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The current media frenzy surrounding Kirsty Fraser-Kirk’s $37 million claim against David Jones and others (David Jones Case) highlights the potential reputational and financial risks for employers and the public interest in sexual harassment in the workplace generally.

What is Fraser-Kirk claiming?

Fraser-Kirk’s claims arise out of a series of alleged unwelcome sexual advances and interactions with the former David Jones' Chief Executive Officer (CEO) and Director, Mark McInnes, in May and June 2010. They also relate to allegations that David Jones senior management and members of its Board were aware of previous incidents in which McInnes is alleged to have engaged in unwelcome sexual advances and did nothing about that conduct.  Finally, the claims relate to public statements made on behalf of David Jones about the reasons for McInnes’ resignation.

Fraser-Kirk has complained of unlawful sexual harassment and sex-based discrimination under the Sex Discrimination Act 1984 (Cth) (SD Act).  These claims are not yet part of the Federal Court proceeding because the complaint is before the Australian Human Rights Commission.  If the complaint is not resolved by the Commission, we expect that Fraser-Kirk will join these claims to the other Federal Court claims.

Who is Fraser-Kirk suing?

Fraser-Kirk is suing her employer, David Jones Limited.  She is also suing McInnes, David Jones’ Chief Financial Officer, Stephen Goddard, its Group General Manager - Stores and Operations, Paul Zahra, who replaced McInnes on 18 June 2010 as Director and CEO, and each and every one of the directors of the David Jones’ board.  The personal liability of Goddard and the directors is alleged to be established by the claims of misleading and deceptive conduct, sexual harassment and sex-based discrimination.

When might an employer be liable for sexual harassment committed by employees?

It is unlawful for an employee to sexually harass another employee in the workplace (SD Act, section 28B(6)).   Workplace is defined as a place at which an employee works or otherwise carries out functions in connection with being an employee.

In order to establish that a person has engaged in unlawful sexual harassment a complainant must prove that the alleged perpetrator engaged in:

• conduct of a sexual nature;
• that was unwelcome; and
• occurred in circumstances in which a reasonable person, having regard to all the circumstances, would have anticipated that the person harassed would be offended, humiliated or intimidated.

The employer will be vicariously liable for sexual harassment committed by an employee perpetrator, if those acts are done ‘in connection with’ the employment of the employee. This connection may be established even if the if harassment occurs away from the workplace.

The employer will defend a claim of vicarious liability if it can prove that it took all reasonable steps to prevent the employee from engaging in sexual harassment.  What will constitute reasonable steps will vary with the size of the employer.  However, the case law suggests that in order to access this defence an employer must generally be in a position to establish the following:

• adoption of a clearly written policy that describes unlawful sexual harassment, specifies the sanctions for breaching the policy and details the procedure for making complaints and reports about policy breaches;
• promulgation of that policy to new employees during induction, and to all employees by way of general and refresher training for staff, and ensuring all employees can access the policy at any time; and
• operation of the policy as an effective system administered by qualified and trained people to resolve complaints and reports promptly, fairly and effectively.

The last point is the area at the centre of Fraser-Kirk’s allegations in the David Jones Case.  It highlights the potential legal risk for an organisation that has been alerted to allegations of an employee’s propensity to engage in inappropriate sexual conduct, but fails to act to monitor the situation, to ascertain the situation of the people on the receiving end of the alleged conduct and to remind the perpetrator that he or she is breaching the policy and will suffer disciplinary action if the breaches continue.

When might directors and officers be liable for sexual harassment committed by their organisation’s employees?

If a director or manager causes, instructs, induces, aids or permits an employer to commit sex-based discrimination, that director or manager will be personally liable under the SD Act as if they committed the discrimination.  Sexual harassment can constitute discrimination on basis of sex.

There is case law to suggest that a failure of senior managers to recognise the potential unlawfulness of what an employee is doing and to act appropriately means that they permitted or authorised the conduct in the relevant sense.  Therefore, if director or manager knows or has reasonable grounds for believing that there is a real chance that an employee will be at risk of being sexually harassed and does nothing to prevent it from happening:

• the employer will be vicariously liable for any resulting sexual harassment;  and
• the director or manager may be personally liable for permitting an act of sex- based discrimination by an employee.

What does this mean for directors and managers?

Directors should check that their organisation has properly adopted a system to prevent sexual harassment. They should monitor the operation of that system and act on information that it is not working.

Senior managers need to develop and implement a proper system, act on complaints and reports of policy breaches, enforce the policy fairly and consistently and report to the Board on the operation of that system.

Sexual harassment damages in context

Fraser-Kirk claims damages under both compensatory and punitive heads.  In terms of compensatory damages, Fraser-Kirk claims a sum for loss of opportunity for promotion and advancement in her chosen career, and for medical expenses incurred.  However the vast bulk of Fraser-Kirk’s claim for compensatory damages is for general humiliation, distress and anxiety, and other matters.

Fraser-Kirk also claims punitive damages, namely an award that is designed to punish both David Jones and McInnes for their “deliberate and in contumelious disregard of Fraser-Kirk’s rights”.  Against David Jones, Fraser-Kirk claims punitive damages at the level of 5 percent of the profit generated by David Jones during the period from 2003 to 2010 during which McInnes served as CEO.  Fraser-Kirk also claims punitive damages equal to 5 percent of the total remuneration of benefits earned by McInnes, CEO of David Jones.

