August 2006

Employment contracts & entitlements on termination

In our February 2006 bulletin, 'The resurrection of the contract of employment', we warned that post Work Choices the precise terms of the contract of employment would become crucial in determining the rights and obligations in the employment relationship, and so it is proving to be.

Two recent decisions of the Federal Court of Australia illustrate the importance of the contract of employment to assessing entitlements on termination. Poorly drafted contracts (and promises of pleasurable employment) can now expose employers to damages claims well in excess of the stipulated notice period.

Two million dollars plus for no work

In Walker v Citigroup Global Markets Australia Pty Limited [2006] FCAFC 101 (23 June 2006), Mr Walker alleged breach of his contract and also misleading and deceptive conduct contrary to the Trade Practices Act.

The offer of employment made to Mr Walker contained terms about remuneration for his first year, guaranteed bonuses and arrangements for reviews and possible advancement beyond the first year. Termination was allowed for any reason on one month's notice. Mr Walker accepted the offer and then resigned from his existing job, only to find out his new employer did not then wish to proceed.

On an appeal the Full Federal Court had to determine whether the initial decision to award the one month's salary for notice was correct; the trial judge had applied the established rule that damages were limited to the notice period even though Mr Walker had given up his previous employment.

The Full Court construed Mr Walker's contract as a whole so that all of its clauses were given meaning. That approach led to the conclusion that notice was to be given before the end of the first year only "for cause"; in effect, the contract contemplated employment beyond a year. Given this interpretation, the Court was not bound to limit damages to the notice period.

Instead, Mr Walker obtained damages for the first year of employment and damages for the "loss of chance" that he would have remained employed for the next five years, discounted by 25% for the possibility of early termination, amounting to $2,346,553 - about four years salary!

Policies that bite

In Nikolich v Goldman Sachs J B Were Services Pty Ltd [2006] FCA 784 (23 June 2006), the Federal Court found that policies were incorporated into an employment contract with significant consequences for the employer.

Upon commencing employment Mr Nikolich signed a contract which required him to comply with all of the company's policies. The policies dealt with 'Harassment', 'Health and Safety', Integrity', 'Termination of Employment' and 'Support for Personal Issues'.

Later, Mr Nikolich lodged a bullying and harassment grievance which was handled ineptly and in breach of policy. The harassment and incompetent handling of his grievance resulted in Mr Nikolich suffering from depression and being off work for long periods.

Soon after, Mr Nikolich was dismissed. He commenced proceedings alleging, amongst other things, breach of his employment contract.

Justice Wilcox was of the view that by saying Mr Nikolich had to comply with the policies the contract incorporated the company policies as express terms. It followed that the obligations were mutual and the company was required to comply with its own policies.

The company had breached the terms of Mr Nikolich's employment contract by not properly handling Mr Nikolich's grievance and in not providing a workplace free from harassment.

And, perhaps for the first time in Australia in the employment context, the Court awarded general damages for "pain and suffering". Since 1909 the House of Lords decision in Addis v Gramophone Co Ltd had been applied to prevent general damages for breach of contract. The only exception was if the contract was one for "pleasure".

Justice Wilcox held that Mr Nikolich's contract came within the exception as one of the contract's objects was to provide comfort to Mr Nikolich about how he would be treated and to give him "peace of mind". As a consequence of the breach, Mr Nikolich was awarded $80,000 in general damages plus an award for loss of income. An appeal has been lodged.

Lessons

The lessons for employers are:

  • review your contracts;

  • keep the employment contract as brief as possible;

  • deal only with the legal terms;

  • avoid terms that send mixed messages - short notice periods do not sit well with annual reviews;

  • avoid referring to policies unless the reference is to specific policies which create obligations only for the employee; and

  • avoid promises and statements that suggest ongoing employment, "fair" treatment or that work will be enjoyable.

Overall, treat the contract as a purely legal document.

Work Choices encourages employees and their lawyers to look for new ways to sue. Nikolich and Walker give lots of scope to disgruntled employees to make a claim and ask the employer for a few more dollars.

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