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Friday Workplace Briefing

The Essential Ingredients in a Successful Offer of Settlement That Makes an Employee Say “Yes”

When is an offer to settle enough to trigger a costs order?

This week, Andrew Douglas and Kim McLagan tell us what the essential ingredients are for a successful offer of settlement to an employee.

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About the Hosts

Managing Principal - Victoria

Principal Lawyer - Head of Workplace Relations

Episode Transcript

Andrew Douglas: I guess we’ve got Makita’s case to talk about. Which is a offer of settlement that didn’t get a cost reward at the end of it. So it’s a general protections claim. The person lost, they found that they were terminated because of serious misconduct. So there was a win for the employer. The employer had done a range of offers. There’d been counter offers. They weren’t that much different. There was one high one of 55, but then the difference was not much in between. But there was certainly a risk of the employer losing. And what the tribunal said at the end of it is, look, the threshold that exists under the Fair Work Act is that this is vexatiously refused to accept an offer. So that’s a very high, that is, in other words, knowing an offer is being made, you make a decision, which is so crazy is not to accept it. Well, that was not this case.

Kim McLagan: No.

Andrew Douglas: Okay. But the analysis of it was, well, what is a good offer? And I reckon that’s a really good decision because we’re going to talk about Tra and Prodigy shortly, which is one of Val Gostencnik’s, the deputy president’s case that comes next. But can I say to you, just whipping out the template though it’s not a great idea. Saying five grand go away. Sounds good. It’s a really powerful thing to say but doesn’t work. What the decision in this case is, you’ve got to look at what would the person be entitled to, if they won. You’ve got to look at where you’re up to in the proceedings. What’s the investment in the proceedings today?

Kim McLagan: The costs that that incur.

Andrew Douglas: Yeah.

Kim McLagan: Yep.

Andrew Douglas: And then you’ve got to look at the commercial risk of winning and losing. And you’ve got to add that as a multiplier or a divisive, if that makes sense, based on the case.

In this case, there was no commercial reality around the risk of loss. So when the person was applying their mind to refusal, they entertained a reasonable basis believing they could win.

So a bit of throwaway money wasn’t going to cut it. So they didn’t get their cost sorted. So here’s our lesson, and I guess this is, I know I’m sort of preaching at you, but, for those who work with me, I’ll say to you, this is not a case that we will necessarily win when we do a call to bank offer, which is done in contractual arguments or on Superior court matters. That is an offer which triggers a cost outcome.

When you’re doing a formal cost outcome under the rules, the same things apply, which is you must identify the facts and the law you’re going to win on in any offer of settlement. And you must win those.

Because what you’re saying to the person is, “I’m satisfied, as a matter of fact. And when you get advice, you’ll be satisfied, as a matter of fact, based on the evidence that we currently hold, you’ll lose these things.”

And if you continue to proceed past that, given the amount of money I’m going to pay will properly compensate you for the investment risk you are taking against the likely outcome.

If you were to win, see the, I’d like to say algorithm because it sounds clever, but it’s not just a computation. If I don’t put that in the offer, it won’t work. And it didn’t work in this case.

So please, it’s nice. It’s an empowering thing to say with a dismissive wave, of the hand, five grand to go away. Or 10 grand to go away. It’s more than you’re going to get. But the person’s already three parts into the litigation, they’ve already incurred 10 grands worth of costs. So the five grand’s not going to cover their investment to date. And they may have a chance of winning.

So we’re talking about the cost of investment they’ve spent, probably spent about 10. Remember in plaintiff law firms where they are paying the costs are much higher than you would expect. Okay. And they’re inclined to be fixed irrespective of what’s going on. So they’re in there, they’ve got contingent costs on settlement as well as part of that. So you’ve got to build that into the sum that you’re doing.

If they win, just say they would win 10 weeks. So say that’s $20,000 and then you put in commercial risk and you say, “Look, we have three facts. We might not get up. And if we don’t get up on those facts, we lose.”

So our risk is high. It’s at least at 50%. So you take those numbers and you say, “Okay, we’ll build that risk into it by saying this is the total amount you could accept. But we say the risk of success of this, so we’re going to knock it down by this amount.” We’ve got a good offer. Okay, we’ve got a good offer. And a court’s going to look at that and they’re going to see you are generous, sensible, and thoughtful. And you’ll get over the threshold then in the Fair Work Act and the call the bank, it will always win. And then the under the rules, it’ll win in Superior Courts. Okay?

