June 2008

New Use For Common Law Contracts Arising From The 2008 Legislation

Chris McArdle, Principal, and Melanie Maskell, Associate, McArdle Legal, May 2008.

"The Government's election commitment is that there will be no place in the new workplace relations system for AWAs or any other form of statutory individual employment agreement."

On 13 February 2008, a bill which became the Rudd Government's new Workplace Relations Amendment (Transition to Forward with Fairness) Act 2008 was introduced in Parliament. It commenced on 27 March 2008, and along with its companions the Workplace Relations Amendment Regulations 2008 (No. 1) and Workplace Relations Amendment Regulations 2008 (No. 2) which together form a suite of transitional legislation, its purpose is to dismantle, at least to some extent, the changes wrought by Howard's Work Choices legislation.

This transitional legislation seeks to make several major alterations to the federal industrial relations landscape:

A modified version of the 'no-disadvantage test' is to be re-introduced, in place of the previous government's 'fairness test' - there is no practical difference between the two, but we must accept that it is necessary for the new to appear different to the old; It will no longer be possible to unilaterally terminate collective agreements after they have run out - the party wishing to terminate the agreement would now need to apply to the Australian Industrial Relations Commission, who would only terminate the collective agreement if the public interest would not be harmed by doing so. Since that test means: "does not affect anyone else", we can assume that termination by the AIRC will be virtually automatic unless it is opposed on "flow on" grounds; A special 'award modernisation process' is to be put in train, to be conducted by the AIRC and to be completed by 1 January 2010. This will have no effect on most people - it will mean that, after much debate things like "gender non-specific terms" will be introduced; All awards are to contain a mandatory 'flexibility clause' to enable employment arrangements to more closely suit the genuine needs of employers and employees; There will be a new statutory 'safety net' to consist of ten National Employment Standards, which have not yet been released; and One of the most high-profile changes is to forcibly retire the Australian Workplace Agreement and replace all AWAs with Interim Transitional Employment Agreements, (ITEAs), during the transitional period.

AWAs and ITEAs

AWAs at their height covered about 5% of the workforce. They have been subject to the "fairness test" since May 2007, which is identical to the "no-disadvantage test" in all discernable respects. They have thus not been the ogre documents of popular fiction that they are still painted since then. It is odd, therefore, for their removal to be held out to be so significant.

That is especially so in the light of the policy of the new government to abolish all but the most minimum safety net for any of those rich people earning more than $100,000 per year. Thus, all the unskilled mine workers in WA who were earning $150,000 on AWAs will now have less protection than they previously did - mainly in the area of wrongful dismissal, in the event of which they can now approach the AIRC being "award covered", but from now on will not be able to, being rich.

ITEAs are re-named AWAs, - so named to appear different. They are "end game" documents, and will all cease to be on the last day of 2009. None could be made after 27 March this year.

During parliamentary debate over the Forward with Fairness Bill, Julia Gillard stated: "From the date of proclamation… the ability of any employer in the country to make an Australian workplace agreement… to rip away an award condition without compensation, will be over - done and dusted." Puzzling rhetoric, in view of the Fairness Test that Howard introduced in his panic in May 2007. The ALP could not acknowledge that, since they could hardly admit that their key criticism was no more, and the Coalition could not point it out, since they could not admit that their policy was anti social before May 2007. The press could not say anything, because there is no story in emptiness. Academics could hardly write papers to the effect that it was all about nothing. So, we had and continue to have the Seinfeld debate about Industrial Relations.

Individual Common Llaw Contracts

The solution to the problems of IR seen by the new Government is to remove great chunks of the community from under the umbrella. The AIRC will be replaced by a public service agency that will take up to a year to do anything, and the functions of which will be discharged by the unmotivated led by the unimaginative. Most of the community will be spared this, as most will be excluded, either because they are rich and earning more than $100,000 a year, or cannot wait for the wheels of bureaucratic justice to grind slowly.

The exception is the public sector, the members of which will not be put off at all by the slowness or the passive aggressive unresponsiveness of the "Fair Work Australia" crack team of operatives. That finalises the process that has been evolving for some time - trade unionism is confined to the public service, and is an institution that serves the lowly paid (and preserves their lowly paid status).

