Recovering settlement amounts arising from misconduct of an employee and setting off against statutory entitlements

The risks of commencing proceedings 3 min read

The Full Federal Court of Australia has decided that an employer could not only recover amounts paid to settle proceedings arising from the misconduct of a former CEO, but also set off those amounts against the statutory entitlements that were owed to that individual upon their dismissal.¹

Key takeaways

• In order to recover settlement monies arising from the misconduct of an employee, the employer must show that the misconduct was a material cause of the settlement being entered into. The amount paid by way of settlement must also be reasonable.
• This case is another useful illustration of the risks associated with a decision to commence proceedings, and in particular the possibility that amounts pursued by way of cross-claim may well eclipse the amounts initially sought.

Background

Mr Joseph was initially employed as the Chief Executive Officer of Parnell Corporate Services Pty Ltd (Parnell AU) and was subsequently working on secondment at Parnell Corporate Services US Inc (Parnell US).

During Mr Joseph's secondment, three separate proceedings were commenced against Parnell US in the United States, alleging assault and discrimination by Mr Joseph.

Parnell US resolved the three separate proceedings by making settlement payments to the alleged victims. During this period, Mr Joseph had also been summarily dismissed.

Mr Joseph subsequently commenced proceedings against Parnell AU and Parnell US seeking, among other things, the payment of statutory entitlements upon dismissal.

The respondents accepted that Mr Joseph was entitled to his accrued but untaken annual leave and long service leave, but filed a cross-claim alleging that Mr Joseph had breached his contractual and other duties as CEO and director and that he had caused them loss (being the amounts paid to settle the various proceedings). An order was also sought to set-off those amounts against any statutory entitlements owed to Mr Joseph.

Decision

The Full Court concluded that Mr Joseph's alleged misconduct was a material cause for the three separate workplace proceedings commenced by Parnell US' former employees.

The settlement amount paid in all three proceedings was also reasonable, with the Full Court taking into account the fact that the settlement amounts had been proposed by an experienced former US Circuit Court Judge who had had substantial experience as a mediator, and that the companies had obtained detailed legal advice in relation to their prospects in those proceedings, and therefore the settlement amounts could be recovered from Mr Joseph in the form of damages.

The primary judge had not accepted that set-off was appropriate, and had made reference to the provisions under the Fair Work Act relating to permitted deductions.² The Full Court, however, accepted that the discretion to set-off had miscarried and that it was in fact appropriate to set off the amounts payable to and by Mr Joseph. In light of that decision, there was a complete set-off of Mr Joseph's statutory entitlements and judgment was entered in favour of the Parnell companies (in an amount of just under US$1 million).