Enterprise Investment and Trade department secretary Amy Brown oversaw the recruitment process for the trade commissioner job, an office created while Mr Barilaro was trade minister.
Michael Coutts-Trotter, who heads the premier's department, said he had formed a preliminary view Ms Brown had not performed her role properly and should face disciplinary action.
The issue wasn't misconduct, but her performance, he told a budget estimates hearing under privilege on Wednesday.
Termination could be a possibility as Mr Coutts-Trotter said the other actions available under the relevant law appear to be inappropriate for someone at the head of a department.
Ms Brown, who went on leave on August 12, has an opportunity to formally argue to keep her position.
"I must keep an open mind and be seen to keep an open mind," the Department of Premier and Cabinet secretary told the committee hearing.
Under the provisions, Ms Brown would leave with 13 weeks' pay if terminated.
The controversy over Mr Barilaro's appointment to the coveted job has engulfed the Perrottet government since it was announced in June, claiming the scalp of then- trade minister Stuart Ayres after a draft review suggested he might have intervened in the hiring process. Mr Barilaro has since withdrawn from the position.
The final version of former NDIS commissioner Graeme Head's review was delivered to Mr Coutts-Trotter on August 12, informing his view on Ms Brown's performance.
Amongst six grounds for disciplinary action, Mr Coutts-Trotter said the Head report found Ms Brown had failed to consider relevant factors in accepting Mr Barilaro's late application during the first recruitment process, when the former trade minister had access to information about other candidates in the process through his job.
Without an intention to mislead, she gave ministers an "incomplete and hence misleading picture" as to whether suitable candidates had been identified.
Ms Brown had formed the view the first preferred candidate - senior Investment NSW official Jenny West - was no longer suitable but she declined to mention the selection panel had found a second suitable candidate.
"Mr Head's report finds Ms Brown genuinely believed the advice she provided there were no suitable candidates - but there were," Mr Coutts-Trotter said.
When the recruitment process was restarted, Ms Brown didn't disclose her conversations with Mr Ayres during the selection panel's discussions.
She then completed contract negotiations with Mr Barilaro before the panel made a final assessment of candidates, the Head review found.
The review also recommends changes be made to public sector recruitment processes.
Questions have also been asked of the process to fill the state's UK Agent-General trade position after it emerged appointee Stephen Cartwright was ranked lower than other candidates, sought an $800,000 salary and eventually negotiated a package higher than other NSW trade commissioners receive.
As a result of NSW picking up Mr Cartwright's rent in London, the state anticipates it will pay a $105,000 fringe benefits tax bill.
Premier Dominic Perrottet on Wednesday denied he was aware Mr Cartwright had invoked his name during negotiations with the public service.
"It's absurd," he told a budget estimates hearing.
He also defended his chief of staff Bran Black, saying his understanding didn't accord with the suggestion that Mr Black told Ms Brown to give Mr Cartwright what he wanted.
"It wasn't really a matter for him or a matter for me. It was a matter for the public service," Mr Perrottet said.
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