Most people will be on their own. The exception is the '10 National Minimum Standards' (see following article).

The Government has settled on a figure of $100,000 a year as the magic number. The 2008 legislation provides that if an employee, whose 'guaranteed ordinary earnings' are less than $100,000 a year, enters into a common law contract with their employer, then that contract must adhere to the 10 national minimum standards and must also allow for, at a minimum, the standards set out in any applicable award. So far so good, for these are longestablished legal requirements for common law employment contracts; you cannot 'contract out' of any applicable award provisions, and your contract has to meet minimum award standards whether you like it or not.

However, if a common law contract is going to govern the employment of an employee who earns $100,000 or more per annum, then the only compulsory minimum standard which the contract must meet is that which will be set out in the 10 national minimum standards. To put it simply, those earning, or paying, six-figure salaries can contract out of an award - any relevant award is simply considered not to apply to the employment of that employee. So, the whole system is now to be only for the bottom rungs. "Middle Australia" ("working families" - the people who elected them) will be largely cut out.

It is stated in the amending act's explanatory memorandum that "the proposed National Employment Standards… will be legislated as part of the Government's substantive workplace relations reforms", but we have not yet been advised of the final version of these standards. To make an educated estimation of what those 10 minimum standards will be, it is useful to examine the details of the industrial relations policy which the Labor Party took to the 2007 election. Using the 'Forward with Fairness' document as a guide, the present indications are that the ten standards would set out required minimum entitlements for:

Hours of Work Parental Leave Flexible Work for Parents Annual Leave Personal, Carers and Compassionate Leave Community Service Leave Public Holidays Information in the Workplace Notice of Termination and Redundancy; and Long Service Leave.

The only real change in this list is "the right to request flexible working hours". How "requesting" requires a "right" has not been explained. How it could not have been requested up to now has also not been extensively analysed.

The Possible Future Direction Of Common Law Employment Contracts

The replacement of statutory agreements with common law contracts will provide the parties with more freedom and flexibility, particularly in cases where remuneration is at or above $100,000 a year, because these contracts will only need to adhere to the prescriptive 'safety net' of minimum standards. In this way, the impact of the legislative changes may be seen in a definite increase in the use of these contracts. Not only would it be advantageous to an employer of a worker who is earning at least $100,000 a year not to have to remain aware of all applicable awards in that industry sector, but this type of instrument would also effectively 'de-unionise' that category of worker, because if most of the workforce is on individual common law contracts, it would not be worth the union's while to engage in litigation on behalf of one employee at a time (however, if all of these workers were on AWAs prior to 2010, this situation would have existed prior to 2010 as well).

The reforms that will be implemented by the 2008 legislation will, in all probability, have a significant impact on the content of common law employment contracts. But it is also essential to keep in mind that, apart from these dramatic changes to the legislative regime, the common law position on employment contracts continues to evolve.

It would seem that all of the doom-ness visited upon Workchoices will now be visited upon anyone on more than $100,000 per year. That either means that the criticism of Workchoices was exaggerated, or they are "only pretending to care". It is as if this Government will do more to reduce the role of the union movement than the previous one dared to.

Positively, when Governments create vacuums, the Courts fill them. There have been many benchmarks set in recent times by the Federal and State Courts which create protections for the general middle-management-and-above community, which the Government has chosen not to give them by legislation.

Contractual Terms

Common law contracts are the means of engagement already for most people - award or non-award. That is because award standards have so completely fallen behind community standards in most occupations over the past two decades (eg, under the State Clerical and Administrative Award, the "executive rate" above which you cease to get overtime is about $38,000). Awards can be completely avoided so long as the common law contract ensures that its clauses are not undercut - a simple task in most cases. With the new legislation, that will not even be necessary for those on $100,000 or more.

If one was advising an employee on more than $100,000, prima facie, that advice would be to get nothing in writing and to sign nothing. That is because if you write down a right, or define it, you automatically limit it to what is written. The idea of "reasonable standards" is thus much abridged by a written contract. It could be said that the best contract is an unwritten one, as in that case the parties necessarily leave it to the courts to determine many of the specifics of the contract.

For everything that is not written, (or verbally 'express' - hard to prove when in dispute) the common produces terms which are held to be 'implied' into the contract, if not expressly written into the contract.

