Australia: Failure to update employment contracts proves costly

The Supreme Court of NSW (“NSWSC”) has provided organisations with a reminder that failure to update employment contracts can prove costly, ordering a company to pay $1,105,239.50 plus legal costs in a case involving an employee who was promoted but never signed the employment contract for her new senior executive role (the “Plaintiff”). The NSWSC decision provides guidance to employers about mitigating against the risks and costs of claims brought with respect to breaches of an implied contractual term of “reasonable notice” of termination.

1. Facts

To summarise the facts of the matter:

• on 26 June 2006, the Plaintiff commenced employment with the Company in the position of Chief Financial Officer (“CFO”), pursuant to a written offer of employment (the “Original Contract”);
• on or around October 2014, the Plaintiff was appointed as the “Finance Director” of the Company and as Director of 12 related companies;
• in addition to incorporating all of her previous duties as CFO, the Plaintiff was a “decision-maker” in her new role and was required to undertake governance, management, strategic and policy functions across a range of areas;
• in or around January 2015, the Plaintiff was provided with a draft employment agreement for the new role (the “Draft Contract”);
• the Plaintiff made handwritten comments on the Draft Contract, but the contractual negotiations were never finalised, and the Draft Contract was not signed by the Plaintiff; and
• the Plaintiff remained employed by the Company until 12 April 2018, when her employment was terminated without notice (but a payment in lieu of notice of three months' salary was made in July 2018).

2. When a change in duties may lead to a change in contract

As evidenced by the parties' agreement to prepare and review the Draft Contract, the NSWSC found that it was the “mutual intention” of the parties that the Plaintiff's employment would be bound by a new contract instead of the Original Contract. In forming this view, the NSWSC noted that the recitals to the Draft Contract stated that the Company wished to enter a “new arrangement” with the Plaintiff.

The evidence as to the significant changes to the Plaintiff's duties, reporting lines and remuneration also supported the view that the parties were no longer bound by the Original Contract. However, organisations should note that such changes may not necessarily lead to the cessation of an existing contract of employment in circumstances where that original contract contains flexibility terms that expressly provide for such variations and for the continuation of the contract in those circumstances.

As a result of the Original Contract ceasing to apply and the Draft Contract not being finalised, the employment relationship was governed by a new contract, albeit not in writing. As the NSWSC determined that there was no written agreement governing the parties' rights on termination, the parties agreed that there would be an “implied term” that the Company must provide “reasonable notice” of termination.

3. The period of reasonable notice

The period of reasonable notice that will be implied into a contract of employment is a question of fact that is determined as at the date the notice should have been given.

In this matter, the NSWSC considered that the following matters were relevant to the assessment of the period of reasonable notice:

• the Plaintiff was a Board member, executive director and the second-most senior employee of a very large public company;

• the Plaintiff had about 12 years of service with the Company;

• the Plaintiff was 49 years old at the time of dismissal;

• there was no evidence of any misconduct or improper behaviour by the Plaintiff which might have justified the termination of her employment without notice or warning;
• the Plaintiff was the only woman on the Board at the time of her dismissal;
• the Plaintiff would be unlikely to receive a reference from the Company; and
• the Plaintiff's remuneration (particularly with regard to her incentive entitlements) was very high and well above average.

Taking into account that the primary purpose of giving a period of notice of termination is to enable an employee to obtain new employment of a similar nature, the NSWSC found that 12 months was a reasonable period of notice of termination.

4. A costly reminder to update contracts of employment

As the Company had only provided the Plaintiff with payment in lieu of three months' notice, the NSWSC ordered the Company to pay the Plaintiff an amount equivalent to an additional nine months' salary plus interest.

In providing organisations with a costly reminder to review and update contracts of employment regularly, the NSWSC also awarded the Plaintiff additional damages with respect to her lost opportunities to obtain a commercial benefit under the Company's short term incentive (“STI”) scheme and long term incentive (“LTI”) plan.

5. Contractual entitlement to “discretionary” incentive payments

Based on the wording of the STI scheme, the NSWSC found that the STI benefits formed part of the contractual remuneration payable to the Plaintiff and that the amount payable depended on the satisfaction of fixed criteria (that is, the STI payment was not subject to the Company's absolute discretion).

The Court found that the Company's failure to provide the Plaintiff with 12 months' notice of termination deprived the Plaintiff of the opportunity to earn some of the STI and LTI payments that would have been payable during that 12 month notice period.

6. Key take aways

• Always consider updating an employee's employment contract when the employee is given a new position, additional duties or an increased remuneration package.
• A breach of an implied term of reasonable notice can entitle an employee to damages with respect to their salary for their notice period as well as other non-fixed entitlements such as incentive payments.
• An employment agreement should always include provisions that specify that:

o the employment agreement can be terminated on the provision of a specified period of notice or payment in lieu of notice (otherwise the courts will imply a term of “reasonable notice”);

o the employment agreement will continue to apply, notwithstanding variations to the employee's position, duties, responsibilities, reporting lines, or remuneration; and

o the written agreement is the “entire agreement” between the parties (to mitigate against the risks of verbal terms and other representations forming part of the contract).

• Organisations should carefully draft incentive schemes to disentitle employees from receiving payments in appropriate circumstances, such as where the employee is no longer employed (or is serving their notice period) or has engaged in sufficiently serious unsatisfactory performance or misconduct.

See the full decision here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.