar, without any addition. They also suggested the review might satisfactorily be conducted on the basis of written submissions. I accepted this proposal subject to the possibility of listing the matter for supplementary oral submissions if this course subsequently seemed desirable. I settled a timetable for submissions.

In a letter to my Associate dated 5 November 1997, Mr Michael Christie, counsel for the Association, suggested supplementary oral submissions. His opponent, Mr Terence Lynch, took no position on the request. My Associate told Mr Christie I would consider his suggestion in the light of his written submissions when received. Having done so, I see no reason for an oral hearing. This will serve only to increase the legal costs incurred by the parties. Their arguments are fully and clearly expressed in their written submissions.

In his written submissions, Mr Christie advanced three grounds of review:

"(1) The Applicant earned wages in excess of the statutory limit;

(2) If (1) is wrong, then it ought to be held that the termination of the employment was for a valid reason. Specifically, if in all other respects the reason for the decision is sound or defensible, such reason cannot be stigmatized as invalid merely because a consultative procedure was not followed; and

(3) If (1) and (2) are wrong, the correct methodology for compensation ought to lead to no amount being payable."

Mr Christie said the Association does not seek a review of the Judicial Registrar's decision in any other respect. I will deal separately with each of the three grounds.

Jurisdiction

Section 170CD of the Industrial Relations Act 1900 has the effect of limiting the classes of employees who are entitled to maintain a claim under Part VIA of the Act for unlawful termination of employment. The provisions that confer a remedy do not apply to a termination of employment of an employee, who is not employed under award conditions, if the employee's "relevant wages" in the previous 12 months exceeded the "applicable amount". The term "relevant wages" is defined by s 170CD(4) as meaning "the total amount of the wages that the employee received, or was entitled to receive, from the employer" in respect of a relevant period. It is common ground that the "applicable amount" for the purposes of this case is $62,000. It is also common ground that, at the time of her dismissal, the applicant was entitled to receive a salary of $55,625 per annum less $5,000 for the value of a motor vehicle provided by the employer and less tax and superannuation. If the relevant facts stopped there, there could be no question but that Ms Dodson's relevant wages were less than the applicable amount, so s 170CD did not exclude the jurisdiction of the Court to grant her relief for any unlawful termination of employment.

However, more than 12 months before her dismissal, Ms Dodson exercised a "salary sacrifice" option given her by the Association. Apparently the Association is not required to pay Fringe Benefits Tax, so it decided to offer staff (or some of them) the option of substituting for (taxable) salary payments an equivalent amount in non-cash benefits, which it was apparently thought would not be subject to income tax. Ms Dodson took advantage of this offer to the extent of half her salary, which she directed be paid into a bank account in reduction of her home mortgage.

The view that the payments into the bank account were not taxable is surely questionable, but the case was conducted before the Judicial Registrar on that basis. On that basis, Mr Christie argues that Ms Dodson's "relevant wages" must be assessed by adding to the sum of $55,625 the amount of the "saved" tax; that is, the income tax that would have been paid if the mortgage payments had been received as salary and declared in Ms Dodson's income tax returns. It is said that, if the "saved" tax is taken into account, the total value of Ms Dodson's "package" is $75,000.

I have difficulty in understanding how the tax saved on a sum of about $25,000 could amount to $20,000. But the detail does not matter; it is common ground that the "saving" would have been enough to take the value of the "package" over $62,000. The question is whether it is appropriate to determine Ms Dodson's "relevant wages" in the manner suggested by Mr Christie.

I am of the opinion it is not. In Ardino v Count Financial Group Pty Limited (1994) 1 IRCR 221, I discussed at some length the concept of "relevant wages" embodied in s 170CD. I expressed the view it embraced all money payments which the employee was entitled to receive, even payments diverted elsewhere pursuant to an agreement between the employer and employee. In Ardino the relevant payments were made to a superannuation fund pursuant to a "salary sacrifice" arrangement similar to that made in the present case. It follows that the whole of the sum of $55,250 that Ms Dodson was entitled to receive falls within the concept of "relevant wages".