Implied Terms

Historically, the courts have come up with two categories of implied terms: those implied by law for reasons of policy (for example, the requirement that the employer will take reasonable care of the employee's health and safety while at work is intended to safeguard the working public's health and safety) and those implied by fact (for example, the custom, practice and usage of many industries requires reasonable notice of termination to be at least four weeks).

In determining whether a term is capable of being implied into an employment contract, the courts have formulated the following conditions:

The term must be reasonable and equitable It must be necessary to give business efficacy to the employment contract It must be 'so obvious that it goes without saying' It must be capable of being clearly expressed It must not contradict an express term elsewhere in the contract.

In this manner, the common law has discovered many implied terms to exist within the employment contract, conferring definite duties upon the contractual parties - employee duties such as: obeying all reasonable and lawful commands of the employer; disclosing all necessary information to the employer, but not disclosing any confidential business information to others; furthering the employer's interests, or at least not frustrating the employer's interests. And the common law has found some of the employer's duties to be: providing the employee with prescribed wages and conditions; paying redundancy pay to eligible employees; and advising employees of superannuation and resignation requirements and arrangements. And some implied terms have created mutual duties, which are borne by the employee and the employer. One such mutual duty is the obligation of mutual trust and confidence, which has its origins in the ancient fiduciary duty owed by a servant to their master.

The Obligation Of Mutual Trust And Confidence

The common law has traditionally viewed this obligation as a duty on the part of employer and employee to refrain from conducting themselves in a manner that is apt to destroy or to seriously damage the relationship of trust and confidence between them. It has been characterised as "a duty, on both employer and employee, to act in the best interests of maintaining trust in the relationship." An employer may still be able to terminate the employment contract if it is necessary and appropriate to do so; however, it remains necessary for both parties to act with "prudence, caution and diligence". In other words, the duty is owed to the employment relationship itself rather than to the other contractual party.

At the time of writing (it has been appealed by both sides, and judgment is awaited) the most recent major development in this area was in the matter of Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney & Anor. Russell was Director of Music for the choir of St Mary's Cathedral in Sydney. He had worked for the Cathedral for many years in various music-related roles. No written contract of employment ever existed, but his role appeared to have evolved as a result of several discussions with the Cardinal. In the course of his employment, Russell was required to be in frequent contact with students of St Mary's Cathedral school.

Years before, an individual who worked at the Cathedral, presumably being unable to afford to pay rent, was living in the Cathedral Presbytery. The Church considered this to be inappropriate, and so Russell offered to let him stay at a room in his house, which offer the employee accepted.

In 1999 Russell was arrested and charged with sexual misconduct arising from the evidence of former members of the Choir. His flatmate was also arrested. The majority of the allegations were directed at that person, but one was directed at Russell. The other person was convicted of an offence. During this time, Russell stood down from his position as Director of Music. The criminal proceedings against Russell were dismissed. Russell then resumed work.

The Dean of the Cathedral subsequently received a letter from the NSW Ombudsman's Office giving notice that the Office was going to investigate the handling of and decisions made concerning, "child protection issues associated with Mr Russell's current employment" among other matters. Soon after the Dean told Russell that the Church was needed to file a report on his case, and so "we have to do an investigation to satisfy this requirement."

The Church then appointed an investigator to determine whether there were "grounds for concluding, on the balance of probabilities, that the complaint is justified - either in whole or in part?" This 'complaint' was in fact the criminal conduct of which he was acquitted. Russell was then invited to attend a meeting concerning the investigation.

Russell had requested further information concerning the investigation several times, but had not received it, and now wrote to express his concern at the lack of information given to him to enable him to prepare for the meeting. He was dismayed that he was not informed of what Church protocols were governing the investigation, whether he would need legal representation, what the past experience of the investigator consisted of, whether the meeting was confidential to any other parties besides the Ombudsman's Office, and whether minutes would be taken. The Church responded to some of these queries but was unable to provide further information.