One week prior to Ms Kirk’s claim being filed, in the decision of Employment Services Australia Pty Ltd v Poniatowska [2010] FCAFC 92 (ESA Decision), the Full Court of the Federal Court rejected an employer’s appeal against a 2009 Federal Court decision that awarded a former employee $466,000 damages for sexual harassment plus legal costs. The ESA Decision is currently the highest payout awarded by the Australian Courts for a sexual harassment claim.

The Facts

Ms Poniatowska (Poniatowska) was employed by Employment Services Australia Pty Ltd (ESA) as a building services consultant for approximately 12 months before her employment was terminated. During her employment, she made a number of allegations in relation to sexual harassment, including receipt of sexually explicit emails and text messages from a colleague containing requests for sexual relations and receipt of sexually explicit text messages and phone calls.

When Poniatowska initially reported this conduct to her female manager, her manager responded by stating “What do you expect with a face like yours?”. When Poniatowska made a further complaint to the managing director, the investigation was cursory, not kept confidential and soon became common knowledge in the office. The alleged perpetrator was treated in a disproportionate manner to Poniatowska and received warm and sympathetic treatment. Poniatowska received no support and was not regarded as a victim but as a problem to be dealt with.

Poniatowska subsequently received a number of warning letters and her employment was terminated for purported poor performance. Poniatowska alleged that the termination was a direct result of her complaints of sexual harassment and discrimination.

The First Instance Decision

At first instance, Justice Mansfield in the Federal Court of Australia held that Poniatowska had been the victim of sexual harassment and her employment was terminated as a result of her complaint rather than poor performance. The Court placed emphasis on ESA’s slow response to the complaints, lack of a formal procedure for dealing with such complaints and hostile work environment.

Despite this, the Federal Court stopped short of awarding exemplary damages and instead awarded $466,000, $90,000 of which was general damages. The quantum included pain and suffering; past loss of earning capacity; future loss of earning capacity; and future medical expenses. The amount largely reflected the personal circumstances of her case, including Poniatowska’s anxiety, depression and her inability to work for a number of years, which were significant factors that the Court took into account when determining the appropriate award. ESA appealed on 12 factual grounds which challenged the primary judge’s factual legal findings.

The Full Court decision

The Full Court of the Federal Court (Justices Stone and Bennett in the majority judgement) dismissed the appeal and ordered ESA to pay 90% of Poniatowska’s costs. The majority agreed with the primary judge’s decision that Poniatowska was treated less favourably than ESA would have treated a male employee in similar circumstances. This was based on evidence from, among other things, the sympathetic treatment afforded to the two male perpetrators as opposed to the victim. Justice Dowsett dissented on one point, namely that it was not possible to infer that a male making a sexual harassment complaint would have been treated differently based on how the alleged perpetrators were treated by ESA.

Poniatowska appealed on the question of exemplary damages and / or aggravated damages. The Court refused to award exemplary damages, despite ESA not having appropriate mechanisms in place to deal with sexual harassment complaints.

In September 2010, ESA won a partial stay on the payout, subject to conditions, pending an application for leave to appeal to the High Court.

Damages for sexual harassment

To date, the ESA Decision has been the highest compensation awarded for a sexual harassment claim in Australia, which is in stark contrast to the high figures awarded in the US, UK and Canada. Prior to this time, the damages awarded have been fairly minimal, even for more overt or physical sexual harassment. For example, in the case of Lee v Smith & Ors [2007] FMCA 59 a naval officer was raped and was awarded over $400,000 in damages. Until now, the highest quantum claimed was $11 million by a former partner of PriceWaterhouseCoopers, which was settled for an undisclosed figure.

These amounts are insignificant when compared to the $37 million claimed in the David Jones Case, However, it is important to note that in this case, the claim has not been brought under the usual Human Rights and Equal Opportunity Commission Act 1984 (Cth) or SD Act.  Instead, the causes of action relate to misleading and deceptive conduct under the Trade Practices Act 1974 (Cth) and Fair Trading Act 1987 (NSW), breach of contract, breach of tortuous duties of care and trespass and other equitable claims. Further, damages have been calculated on a percentage of the defendant’s earnings rather than the plaintiff’s losses.

Interestingly, exemplary damages are being sought in the David Jones Case, however that aspect of the damages claim was rejected in the ESA Decision.

 Implications for employers 

The ESA Decision and David Jones Case amplifies the need to:

• have adequate policies and procedures in place to deal with complaints of harassment and other forms of inappropriate workplace behaviour and ensure they are complied with;
• ensure employees and manager receive training on appropriate workplace behaviour;
• to treat complaints seriously and address them in a timely and consistent matter;
• ensure management minimises the risk of claims by taking steps to address complaints rather than ignoring such issues;
• keep the matter confidential and only inform relevant parties;
• foster a working environment that is free from harassment
• ensure complainants are not victimised or treated differently for making the complaint; and
• exercise caution when managing or terminating employees for poor performance, particularly when a complaint has been made so as to avoid potential victimisation or adverse action claims.

Contact details

Melbourne

Charles Power, Partner
T: +61 (0)3 9321 9824
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Sydney

Stephen Trew, Partner
T: +61 (0)2 8083 0439
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Brisbane

Paul Hardman, Partner
T: +61 (0)7 3135 0675
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Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this publication is accurate at the date it is received or that it will continue to be accurate in the future. We are not responsible for the information of any source to which a link is provided or reference is made and exclude all liability in connection with use of these sources.