CEO found personally liable for settlement payments made due to his serious misconduct
A recent Federal Court of Australia (FCA) decision has revealed the pitfalls of a CEO commencing proceedings for wrongful termination. The CEO’s serious misconduct resulted in the employer being entitled to recover from him the settlement monies paid in relation to claims arising from his serious misconduct.
In late 2017, two decisions were made by Parnell Corporate Services Pty Ltd (Parnell) to terminate CEO, Mr Robert Joseph’s employment.
Relevantly, on 18 December 2017, the second decision by Parnell to terminate his employment (and forming the crux of the FCA judgment) were influenced by Mr Joseph:
- being involved in an incident in about December 2015 when he inserted a needle attached to a syringe into the leg of another employee, Ms Jennifer Lindsey (The Needle Incident)
- making an offensive remark at a Gala Dinner in January 2016, resulting in the subsequent termination of employment of Ms Jennifer Tymeson who had (among other things) complained about Mr Joseph’s remark (Gala Dinner Incident)
- grossly misleading conduct in relation to US Litigation and his Notice to Shareholders which disclosed confidential information of Parnell (Other Conduct)
In April 2018, Parnell paid Ms Lindsey US$295,00.00 in settlement of The Needle Incident. Similarly, in November 2018, Parnell paid Ms Tymeson US$180,000 in settlement of the Gala Dinner Incident.
In the FCA case Parnell, other corporate entities of Parnell and the Executive Chairman of one Parnell’s entities, filed a cross-claim against the CEO Mr Joseph seeking declaratory relief in addition to a claim for damages for the settlement of The Needle Incident and Gala Dinner Incident.
The FCA was required to resolve a range of issues including whether:
- the termination of Mr Joseph’s employment was lawful (Termination Issue)
- Mr Joseph’s conduct amounted to a breach of his employment contract (Breach Issue)
- monies paid in settlement of the Needle Incident and Gala Dinner Incident arising from Mr Joseph’s conduct were recoverable as damages in the present proceedings (Settlement Issue)
The decision at trial
In relation to the Termination Issue, Justice Flick rejected Mr Joseph’s claims of unlawful termination and concluded that the grounds for summary termination of his employment on 18 December 2017 had been made out. At the same time, it was observed by the Court that if any one or other of the three bases upon which Mr Joseph’s employment could be summarily terminated would have been sufficient to reject the claims made by him as taken together the decision becomes “unassailable”.
In relation to the Breach Issue, it was concluded that the conduct of Mr Joseph caused the proceedings in the US brought by Ms Lindsey and Ms Tymeson and that his conduct had constituted a breach of his contract of employment.
In relation to the Settlement Issue, Mr Joseph sought to rely on an indemnity clause in Parnell’s Constitution regarding indemnities in favour of directors, secretaries and executive officers. Justice Flick rejected this claim noting that on proper construction of the clause, it provided a right to be indemnified with respect to liabilities as against third parties, not a right to be indemnified in respect of monies that Mr Joseph may be obliged to pay Parnell.
Further, Mr Joseph sought to rely on section 3 of Employees Liability Act 1991 (NSW) (ELA) which provides that an employee is not liable where an employer is also liable. However, given that Mr Joseph’s conduct fell within the serious misconduct qualification in section 5 of the ELA, this claim was also rejected by the Court.
Thus, Mr Joseph was held liable to pay at least some of those settlement monies recoverable as damages in relation to the Settlement Issue.
This decision highlights that an employer may succeed in defending and subsequently recouping some of the losses it has sustained from a previous employee’s serious misconduct.
As such, employees wishing to entertain a wrongful termination claim in circumstances where serious misconduct is involved must be aware of the cross-claims that an employer may make against them.
Joseph v Parnell Corporate Services Pty Ltd  FCA 426
This article was authored by Simon Black, Laura Sowden and Lucinda Touma.