The FWC recently found an employee’s termination for failure to meet KPIs unfair due to ‘arbitrary’ and ‘unreasonable’ sales targets. What went wrong for the employer in this case, and how can HR avoid similar claims arising?

An employee of a Sydney-based beauty clinic recently filed a successful unfair dismissal claim with the Fair Work Commission (FWC) after she was sacked for failing to meet her key performance indicators (KPIs).

The FWC found that, while the employee had indeed failed to reach her sales targets, the targets set by the employer were arbitrary and unrealistic, and were not adjusted based on how many hours employees worked. 

Moreover, the FWC found fault with the employer’s dismissal process, particularly with regard to the warning letters it sent to the employee prior to her termination.

“[This case] is a lesson for employers to, firstly, ensure that their performance criteria are well-founded and will stand up to scrutiny,” says David Catanese, Partner at Hall & Wilcox.

“Another key lesson for employers is to ensure that when they’re issuing warnings, they have to be meaningful, they have to be understandable and they must give warnings that allow an employee to remedy their underperformance.”

Employee received unclear warning letters

The employee in this case commenced her role as a sales and beauty consultant at the company in January 2022. 

In November 2022, she received a warning letter informing her she had not met her sales target for the previous month. Her sales target was $150,000 per month, a target applied to all employees in the sales team whether they were full-time or part-time.

She sent a response to the warning arguing that it was unfair to impose this target on her, especially since she had taken approved leave in October and had only worked a total of nine days during the month. She requested that the employer revise or retract the warning before she sought assistance from the FWC. The employer did not respond.

A month later, the employee received an almost identical warning letter stating she had failed to meet her sales target in November for a second time. The letter instructed her to take immediate ‘corrective action’. During a phone call to discuss this second warning, her employer said she had not met the target because she had been 15-30 minutes late to work on several occasions and failed to make calls to existing clients. 

In response, the employee contested that her requests for clarification on the original warning letter had not yet been actioned. She rejected the letter as invalid on the grounds that it had been issued ‘arbitrarily’ and contained no details of the corrective actions she should take. She further argued that meeting the sales target and overall profitability was not part of her job as a consultant. 

However, the employer told her that meeting the sales targets was a requirement of her role, and urged her to ‘try [her] best’ to reach them. Six months later, in June of this year, she was sent a termination letter stating that her performance had been unsatisfactory and had not improved after two warnings.

The employee asked for further details on the terms of her termination, why her performance had been deemed unsatisfactory and why her queries about the warning letters had not been answered. When the employer failed to provide this, she filed a claim of unfair dismissal with the FWC.

“Don’t wait until you’re in an unfair dismissal hearing to think about what evidence you need to justify the performance criteria.” – David Catanese, Partner at Hall & Wilcox

To demonstrate that her dismissal was harsh, unjust or unreasonable, the employee argued that both warning letters she had been sent were invalid due to unreasonable demands and typographical errors and inaccuracies.

“For employers to give warnings that they can rely on, and demand compliance with, they need to be reasonable,” says Catanese. “They [also] need to be clear and understandable – otherwise, they’re effectively meaningless.

“In this case, the lack of rigour in the warnings that were issued meant that, from the point at which the first warning was issued, it was a bit of a train wreck waiting to happen. Once the first warning was infected with error, then so was the second one and anything else that relied on that.”

Application of KPIs was “not sound, defensible or well-founded”

As well as pointing out the inadequacy of the warning letters, the employee called into question her employer’s process for setting KPIs. 

She noted that, to her knowledge, no consultant had ever met the sales target of $150,000 per month. Several other consultants had been dismissed in the recent past for failing to hit this target, and she therefore surmised that the target was unrealistic and unachievable. 

She also stressed that she was a part-time employee, but was held to the same targets as her full-time colleagues.

In its ruling, the FWC said that the employer had not provided any evidence about how the sales targets were set, whether they were reasonable and whether other employees ever reached them. 

While it’s an employer’s prerogative to set high performance standards, Catanese advises employers to carefully consider how they might explain their targets in a legal setting like this one.

“Don’t wait until you’re in an unfair dismissal hearing to think about what evidence you need to justify the performance criteria,” he says. “At the point of setting the criteria, consider: is this going to stand up to scrutiny? And if I need to justify this performance criteria, what evidence would I rely on?

“For example, if you’re setting a monthly sales target of $150,000, how have you arrived at that figure? [It might be], for example, ‘Our overheads are $140,000. And we need $150,000 to make a profit.’ You don’t need to gather the evidence at that stage, but knowing how you would answer the question is very important.”

Ultimately, the employer conceded that it was unreasonable to expect the employee to reach the monthly sales target in just nine days, and therefore that the warning letters were unfair.

Calling the targets and their enforcement “not sound, defensible or well-founded”, the FWC found that there had been no valid reason for dismissal. The ruling also said the employer “quite clearly does not care about fairness in employment matters”.

The termination process was also called into question; the employee said she had not been spoken to in-person about her dismissal, nor given the opportunity to respond or have a support person present, and that the experience had caused her severe stress.

“Those types of conversations should, wherever possible, be conducted in-person and confirmed in writing,” says Catanese. “The legislation requires a person to be allowed to have a support person at these types of key meetings if they request one. But we go further and say that employers should invite employees to have a support person.”

Read HRM’s article about managing a support person in an HR meeting.

Satisfied that the dismissal was harsh (due to economic and health consequences), unjust (because she was not guilty of alleged poor performance) and unreasonable (because the employer did not support the conclusion that she was a poor performer), the FWC approved her unfair dismissal claim and ordered the employer to grant her $4,300 in compensation. 

Next week, keep an eye out for HRM’s comprehensive guide on setting and enforcing fair, achievable and legally compliant key performance indicators.

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