When it comes to engaging new employees or promoting existing employees, it is crucial that employers prepare and review contracts of employment to ensure that they accurately reflect the terms which will govern an employee’s employment.
Standard clauses, such as clauses providing notice of termination, can easily be overlooked. This can be a critical error because, in the absence of a contract or certain clauses within a contract, a court will imply those terms. For example, “reasonable notice” may be implied into a contract that does not have a clause that provides for notice of termination – which could be above and beyond the minimum notice periods in the Fair Work Act 2009 (Cth).
This point is highlighted in the recent Supreme Court of New South Wales (the Court) decision in Roderick v Washington H Soul Pattinson & Company Limited (No 2)  NSWSC 1224 in which an employer was ordered to pay over $1.1 million in damages to a former employee.
The employee, a senior executive of Washington H Soul Pattinson & Company Limited, was dismissed from her employment in April 2018. She sought damages from her former employer on the basis that it had breached her contract of employment by failing to provide her with adequate notice and failing to pay her entitlements pursuant to a short-term incentive plan as well as a long-term incentive plan.
The employee had commenced employment in June 2006 as the Chief Financial Officer. That employment was pursuant to a short-form contract which required the employer to provide the employee with three months’ notice of termination. The contract made no provision for payment to be made in lieu of such notice.
In November 2014, the employee was appointed to the employer’s Board as an executive Finance Director, a position which encompassed her previous role as Chief Financial Officer. The employer provided the employee with a new (more complex) contract of employment which had been drafted by its solicitors. Whilst the employee had sought some amendments to the new contract, those discussions never progressed and the contract was ultimately never signed.
In April 2018, the employer terminated the employee’s employment with payment in lieu of three months’ notice. Shortly thereafter, the employer employed a new Chief Financial Officer.
In the proceedings, the employer claimed that the reason for the employee’s dismissal was poor performance, despite there being no direct evidence of any performance issues either prior to or after the employee’s dismissal.
The employee claimed that the change in her role and duties in November 2014 was so significant that the original employment contract was discharged and that her employment was now governed by a new contract. Even though the new contract was not signed, the employer had still shown an intention to be bound by a new contract.
The employer argued that its intention was to continue to be bound by the original contract until they had executed the new contract. As they had not executed the new contract, the original contract still governed the employment relationship.
The Court found in favour of the employee. It considered that the employee’s duties and responsibilities had significantly increased (including that she now reported directly to the Board rather than the Chief Executive Officer), as had her salary, following her appointment as executive Director. Importantly, the Court noted that the original contract did not have any provision which allowed the employer to make such changes to the employee’s duties.
The Court was also not satisfied that the failure to sign the new contract indicated any intention to remain bound by the original contract. Rather, the employer told the employee that there would be a new contract and then sent her a proposed new contract.
As a result, the Court found that the original contract no longer applied to the employment and there was no longer any written contract in place that governed the employment. Given the absence of an agreed written contract, the Court considered it necessary to imply terms including that the employer must give reasonable notice of termination.
The Court considered 12 months to be a reasonable period of notice having regard to a number of factors, including her age, the longevity of her service, the seniority of her position (including that she was a Board member), her level of remuneration, the lack of evidence of an misconduct or inappropriate behaviour that would have justified her dismissal, as well the likelihood of her obtaining alternative employment in the circumstances, particularly when it was unlikely that she would receive a reference. This entitlement to 12 months’ notice equated to a payment of her annual remuneration of $690,000 (less notice already paid).
The Court also found that, as a result of this failure to provide reasonable notice, the employee was deprived of payments pursuant to the employer’s short-term and long-term incentive plans, which she would have received had she still been employed during the notice period. This brought up the total payments owing to the employee to $1,105,329.50.
Lessons for employers
This decision is an example of the potential ramifications of failing to review and update employment contracts throughout the employment, particularly on promotion. The intention of a party that a particular document or terms will apply to the employment relationship is not sufficient – employers must ensure that they (and the employee) commit in writing to the terms of the employment relationship, particularly when it concerns senior employees.
It is also important to note the Court’s comments that, whilst the original contract no longer applied to the employment, the employer would have acted in breach of that contract as well, as the contract did not allow the employer to pay the employee’s notice in lieu.
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