It is a trite proposition that employment contracts are important. One key benefit of having an applicable employment contract in place governing an employment relationship is that the notice an employer is required to give to the employee to terminate employment is, subject to the minimum legislative requirements in the Fair Work Act 2009 (Cth), the period specified in that contract. As a general proposition, the specified periods of notice in employment contracts are rarely more than 6 months (usually for senior executives) and more commonly between 1 and 3 months.

If a court finds that there is no applicable employment contract in place then the employer needs to give "reasonable notice" to terminate the employment relationship - while this might sound benign, reasonable notice will often far exceed the period that would likely have been specified in an employment contract for the same employee.

This was illustrated in the recent NSW Supreme Court decision of Roderick v Washington H Soul Pattinson & Company Limited (No 2) [2020] NSWSC 1224 (Roderick).

One key issue to be determined in Roderick was whether there was an applicable contract governing the employment in place. The employer contended there was (described in the decision as the "original contract"); the employee asserted there wasn't.

At paragraph 117 of Roderick, the presiding judge, Justice Cavanagh stated:

"If the parties remained bound by the original contract then there could be no scope for the implication of a term as to reasonable notice. The original contract contained an express term as to notice and there is no scope for implying a term inconsistent with the express term of the contract."

His Honour continued at paragraph 123:

"There is no dispute that, if the original contract was discharged or replaced, then it would be necessary to imply a term into the new contract to the effect that the contract is terminable upon reasonable notice."

After considering the evidence and applicable law, Justice Cavanagh concluded (at paragraph 194):

"In the circumstances, at the time of her purported termination, the original contract no longer governed the employment relationship. As accepted by the parties, it would thus be necessary to imply a term as to reasonable notice into the employment contract."

His Honour then considered what constituted "reasonable notice" in the circumstances. If the submissions of the employer had been accepted, and the "original contract" governed the employment relationship, the notice period stipulated in that contract (three months) would apply.

At paragraph 195, Justice Cavanaugh stated:

"It is accepted that determination of a reasonable period of notice is a question of fact. The period of reasonable notice must be determined as at the date notice should have been given. As observed by Gillard J in Rankin v Marine Power International Pty Ltd, it must be borne in mind that the primary purpose of giving a period of notice is to enable the employee to obtain new employment of a similar nature. Those at the top of their chosen fields have fewer opportunities to obtain similar employment. In Rankin, it was suggested that the period of notice in those circumstances is usually many months to in excess of a year."

His Honour continued at paragraph 196:

"There is no restriction or limitation on the circumstances to be taken account of in determining the period of reasonable notice. Again, in Rankin at [223], Gillard J said:
'[223] The factors include the high grade of the appointment, the importance of the position and the size of the salary. Further, it is clear that the nature of the employment is a relevant factor. In addition, factors which pertain to the particular employee which are relevant are the length of service, his professional standing and his age, his qualifications and experience, and the expected period of time it would take for him to find alternative employment.' "

The Plaintiff, who was the Finance Director of the Defendant (a large company that is currently in the ASX 100), and had been employed from June 2006 until April 2018, contended that reasonable notice was a period of 24 months. The defendant submitted that reasonable notice should be determined to be in the range of 3 to 6 months.

Justice Cavanagh considered the factors relevant to determining reasonable notice in this case. At paragraph 200 his Honour stated:

"I regard the following matters as relevant to the consideration of the period of reasonable notice:

(1) The plaintiff was 49 years old at the time of termination.

(2) She had worked for the defendant since 2006.

(3) She had been appointed Finance Director in 2014.

(4) She was an executive director of a very large public company.

(5) On the basis that the only other executive director was the CEO, she was the second most senior employee in that very large company.

(6) She was a Board member.

(7) Her position was so senior that she reported directly to the Board rather than the CEO.

(8) She was the only woman on the Board at the time of her termination.

(9) Despite being terminated without notice or warning, there is no evidence of any misconduct or improper behaviour on her part which might have justified the manner of termination.

(10) Indeed, in circumstances in which I have preferred the plaintiff's evidence as to what she was told at the time of termination, she was left very much in the position of being unable to explain her abrupt termination to any future employers.

(11) The comparable position is thus the position of being a finance director and executive director of a large public company.

(12) In my view, it is a matter of common knowledge that there are considerably fewer women in such positions than men. It is only necessary to look at the composition of the Board of the defendant to receive confirmation of such ongoing imbalance. Statistical evidence relied on tends to suggest numbers increasing up to 30%.

(13) She would be unlikely to receive a reference from the defendant.

(14) Her fixed salary was high and taking account of entitlements under the Incentive Schemes, her remuneration was very high.

(15) On the defendant's own evidence (comparisons of her remuneration package with the medium package) her package was well above average."

While each case ultimately turns on its own facts, these reflect the types of matters a court would generally consider in determining reasonable notice.

The defendant submitted that in determining reasonable notice for the plaintiff, the court should have regard to the agreed notice period in the contracts of other senior employees, including the CEO. Justice Cavanagh gave this approach short shrift, stating (at paragraph 202):

"I reject the submission of the defendant that reference should be made to the agreed period of notice for the CEO or any other employee. I do not consider that the period the CEO agreed to, presumably having regard to all the other conditions of his employment, is a factor to be considered when assessing what reasonable notice would be. The subjective views of the defendant or the CEO as to what an appropriate period of notice might be for the CEO do not bear on what a reasonable period of notice might be for the plaintiff."

One factor given close attention by the judge was the difficulty the plaintiff had in securing alternative employment. This is consistent with the primary purpose of notice being a period to enable the employee to obtain such employment. In this regard, his Honour stated (at paragraph 208):

"There is evidence from the plaintiff about her difficulties obtaining alternative employment. Although the period of notice is to be assessed as at the date on which notice should have been given, evidence as to the difficulties in obtaining employment may be taken account of as evidence of just that i.e. the difficulties that a person in the position of the plaintiff might have in obtaining alternative employment."

After considering the relevant factors and various authorities on reasonable notice (including one case which was considered to be most comparable, where reasonable notice was held to be 10 months), the court determined reasonable notice in this case to be a period of 12 months.

Lessons for Employers

The case illustrates why it is important for employers to have current, applicable employment contracts in effect. To do this, employers should ensure there is an employment contract in place at the start of employment and that the contractual terms are revisited (either by way of a new contract or express continuation of existing contractual terms) when the position of the employee changes, particularly when there is a promotion.

A failure to do so will mean that an employer can only terminate on reasonable notice, which will, in almost all cases, be a period that far exceeds the period of notice that would likely have been agreed in the employment contract. In some cases, it has extended well beyond the 12 months determined in Roderick.

One of the first questions an employment lawyer will ask an employee client is whether they have a current employment contract, often in the hope they don't. For employers, the lack of an applicable employment contract can end up, due to the harmless sounding concept of reasonable notice, being a very expensive omission.

For further information please contact:

Michale Byrnes, Partner
Phone: +61 2 9233 5544

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.