In our November 2006 Newsletter, we covered the case of Nikolich v Goldman Sachs J B Were Services Pty Ltd [2006] FCA 784 in which Wilcox J found that Goldman Sachs’ HR Policy formed part of the employee’s contract of employment, and the employer’s breach of its own HR Policy entitled the employee to damages for psychiatric injury.

Goldman Sachs appealed this decision, and many employers have watched these proceedings closely, as Wilcox J’s judgment had significant implications, particularly for employers with detailed HR policies.

In early August 2007, the Full Federal Court handed down a judgment dismissing Goldman Sachs’ appeal. The decision has been heralded by some as a great victory for employees, because it may offer alternative remedies for employees shut out of the Federal unfair dismissal system. However, a closer analysis of the Full Federal Court’s judgment reveals that the appeal could have gone either way, as the Full Federal Court took a much more restricted view of whether terms in an HR policy form part of an employee’s contract of employment.

Background to the case

For the full facts of the case, please see our November 2006 article HR Policies – Biting the hand that creates them?

Essentially, at first instance, Wilcox J found that Goldman Sachs had breached Mr Nikolich’s contract of employment by failing to follow obligations it had under its own HR Policy Manual, known as the Working With Us (WWU) document. Prior to the commencement of his employment with Goldman Sachs, Mr Nikolich was sent a letter of offer of employment, and a copy of WWU document. Wilcox J found that Goldman Sachs had breached the WWU document in its treatment of Mr Nikolich following his complaints about how his Manager, Mr Sutherland, had allocated certain client accounts.

Goldman Sachs argued that the WWU document was not contractually binding. It was “simply a manifestation of (the employer’s) right to issue lawful and reasonable directions to its employees, and the corresponding obligation of employees to comply with such directions”. However, Wilcox J found that the WWU document did more than set out directions to employees. He concluded that the WWU document not only bound the employees of Goldman Sachs, it was also binding on the company. In doing so, he relied on the earlier Full Federal Court decision in Riverwood International Australia Pty Ltd v McCormick [2000] FCA 889. In that case, a Full Court by majority found that a document called ‘Human Resources Policies and Procedures Manual’ bound the employer so as to entitle an ex-employee to redundancy benefits set out in the Manual. Justice Wilcox also noted that many of the employees of Goldman Sachs who were called to give evidence for Goldman Sachs in the case said they considered themselves to be bound by the WWU document.

Justice Wilcox found that Goldman Sachs had breached the following provisions of the WWU document in its treatment of Mr Nikolich:

  • those relating to health and safety of its employees
  • those relating to harassment
  • those relating to the resolution of grievances.

He found that these breaches caused Mr Nikolich to suffer a psychiatric injury, and awarded Mr Nikolich total damages of $515,869 being $305,869 which was his past lost income as a result of the breach, $130,000 for loss of future income, and $80,000 in general damages.

Goldman Sachs appealed against the decision.

The Appeal

Goldman Sachs’ appeal was dismissed by a majority of the Full Federal Court (Black CJ and Marshall J), with Jessup J in dissent. However, what at first appears to be a resounding defeat for Goldman Sachs, and a message to all employers to “get their house in order” in terms of their HR policies, turns out on closer inspection to have been a close call for Mr Nikolich.

Were the terms of the WWU document contractually binding?

At first instance, Wilcox J found that the provisions in the WWU document concerning grievance procedures, harassment, and health and safety were contractually binding.

On appeal, Black CJ and Marshall J found that only the provisions relating to health and safety were binding. They upheld Goldman Sachs’ argument that the provisions in the WWU document concerning grievance procedures were “descriptive’ and “aspirational”, that is, they described what the employer hoped to achieve. They were not “promissory in nature.”

However, the provision which stated that Goldman Sachs would “take every practicable step to provide and maintain a safe and healthy work environment for all people” was binding. Black CJ and Marshall observed that if this term was no more than an “aspirational representation”, imposing no obligation on Goldman Sachs, then:

“it would be seen as an exercise in hypocrisy. The statement is a reflection of, and is central to, WWU’s expression of the “culture” of the firm and its approach to its staff, and its aspirations about the approach its employees will take to each other. The language used, taken in the context as a whole, points to the statement embodying a contractual obligation and the trial judge was correct in holding that it was a term of the contract.”

Jessup J, although in dissent, agreed with the majority on this point – that the term concerning health and safety was contractually binding.

Was there a breach of this contractual obligation?

It is at this point in the judgments of the majority that there seems to be some division, which arguably could have led to a judgment in favour of Goldman Sachs.