So look, I just thought it’s a good case. Tra and Prodigy’s recent case by Val Gostencnik, as I said, deputy president, where a deed was done at a conciliation or a type of conciliation. It was done with lawyers involved, but it was contingent on some other protection. And there was an argument about whether, there’d be mutual lists. So a deal was done as to money and stopping the proceedings, but was subject to a discussion around individual mutualists. And there was a shareholder action on the side that caused risk. So it didn’t stop the proceeding. Okay. Didn’t stop it. Didn’t release, didn’t have any effect because there was no time for the release taking effect.

Now, if lawyers can’t get this right, your template that you have sitting on your laptop, you ain’t going to get it right. And remember, there are very few circumstances where a pure deed is used and often it’s tried to be corrected by exchanges of emails and all those sort of things. Before you do a deal. The first thing you got to do is what stops? What is the time this proceeding is stopped? What is the action that I need to take? Is it a filing in discontinuance? What is the action that has taken that has done it? And that must be in the deed. Okay, it’s not there. It doesn’t work. Okay.

Kim McLagan: Covered a lot of ground.

Andrew Douglas: We’ve covered a lot of ground and we’ve still got time. Which is excellent. Yeah. So I think on our clock that you were staring at consistently, I think we’ve got about six or seven minutes left. So let’s go to the problem.

Kim McLagan: It’s not too bad.

Andrew Douglas: Case study.

Kim McLagan: Daniel was a finance director with Penguin Pacific or PP. PP was a financial services and fund management business. Fast Place Recruiters head hunted Daniel for Hot Super, which was a major competitor of PP.

At his meeting with HS’s MD, Teresa, she offered Daniel the Fund Manager Director Role, which would report to her, a short term incentive of 1% of revenue earned fees under management, and equity in two years if he grew the business by 15%. Daniel had achieved these benchmarks easily at PP.

Two weeks before he commenced work. HS received reliable intel that Daniel was a cultural nightmare. He used and shared cocaine with his subordinates, had two outstanding sexual harassment investigations and lived a chaotic lifestyle. Under their contract with him, HS relied on the notice clauses to terminate his employment with a three month notice period allowed for under the contract.

Daniel had provided undertakings as part of the offer of employment that he would disclose if he had committed any criminal wrongdoing or engaged in any conduct that would endanger his own reputation and the reputation of HS.

HS advised Daniel, it would not proceed with his employment as a result of evidence surrounding his past conduct, which said was inconsistent with the values of HS.

Daniel issued Supreme Court proceedings, claiming a breach of his employment contract and sections 18 and 31 of the Australian Consumer Law, Competition law, sorry.

Daniel’s remuneration at PP was around 600,000 per annum. If he had succeeded at HS, it would’ve been 750 for the first two years. And after that with equity, north of 1 million per annum.

So questions.

Andrew Douglas: Okay. So the first question is, was Daniel’s failure to disclose the nature of the things that are alleged against him. Repudiatory conduct that HS was entitled to accept?

Okay, now two parts to that. One is the conduct and the second part is the undertakings that they go.

Now the undertakings were towards criminal conduct or conduct that would damage. Now, there’s no evidence at all that they hold of that conduct. So that HS got reliable intel with, you know, I don’t back horses. You do. But we all get reliable intel and it always runs last.

So I want you to be very clear. When you put clause and undertakings in, you must put in, are you subject to any investigation or inquiry and respective conduct? You got to do it right.

Kim McLagan: Yeah.

Andrew Douglas: These undertakings wouldn’t work. So first on the undertaking, the undertakings don’t work. The behaviour itself. So we, you and I both dealt with cases where people failed to disclose criminal conduct when they were taking over senior roles, which involve the management of children, all that sort of stuff. We’ve gone through it so many times.