In Ardino at 228 I commented that I could not see how non-pecuniary benefits could be regarded as "wages" for the purpose of the statutory definition. I had in mind benefits received from the employer, such as free or subsided accommodation, a motor vehicle etc. I referred to two dictionary definitions of "wages" and noted their emphasis on "payment". Mr Christie argues this aspect of Ardino is wrong and cites several cases (mainly tax cases) concerning the meaning of the word "wages". I have considered these cases but I remain of the opinion I expressed in Ardino. None of the cited cases supports a contrary conclusion. Some of them were concerned with the distinction between wages and salary. Some refer to wages including "remuneration paid or payable to an employee" as a reward for the employee's services. The word "paid" and "payable" suggest the delivery of a pecuniary benefit. Whether or not this is so, there is nothing in any of the cases that would support Mr Christie's argument that Ms Dodson's "relevant wages" included the tax benefit she received as a result of her employer dealing with her salary in a particular way. This was not something received from the employer at all.

Mr Christie also referred to the Truck Act (NSW) and, in particular, the reference in its preamble to the purpose, in the Act, of prohibiting payment of wages "being made in goods or otherwise than in money". He says this establishes that a non-pecuniary benefit may be "wages". However, that is too simplistic an understanding of the Truck Act, and its counterparts in other jurisdictions. That legislation arose out of the fact that employees at that time were usually in a very weak bargaining position, as against their employers, and it was commonplace for employers to take advantage of that situation by making it a condition of the contract of employment that some or all of the employee's wages be taken in goods supplied by the employer, usually at inflated prices. In other words, it was a condition of the contract of employment that the whole or part of the pecuniary sum to which the employee was entitled be diverted into goods supplied by the employer. That situation is no different to the diversions of salary made by Mr Ardino to his superannuation fund and Ms Dodson to her home loan. In each case the consideration for the employee's work was a pecuniary sum, but part of it was diverted elsewhere by agreement.

In my opinion any tax savings achieved by Ms Dodson as a result of the diversion of her salary into her home loan are not material to the determination of her "relevant wages" for the purposes of s 170CD. Her "relevant wages" did not exceed $62,000 per annum. The Court has jurisdiction to entertain her claim.

Valid reason for termination?

At the date of termination of Ms Dodson's employment, s 170DE(1) of the Act provided:

"170DE(1) An employer must not terminate an employee's employment unless there is a valid reason, or valid reasons, connected with the employee's capacity or conduct or based on the operational requirements of the undertaking, establishment or service."

Section 170EDA(1)(a) cast on the employer the onus of negativing an allegation of breach of s 170DE(1). Mr Christie contends his client did have a valid reason for the termination: its financial fragility. In support of that contention, he made many references to the oral and documentary evidence. I have considered all that evidence but I do not think it discharges the onus of proof that lies on the Association.

There is no doubt that 1994 was a bad year for the Association, in financial terms. In the financial year ended 31 December 1994 the Association suffered an operating deficit of $472,440. However, in 1995, the Association reduced its expenditure by $480,444, from $6,535,266 to $6,054,822. That reduction, combined with a small increase in income (from $6,062,826 to $6,084,906), led to a surplus in 1995 of $30,084. The 1995 reduction in expenditure had nothing to do with the simultaneous dismissals of Ms Dodson and the Manager Client Services, Ms Lydia Fegan. Those dismissals occurred so late in the year that they increased, rather than reduced, 1995 expenditure. The case of financial exigency has to be evaluated in relation to 1996 and subsequent years, not the year in which the dismissals occurred. In relation to that matter, it is important to note that the 1995 annual report showed an increase in government grants of $301,623 (from $1,839,722 to $2,141,345) as between 1994 and 1995. Most of this increase was from a "one-off" State grant, negotiated in late 1994 but received in 1995, that the Association failed to repeat in 1995.

The evidence contains copies of minutes of many meetings of the Association's Board of Directors or Executive Committee. The 1994 minutes demonstrate the Board's concern about expenditure during the latter half of that year. As I have mentioned, the year yielded a substantial operating deficit. The minutes also show some concern about the cash position in August and September 1995; new overdraft arrangements were made at that time. They are not explicit about the likely 1996 trading position, if there was no further reduction in expenditure. However, there is some material that suggests the necessity for some expenditure savings. On 10 October 1995 the President of the Association, Peter Dodd, presented a report to its Executive Committee, in which he spoke of an estimated deficit for the year, leaving aside the government "bail out", of $250,000. That report contained a recommendation that led to Ms Dodson's termination of employment:

"6. My conclusion is that we have to implement another round of cost savings to provide a budget outlook with which we can be comfortable. As with last years [sic] cuts our objective is to minimise the impact on direct services but achieve a significant lower cost outcome.