At the meeting, a number of matters relating to the complaints against Russell and his former flat mate were discussed. Russell later provided written submissions to the Church in which he denied all allegations of assault. He also submitted that the investigative proceedings were "a denial of natural justice and procedural fairness" because he was not given the opportunity to respond to some of the allegations made against him. When his employment was terminated, he took the matter to the Industrial Relations Commission and was re-instated. He then brought an action in the Supreme Court, claiming damages being the costs of the whole matter (which had presumably been crippling to a person of modest means) based on an asserted breach of two implied terms in his contract of employment: the duty to act in good faith, and the obligation of mutual trust and confidence.

Rothman J found that Russell was wrongfully terminated by the Church, and that both the duty to act in good faith and the obligation of mutual trust and confidence formed part of Russell's contract. In analyzing the nature of Russell's employment which, involving as it did the extensive supervision of young boys on behalf of the Church, required his employer to have considerable "trust and confidence" in him, His Honour found that "if one sought to exclude, expressly, the relationship of trust and confidence, if it were a necessary and essential ingredient of employment, one may still have a contract, but it is unlikely to be a contract of employment. Without trust and confidence there is no submission and subordination and no right of control. Without trust and confidence there is no contract of employment." The unjustified termination of Russell's employment was a breach of the duty of mutual trust and confidence that was an implied term of the employment contract. The Church has also breached the obligation of all employers and employees to act in good faith.

Despite finding that the Church breached both implied duties and had wrongfully terminated the employment, Rothman J held that the breaches occasioned no damage to Russell, and awarded him no amount in damages. The basis of that was the fact of his reinstatement by a tribunal which could not award costs. Thus, there could be no "loss and damage" arising merely from the enactment of a statutory restriction.

Russell thus stands (pending appeal) as a precedent wherein an unfair and unjustified termination of employment may sound in damages by virtue of the fact that the unfair termination could constitute a breach of the implied duty of trust and confidence. This has opened up a potentially lucrative solution to those employees who now find the opportunity to bring an action for unfair dismissal has been removed.

Company Policies And Representations, The Common Law Contract and The Courts

Several major developments in the doctrine of implied contractual terms have occurred in response to two modern corporate phenomena: the increasing proliferation of company policy manuals which are commonly written, and delivered to new employees along with their letter of appointment, by Human Resources; and the complicated and protracted negotiations, much of which takes place while an individual is still employed by their previous employer, that is a characteristic of modern recruitment techniques, particularly at a senior level.

Not only have these developments led to an expansion in the range of breach of contract claims that may be pursued by former employees, but given the details of the 2008 legislation there is also a possibility that actions against former employers for breaches of the Trade Practices Act 1974 (such as actions pursuant to sections 52 for misleading and deceptive conduct by an employer during contractual negotiations) may become much more frequent, because for the reasons explained above, no employee on a common law contract who earns at least $100,000 will have the option of suing their employer for the breach of an award term. These employees will need to turn to alternative avenues of litigation. The cases of Nikolich and Walker demonstrate some of the most recent developments in this area of employment contract litigation.

Nikolich v Goldman Sachs JB Were Services Pty Ltd

Nikolich worked as an investment advisor for Goldman Sachs in their Canberra office. Goldman Sachs decided to implement a new 'partnership' method of client management, which was touted as having the definite potential to increase the business efficiency and earning capacity of the office. The new method consisted of several investment advisors forming a partnership in which they pooled their clients and shared client work. Any partner who exited the partnership had to leave their clients behind.

Nikolich formed such a partnership with two other advisors. When one partner resigned and exited the partnership, Nikolich's supervisor transferred the highest-revenue clients from Nikolich's partnership to his own partnership. When Nikolich voiced his disquiet with this transfer, the supervisor informed him that he was "greed[y]", "lazy" and "whinging", and began to behave in an intimidating and threatening manner.

Nikolich eventually made a written complaint to Goldman Sachs' Human Resources department. Following several meetings with the applicant, the only action that HR took was to discuss Nikolich's complaint with the supervisor in question. Nikolich had informed HR that he was feeling unwell and was very stressed, and hated to encounter his supervisor at work. HR advised him to take some time off, or to utilise the company's employee counselling service.

When Nikolich was informed that the outcome of his complaint was that the supervisor would be moved from the Canberra office, he tried to take the complaint further, claiming that he was now "suicidal" as a result of the harassment he had suffered and that he had now lost an estimated $300,000 in client revenue due to the unjust client reallocation. He asked for monetary compensation. Goldman Sachs refused to compensate him for any loss in revenue and asked him to resume his normal duties. When Nikolich refused, the respondent terminated his employment.

