September 2009

Change in the nature of employment should lead to a change in your contract

Too often when employment ends bitterly, there is a scrap for every last dollar owed and then some more.  Employers who do not carefully manage their employment contracts are often left exposed to unexpected claims by ex-employees.

A disgruntled employee and their lawyers will review every offer of employment, contract of employment and change in duties in order to construct an argument for more compensation on termination.  The only certainty for employers is to ensure that the employee's employment contract is updated regularly and routinely and is the sole source of all relevant terms and conditions.

The recent Court of Appeal case of Encyclopaedia Britannica Australia Ltd v David Campbell [2009] NSWCA 286 (10 September 2009) provides a valuable lesson.

The modern day encyclopaedia salesman

In 1999 Mr Campbell commenced employment as a sales consultant.  His letter of offer of employment allowed termination of employment on the company\'s standard one months notice.

Then in March 2000, Mr Campbell was promoted to Director of Sales.  The employer varied his 1999 contract by way of a memorandum to change his duties, increase his remuneration and increase notice of termination to three months.   Mr Campbell accepted the memorandum.

In May 2000 there was a restructure and Mr Campbell was promoted to Managing Director.   Mr Campbell was worried about his entitlements in the event of a future restructure.  He received a letter from his employer recording discussions about the new role  and his concerns.  The letter included a promise that "in the event of redundancy" he would receive a nine month package.  Otherwise the letter did not explicitly deal with any other terms relating to the position.

In 2006 Mr Campbell's employment was terminated and he was paid three months notice.  Shortly thereafter the employer rearranged  some of the duties of the Managing Director.   On this later point, the Court of Appeal held that this subsequent rearrangement of duties did not constitute a redundancy of the position.

What was the contractual entitlement to notice on termination?

It has long been accepted that a significant change in job will often give rise to a new employment contract for that position.  Absent the parties explicitly agreeing to the terms and conditions for the new job, the law will imply the terms, such as "reasonable notice" on termination:  Quinn v  Jack Chia (Australia) Ltd [2000] VSCA 75.  In some situations of change of employment the employer may also lose the benefit of restraint provisions in an earlier contract.

Mr Campbell argued that in becoming Managing Director he had a new position and the new contract did not deal with termination of employment other than in the event of redundancy.  Mr Campbel sought "reasonable notice" of much more than the three month period.  The judge at first instance agreed, and awarded Mr Campbell nine months reasonable notice.

The Court of Appeal took a different view which saved the employer from being liable to pay more than the three months notice.  In a twist of good fortune for the employer the May 2000 letter to Mr Campbell provided:

"You have asked me to clarify the terms of your employment, specifically redundancy provisions. I am in a position to confirm that in the event of a redundancy you will be entitled to [nine months payment]".

Those few words "... to clarify the terms of your employment ..." saved the employer from having to pay "reasonable notice".

The Court of Appeal affirmed that whether a change in circumstances results in a variation of an old contract or the creation of a new contract, the critical issue is the intention of the parties.  The Court said:

"It is firmly established by a long line of cases ... that the parties to an agreement may vary some of its terms by a subsequent agreement. They may, of course, rescind the earlier agreement altogether, and this may be done either expressly or by implication, but the determining factor must always be the intention of the parties as disclosed by the later agreement".

The intention of the parties as recorded in the letter was to retain the terms of the old contract and to simply "clarify" a new entitlement in the event of termination of employment by reason of redundancy.  The parties always intended, objectively, that notice of termination other than for redundancy would remain at three months.

Lessons for employers

The following lessons are learnt:

  • employers must ensure that the employee's employment contract is updated regularly and routinely;

  • whenever there is a significant change in employment, such as a promotion or change of position, a new and complete contract ought to be prepared and signed;

  • variations of the contract itself ought only occur by way of memorandum or letter of variation in respect of salary increases or other discrete and limited payments.

With the full operation of the Fair Work Act 2009 to commence on 1 January 2010, employers ought to update their contracts .  The prudent employer will offer employees a complete and comprehensive new contract detailing all their contractual terms and conditions to apply from the next salary review in return for any increase of remuneration.

Author: James Mattson

Our expertise