7. My proposal is to eliminate the second layer of management and to replace the Managers of Adult Services and Client Services and Executive Officer of Schools with a Director of Professional Services. This position would work with the CEO to be the senior management for direct services with school principles, outreach and EIS, and the managers of Harvey Tech, Roger Q and the residences reporting directly to the Director of Professional Services. A diagramatic representation is attached showing the present and proposed management structures.

8. This proposed structure is more consistent with emerging management structures in the private and public sectors and there is a growing trend to eliminate middle layers. Implicit in this restructure is a delegation of more responsibility to the line managers. I believe that this structure will also encourage more flexibility in the way our services are delivered and will undo the segmented divisional approach that is current across Adult Services, Client Services and Schools.

9. The role of the CEO will change from that under Jane Woodruff's tenure and the ideal CEO will be someone able to contribute to the line management while also taking responsibility for external relations including funding from government and private sources."

Mr Dodd did not give evidence before the Judicial Registrar. However, the Associate President, David Foster, deposed that the Executive Committee adopted Mr Dodd's proposal as a recommendation to the Board of Directors. He thought it would be imprudent for the Board to condone the existing situation. When asked why this would be so, Mr Foster replied:

"Because we were heading for a situation where we would be in serious deficit with a cash shortfall which was likely to exceed our ability to borrow money on overdraft and apart from the possibility that we may be trading without the prospect of being able to pay our commitments, it would be likely to lead to the necessary winding up of the company."

The Executive Committee's recommendations were discussed at a special Board meeting on 18 October but one director expressed the wish for more time to consider them. So they were stood over to the regular Board meeting on 25 October. On that occasion, the recommendations were adopted. On the following day, Mr Foster and another director informed Ms Dodson and Ms Fegan of the decision to abolish their positions and to terminate their employment.

As I have said, the likely post-1995 financial situation does not clearly emerge from the minutes of meetings. However, enough emerges from the evidence to require the finding that, in October 1995, the Board had a genuine and justifiable concern about the Association's future financial situation and thought it necessary further to reduce the level of its expenditure. Mr Foster supported the restructuring arrangement because of his wish to reduce expenditure. Probably there were other directors similarly motivated, although it is possible that some or all of them shared Mr Dodds' view that a flatter management structure was desirable in any event.

However, an employer's general need to reduce expenditure does not necessarily mean it has a valid reason to terminate the employment of a particular employee. I pointed that out in Thomas v Lynch (1996) 71 IR 307. I apply to the present case what I there said. In particular, I mention the points made in the following passage at 311:

"... it is not enough that Mr and Mrs Lynch believed, on advice, that it was in the interests of the business to improve its trading result by reducing its wages bill. First, the evidence does not establish that the termination of the applicants' employment did improve the business' trading result; there is no evidence, one way or the other, on that matter. The stated reason reflects only the subjective view of the employer. Secondly, even if there was evidence of an improved trading result, that would not demonstrate that the decision to terminate the applicants' employment was sound or defensible; the same result might have been obtained by other means. For example, if they had been apprised of the seriousness of the situation, one or both applicants might have agreed to change their working hours or methods."

These points apply to this case. As to the first point, there is no evidence that the termination of the employment of Ms Dodson and Ms Fegan in fact effected an improvement in the Association's financial position. The consequential redistribution of duties led to increases in the values of remuneration packages of other employees; the evidence does not reveal whether or not there was a nett reduction of costs. Mr Foster was unaware of any evaluation of the costs saving (if any) achieved by the terminations, whether made before or after the event. In relation to the second point, it is clear the Board did not canvass possible alternatives. At its meeting of 19 July 1995, the Board had received a report from the then Chief Executive Officer, Jane Woodruff, in which she discussed the likely 1996 financial situation. Subject to two qualifications, she thought it would be unnecessary to cut services at all. It is not clear that either of these qualifications applied. In any event, Ms Woodruff also suggested how $200,000 could be saved without staff terminations. The Board discussed this report on 26 July and resolved as follows:

"that in view of the current satisfactory financial position, there is no necessity at this stage to effect cuts to any service, subject to review of the situation around September 22nd if no word has been received from the Department of School Education."

There is no evidence of a worsening of the position between 26 July and October.