Nikolich brought an action against his former employer in the Federal Court, seeking damages and compensation. He based his claim upon several causes of action, one of them being founded on a breach of the terms of his employment contract by the respondent. He argued that the provisions of the respondent's policy manual, a 119 page document entitled "Working With Us" that was provided to him at the same time as the letter of offer, concerning company policies on workplace health and safety, freedom from harassment and concerns or grievances, was part of his employment contract. As he was employed as an investment advisor, the vast majority of his remuneration was earned in the form of incentive payments for client work, and therefore his remuneration was largely determined by the quality of clients that he handled for the respondent.

The Federal Court found that the respondent had no objective procedure concerning client allocation when it obviously needed one, and that the respondent's human resources officers were inadequate in their handling of the applicant's complaint. Turning to the policy manual, the court considered the question of whether the language used constituted 'lawful and reasonable directions' or were in fact promises that were binding on both employer and employee?

Wilcox J found that the policy manual was not merely a set of directions to employees. He concluded that the WWU document bound not only the employees of Goldman Sachs, but also Goldman Sachs itself, relying on an earlier decision of the Full Federal Court in which the majority held that a 'Human Resources Policies and Procedures Manual' bound an employer such that an ex-employee was entitled to receive the redundancy benefits set out in the employer's Manual. The Court found that the relevant provisions of the manual were indeed promises that formed express terms of the applicant's employment contract. The circumstances surrounding the delivery of the manual to the applicant such that it accompanied the letter of offer, and the promissory language used within the manual itself (e.g. "We will take every practicable step..."), meant that the provisions of the manual were contractual in nature and were, by their very nature, express terms in Nikolich's contract. Wilcox J noted that if the policy manual did not bind the respondent in any way, then "those of its provisions that constitute promises by GSJBW, or which purport to confer entitlements, are misleading..."

Wilcox J found that the respondent knew from the time of Nikolich's complaint that he was in an extremely distressed state, and was obliged to work in the same office as an intimidating and hostile supervisor. He considered that the respondent's policy manual created a legally enforceable obligation on the respondent to "take every practicable step to provide and maintain a safe and healthy work environment" and to conduct a proper and timely enquiry into the applicant's complaint. The respondent breached that obligation, and consequently, Nikolich was entitled to recover damages for the psychological distress caused by that breach. Over half a million dollars was awarded to the applicant, and comprised compensation for past loss of earnings (by far the greatest component of the award), loss of future earnings, and damages for Nikolich's pain and suffering.

Goldman Sachs appealed to the Full Federal Court. The majority dismissed the appeal and upheld the decision of Wilcox J, but they came to different conclusions regarding the interpretation of the policy manual provisions. Black CJ and Marshall J held that only the provision relating to employee 'Health and Safety' was a contractually binding term of Nikolich's contract; the 'Harassment' and 'Grievance' sections of the policy manual were expressed in such a way that it could not be held that they were "promissory in nature", as they were couched in aspirational rather than promissory language - the employer would "strive" to achieve certain things, rather than simply "do" them.

The breach of the 'Health and Safety' policy, which was constituted by the negligent manner in which the HR department had handled Nikolich's complaint, was confirmed by the majority to have caused the damage to Nikolich. That document was "prescriptive", requiring certain standards that were not met by the conduct of Goldman Sachs.

Thus the Nikolich appeal confirmed the distinction between "aspirational" and "prescriptive" policies: corporate aspirations are not contractual; "declarations of intent" are. If Goldman Sachs had not worded its 'Health and Safety' provision in the 'language of obligation', it would, following the reasoning of the Full Court, not be liable to pay Nikolich damages of over half a million dollars for breach of that obligation.

Walker v Citigroup Global Markets

The case of Walker is a significant and costly illustration of the liability that a company may expose itself to when it allows its officers to make careless or unprincipled representations during employment negotiations, in order to entice an individual to enter into the employment arrangement.

