Failure to meet KPIs held not to be a valid reason for dismissal

Underperformance is one of the most common reasons why an employer may look to terminate an employee’s employment, but a poorly drafted employment contract can make it very challenging for an employer to do so fairly.

In the recent decision of Catherine Favaloro v MVCI Australia Pty Ltd [2024] FWC 1508, the Fair Work Commission (FWC) has found that the dismissal of an employee who had not met key performance indicators (KPIs) was harsh, unjust and unreasonable as these KPIs were not part of her employment contract.

Facts

From 14 June 2021 to 30 August 2023 the Applicant, Catherine Favaloro, was employed as a Vacation Specialist (VS Role) for the Respondent. In this role, Ms Favaloro was essentially a telemarketer who called previous guests of a hotel chain to offer them heavily discounted short stays. As part of the VS Role, Ms Favaloro’s KPIs were three sales per week. These KPIs became increasingly vigorously enforced.

On 10 April 2023, Ms Favaloro accepted a new role of Vacation Planner (VP Role), in part on the basis that there would be no KPI pressures in this new role. The duties and responsibilities of the VP Role were supplemented by a ‘VP Commission Plan’ which imposed certain performance standards. On 13 June 2023 Ms Favaloro had a formal performance review meeting which outlined that in accordance with the VP Commission Plan, her required KPIs were five sales per week, which then doubled the following week to ten sales per week.

Ms Favaloro was unable to meet her KPIs and received several warnings by the Respondent, ultimately leading to dismissal on 30 August 2023. The matter subsequently proceeded to a hearing.

Decision

After considering the terms of Ms Favaloro’s employment contract, the FWC found that there was no valid reason for the Applicant’s dismissal.

Specifically, Ms Favaloro’s employment contract stated that:

• it constitutes the entire agreement between the parties;
• the Applicant ‘may’ (without being required to) participate in an incentive program; and
• any incentive program (such as the VP Commission Plan) does not form part of the Applicant’s remuneration under the employment contract.

The VP Commission Plan expressly stated that it was not a contract.

Accordingly, the FWC found that from both a contractual and employment relationship perspective, there was no basis upon which the employer had the right to hold Ms Favaloro to the KPIs in the VP Commission Plan. This meant there was no valid reason for termination of employment.

As such, the FWC found that Ms Favaloro was unfairly dismissed. While reinstatement is the preferred remedy in cases of unfair dismissal, Ms Favaloro did not seek reinstatement. Instead, Ms Favaloro was awarded the gross sum of $10,445.82, plus superannuation.

Take home messages

It is critical that employers ensure that employee KPIs and performance expectations are set out in the employment contract. Generally this will be done by ensuring that the contract stipulates that performance will be reviewed against KPIs (which may change over time) and by attaching the position description and KPIs as schedules to the contract.

Not only does this mean that employees will be clear on what is expected of them before they commence their role, but it will also make it easier for employers to rely on a failure to meet KPIs to commence performance management and, if necessary, take disciplinary action for underperformance.

Employers will need to be careful to ensure that KPIs are regularly reviewed and updated as appropriate.

Should you have any questions in relation to this article, please contact Sathish Dasan on +61 8 8210 1253 or sdasan@normans.com.au or Annabelle Narayan on +61 8 8210 1292 or anarayan@normans.com.au.