At trial, Wilcox J held that Goldman Sachs’ handling of the Mr Nikolich’s complaint was “extremely inept”. He said that that conclusion arose “irresistibly” from the evidence of Goldman Sachs’ own witnesses, and contemporaneous letters and file notes. His Honour said that there was “an inherent conflict of interest” in a system under which an office manager had the task of allocating clients amongst financial advisers, of whom he himself was one. He held that it should have been obvious to Goldman Sachs’ senior officers “that it was essential to develop and enforce a client-allocation protocol which left no room for the office manager to favour himself or his own team, or be perceived to be doing so”. Knowing that there was no such protocol in place, the senior officers should have been particularly sensitive to any complaint “whether justified or not” that Mr Sutherland had abused his power of allocation. His Honour noted that Goldman Sachs failed to act upon Mr Nikolich’s complaint that this was what had happened in relation to the reallocation the client accounts. Indeed,
Wilcox J found that Goldman Sachs’ senior officers “seemingly failed to comprehend” that complaint.

On appeal, Black CJ found that Wilcox J was “plainly correct” in concluding that delay in attending to Mr Nikolich’s complaint was unacceptable and in breach of the obligation to “take every practicable step to provide and maintain a safe and healthy work environment.” He cited in particular Wilcox J’s observations about Goldman Sachs’ “inept” handling of the complaint, the delay in dealing with the complaint, and the fact that Mr Nikolich continued to work in a hostile environment while the complaint was on foot.

However, Marshall J expresses some doubt about this finding. He observes:

“I was not initially persuaded that the history of Mr Nikolich’s dealings with [Goldman Sachs] management about his concerns regarding his treatment by Mr Sutherland shows that Goldman breached its contractual obligation to take every practicable step to provide a safe and healthy work environment.”

He goes on to note that the complaint was “investigated and resolved, albeit adversely to Mr Nikolich.” Marshall J observes that, Goldman Sachs attempted to balance Mr Nikolich’s interests with the overall interests of Goldman Sachs’ Canberra office:

“All of this tends to suggest that Goldman did take its obligation to provide and maintain a safe and healthy work environment seriously and applied it in Mr Nikolich’s case in the context of his complaints.”

This is significant, because had His Honour found in favour of Goldman Sachs on this issue, then Goldman Sachs’ appeal would have been allowed. Why? Because, like Black CJ, Marshall J finds that only the term concerning health and safety was contractually binding. Had he concluded that this term had not been breached, then Mr Nikolich would not have been entitled to damages. As discussed, Jessup J (in dissent) also found that the health and safety provisions of the WWU document were contractually binding. However, he strongly dissented on the issue of whether the health and safety provisions had been breached by Goldman Sachs. He concluded that Mr Nikolich had not established Goldman Sachs failed to take “every practicable step to provide and maintain a safe and healthy environment” for him, and therefore Wilcox J should not have found that Goldman Sachs had breached Mr Nikolich’s contract of employment in this respect. Had Marshall J agreed with Jessup J on the issue of whether there was a breach of the health and safety provisions, the appeal
would have been allowed.

However, despite Marshall J’s initial reservations, he is ultimately persuaded by Black CJ’s finding that Goldman Sachs breached the health and safety term of the WWU document, and therefore agrees that it was open to Wilcox J to find that Goldman Sachs had breached Mr Nikolich’s contract of employment.

Did the breach cause the damage?

On appeal, Goldman Sachs argued that it was not the delay in investigating the complaint which had caused Mr Nikolich’s psychological injury, but Mr Sutherland’s original decision to reallocate the clients. Black CJ and Marshall J found that it was open to Wilcox J to reject that the reallocation decision was “the cause” of Mr Nikolich’s injuries, and to apply a “common sense” approach to causation, finding that the way in which the complaint was handled caused the damage.

Remoteness

Much of what was said by Wilcox J at first instance concerning remoteness was left undisturbed by the majority. This is significant, because it is this part of the judgment which may have implications in the future. In particular, the appeal judges did not reject out of hand Wilcox J’s observations that, even if Mr Nikolich had not suffered a psychiatric illness, but had simply been distressed and humiliated by his experience, he may well have been able to claim general (non economic) damages for distress and humiliation, because the purpose of the promises in the WWU document was to prevent employees experiencing distress and humiliation.

In Australia, Courts have been reluctant to imply into contracts of employment a duty on employers to maintain trust and confidence. As noted in our November 2006 article HR Policies – Biting the hand that creates them?, the significance of Wilcox J’s statements is that now Australian employees may not have to go through the difficult and circuitous process of implying a term of trust and confidence in their contracts, and then proving a breach of that term. Instead, they may be able to point to express terms in HR policy manuals which promise reasonable treatment and claim general damages for breach of those terms. However, this now must be considered in light of Black CJ and Marshall J’s more circumspect approach to whether such terms are contractually binding in the first place. If they are found to be binding, then a breach of such a term may still result in the awarding of damages for non-economic loss.

What can we take away from this case?

Mr Nikolich’s apparent victory in this appeal should not be viewed as some major watershed for employment law. The Full Federal Court has made it clear that not all terms of HR policies automatically form part of an employee’s contract of employment. Indeed, it appears the Courts will closely scrutinize each term of an HR policy to determine whether it is contractually binding. However, it is clear that, where the Court finds that such a term is contractually binding, breach of such a term may well result in the award of damages beyond economic loss, and this may be significant in future cases.

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