Walker was recruited by NatWest to take up the position of Senior Research Analyst in their Equities division (at the time the relevant defendant company was NatWest, the shares in which were later acquired by Citigroup). Walker was at the time employed at ABN AMRO, and he was expecting to receive a substantial bonus payment very soon. However, Walker and NatWest commenced protracted negotiation over the terms of his prospective employment. Simultaneously, there was some discussion over the timing of his resignation from the ABN AMRO role, as he was anxious not to miss out on the bonus payment.

The letter of offer which NatWest sent to Walker referred to a document entitled 'Executive Conditions of Employment', with the proviso that both the letter and the conditions "will form part of your terms and conditions of employment" but it wasn't attached to that version of the letter. One of the 'conditions' was that either party could terminate the employment contract on one month's notice.

During the negotiation process, NatWest officers made representations to Walker respecting his salary, guaranteed minimum bonus payments, length of secure employment, and promotion prospects within the company. Soon after these representations were made Walker signed and returned his letter of offer, and was of the understanding that an employment contract had come into existence to which NatWest and himself were parties.

At some point in the process, however, NatWest's Head of Research decided that employing Walker was no longer an attractive option, but at the same time encouraged him to negotiate a redundancy agreement with ABN AMRO, thereby allowing him to 'burn his bridges' with his former employer.

Walker was then told that the NatWest position was no longer available and that there was no contract in existence between them, as he had failed to sign and return all the documentation attached to the letter of offer. This was followed by a letter from NatWest withdrawing its offer of employment. Ultimately, Walker was informed that no position was available and that NatWest completely denied any contractual liability to him.

Walker brought an action against the respondent in the Federal Court, claiming that NatWest had breached a valid contract and engaged in misleading and deceptive conduct by its behaviour towards him, which constituted a breach of sections 52 and 53B of the Trade Practices Act.

The primary judge found that a valid employment contract did come into existence and that the letter withdrawing NatWest's offer was "plainly incorrect and misleading" and constituted a repudiation of this contract. However, the termination clause in the contract only entitled Walker to damages equal to one months' notice of termination. The breaches of the Trade Practices Act also succeeded, as the primary judge held that NatWest's representations were misleading, and Walker relied upon them to his detriment.

On appeal, Walker argued that representations made to him during negotiations formed part of the employment contract and the quantum of damages should account for these contractual breaches. The unprincipled behaviour of NatWest officers in encouraging him to end his career at ABN AMRO, in the knowledge that NatWest was no longer interested in employing him, Walker argued, should also be reflected in the quantum of damages awarded.

The Full Court held that although the 'Executive Conditions' were contractual terms, to interpret the termination clause literally would negate the representations made at the same time, which would be "an unlikely result in view of the surrounding circumstances and the purpose and object of the transaction, namely, the recruiting of a high level and high profile employee then in other employment."

If the termination clause were read alongside the representation concerning employment into the next calendar year, then the clause would not become operative until the end of the next calendar year. Additionally, given the skill and experience of Walker, it was very probable that he would have continued to perform competently beyond the next calendar year. Consequently, damages awarded for breach of contract should be increased. The court accepted Walker's proposal that damages awarded for contractual breach should equal the total earnings (including bonuses) of a NatWest employee of equal rank during the five years after the breach had been committed, minus 25% for contingencies.

The court avoided 'double recovery' for Walker's economic loss by awarding no damages for the established breaches of the Trade Practices Act. But they increased the general damages component from $5,000 to $100,000, in compensation for the "serious long term effects" upon Walker's personal life resulting from NatWest's unethical behaviour. The total damages award came to more than $7,500,000.

Conclusion

In other jurisdictions - Canada, the United Kingdom - the courts have long since filled the vacuum created by Governments "privatising" or "liberalising", or "de-regulating" the employment relationship. That ideology now prevails in Australia on both sides. Apart from it underlining yet one more indication of the declining role of government (a shrinking public service and incremental privatisation of Government tasks) it removes protection for individuals.

People do not just accept their lot any more, though, and so increasingly look to the courts for judicial protection. The cases described above, when read in conjunction with other principles both home grown and imported, show that the needed protection is very much available.

The future is the evaporation of Australia's unique system of industrial arbitration. The future is the replacement of that ex-system by the rule of law in the Courts.

This article is intended to be general information only. It is not presented as legal advice. Since each legal circumstance is different, no action should be taken unless specific prior advice is sought on that action.

Disclaimer