That conduct can itself be repudiatory, ’cause it can go to the heart of the, here it’s not great and if it’s true, it’s bloody terrible. Does that make sense? So it could be criminal conduct, but at the time of the receipt of that, we just don’t have that level of evidence that you could satisfy yourself. And remember, you are forming a view on something, on less than the balance of probabilities. You’re forming on gossip. So no, I don’t think it amounts to repudiation. If there was hard evidence that came through.

But can I say, Kim, this goes back to this issue. When you’re employing very senior people, those reference checks better be good.

Kim McLagan: Yeah.

Andrew Douglas: Yeah, and they can’t be his best mate. They’ve got to be deep reference checks based around cultural values and performance and behaviours ’cause this would’ve been picked up if appropriate reference checking was done. So that’s the first question.

Would Daniel have a good case against HS, Hot Super and Teresa? Well, the answer is not under misleading and deceptive conduct, which is the section 18 and 31 competition law. Because at the time of them representing the job and the time of them representing the remuneration, that was the truth. I remember under the competition law, misleading deceptive conduct goes to the time of the representation. So this would be a very different case if he accepted the job he was employed. And then he got there and found that he wasn’t reporting to Teresa. That actually 1% of the remuneration was in the limited fund, which has never been successful.

And therefore the representations around his entitlements, that would’ve been a breach of section 31 and it would’ve been actionable. Okay? And it would’ve been a very substantial claim. But that’s not what happened to here. So he’s going to die on the competition. More stuff, I ain’t going to worry. But on the breach of contract, he’s got a really interesting argument, which goes back to Walker and Citibank-

Kim McLagan: Yeah.

Andrew Douglas: -case 20 years ago. Cause what he can say is, “Look, you relied on information.” The contract itself says notice and then it deals specifically with serious misconduct. You are not accepting me ’cause you say there’s misconduct that I had or the capability of misconduct, but even on that basis, it’s not my misconduct while I’m employed. It’s something I did before. So when you look at your contract, you can’t say there’s misconduct on my behalf. Which isn’t ’cause it’s not misconduct while I’m working for you. Moreover, there’s an implied term, you’re going to take me as you find me. You can’t just make shit up after you’ve done it. I think he’s got a reasonably good contractual argument, but the damages are just terrible.

Kim McLagan: But wouldn’t, in that case, they would’ve been better off saying to him, we’re terminating your employment and just relying on the termination clause. And not referring.

Andrew Douglas: Not referring to it at all. The fact that they throw conduct into the ring, puts it on notice that has to be a reasonable basis for doing it. And that’s what the courts do in these cases and the law is pretty soft. Does that make sense? It doesn’t have a lot of things holding together.

But when a judge looks at such a big contract, a person’s taken a huge risk moving one employer to another. It looks that you forming a judgement of untested evidence to determine whether your employer done someone. But that is the reason for it.

The court’s going to go, you’ve induced this guy to leave his job. So he suffered the loss. You formed a view based on evidence, which is not reliable. I’m not going to do it. And it’s that inducement to leave the job that triggers the next reasonable test that comes afterwards.

So this guy’s probably got a lifetime of work with this in normal employee terms of four to five years, he’s probably not employable, ’cause the damage you’ve done into the market and going around and making those inquiries in Australia is a small market. He may have a claim that’s sort of 3 to $4 million.

So we thought it was worth just agitating this issue to show this is a risk that we see every day.

So the last question, what would be a good offer of settlement in these circumstances? And the answer is, a good offer of settlement would be one that looks towards a 6 to 12 month period. On what would be reasonable notice, which provides you that level of protection, but with a real strength behind it that you’re happy to pursue a deeper investigation. So you keeping your lever really hot at the same time you were showing a level of risk understanding in the process.

Yeah, now look, we’re over time.

Kim McLagan: We’re over time?

Andrew Douglas: We’re over time. But look, thank you very much. Don’t forget that we’ve got the workers’ comp masterclass that’s coming up very shortly, which is on the first of 1st of May.

And we are going to talk about this issue, particularly about the rejection of claims and the capacity of the safety regulator to look over the fence.

Kim McLagan: Very hot topic.

Andrew Douglas: Okay, let’s show some thumbs up guys. Kim needs as many thumbs up, she hates this stuff. It’s lovely to do it with you, even though you weren’t enjoying, great to see. See you later guys. Bye-Bye.

Kim McLagan: Bye.

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