Mr Lynch referred to the fact that the Association recruited a new employee in September. It appears there was a vacancy in the position of Manager, Harvey Tech Enterprises, a position within Ms Dodson's area of responsibility. On 27 September the Board was advised of arrangements for interviewing applicants for this position. On 3 October 1995 one Stephen Bailey was offered the position. He commenced on 24 October. It was during this time that Mr Dodd presented his restructuring recommendations. To the extent those recommendations stemmed from the need to make economies, that was a long-standing need. One obvious possibility would have been to defer filling the position at Harvey Tech or to give Ms Dodson the duties of this office. I do not know whether this would have been a satisfactory solution; the point is it was never considered.

The Judicial Registrar found against the Association, in relation to s 170DE(1), because of its failure to consult Ms Dodson about alternatives to her termination. I would not restrict my decision to that point, but I think the failure to consult was an important element in the Association's failure to consider alternatives. Ms Dodson and Ms Fegan were two of the Association's three most senior employees. They must have had an intimate knowledge of its manner of operation and have been well-placed to make suggestions about possible economies. Yet neither was consulted. The decision as to the preferable manner of reducing expenditure was made by the members of the Board, all part-time directors, in conjunction with the remaining senior employee, the person who would potentially gain by the recommended decision; she was to be promoted to the new position of Director of Professional Services.

The Association bears the onus of proving there was a valid reason connected with its operational requirements for terminating Ms Dodson's employment. I do not think it has discharged that onus. I hold the termination was unlawful.

Compensation

Prior to her termination of employment, Ms Dodson had planned to take maternity leave from 3 January 1996. She said in evidence she had not fully decided how long to take but her intention was to take six months. Under the terms of her engagement, the conditions of Ms Dodson's employment by the Association were those set out in the Public Hospitals (Professional and Associated Staff) Conditions of Employment (State) Award. Those conditions included nine weeks paid maternity leave; the remainder of Ms Dodson's leave would have been unpaid, as she accepted. Consequently, if she had not been terminated, Ms Dodson would have remained in receipt of her normal salary until nine weeks after 3 January 1996, that is 13 March 1996. Thereafter she would have been without salary until July 1996.

However, it is now clear Ms Dodson would not have returned to work in July. Unhappily she developed a serious back problem. Between May 1996 and February 1997, she suffered chronic pain from a herniated disc between the fifth and sixth cervical vertebrae that precluded her from working. In February 1997 Ms Dodson commenced looking for work. She was finally successful in obtaining an appointment as Registrar of the Community Services Appeal Tribunal. She took up that appointment on 30 June 1997. It follows there was a period of about five months in 1997 during which Ms Dodson was physically able to work but not employed.

The above facts mean that, but for her termination, in the period 2 November 1995 to 30 June 1997, Ms Dodson might have received a salary in respect of 40 weeks:

(a) 2 November 1995 to 3 January 1996 - 10 weeks;

(b) 3 January to 13 March 1996 - 9 weeks; and

(c) February to 30 June 1997 - say, 21 weeks.

On termination Ms Dodson was paid for four weeks in lieu of notice, a further four weeks by way of an ex gratia payment and a redundancy payment of eight weeks. These 16 weeks need to be deducted from the 40 weeks calculated above, making a maximum loss of 24 weeks or (at $1,069.71 per week) $25,673.

However, it is necessary substantially to discount this figure. I have accepted the Association was facing a situation of financial stringency in late 1995. Although other alternatives should have been examined, there is plainly a strong possibility that proper consideration would have shown there was no satisfactory alternative to the termination of Ms Dodson's employment, or her downgrading to the position of Manager, Harvey Tech Enterprises. She said in evidence that, if there was no alternative, she would have been willing to accept that downgrading (with a consequential reduction in salary) until she went on maternity leave, and to consider during that leave "whether that was the job that I would have to come back to". Obviously, she would not have relished the prospect and it seems to me unlikely she would have done so. So the case has to be approached on the basis that, even with the most meticulous handling of the situation by the Association, there was a substantial chance Ms Dodson's employment would not have long continued. In order to make a proper allowance for that position it is, I think, appropriate to discount the maximum possible figure by 50%. I propose to halve the figure of $25,673 and round it off at $12,500. The order made by the Judicial Registrar ought to be varied by reducing the award of compensation to $12,500.

I certify that this and the preceding seven (7) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Wilcox.

Associate:

Dated: 30 January 1998

Counsel for the Applicant:	T Lynch
Solicitor for the Applicant:	Craddock Murray & Neumann
Counsel for the Respondent:	M Christie
Solicitor for the Respondent:	Fitzgerald White Talbot