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Risks arising from the contractual clause you didn’t even know existed!

By Kristin Ramsey22 Oct 2012

Ask any employment lawyer about an issue involving a staff member and generally the first thing they will ask you is – what does the employee’s contract of employment say about the issue? This will be closely followed by – is there a company policy covering this?

A recent decision of the Federal Court highlights the importance of not only regularly reviewing and updating human resources polices, but also complying with such policies. That’s compliance by the EMPLOYER, not just the employee!

In Barker v Commonwealth Bank of Australia [2012] FCA 942, a former executive argued that the Commonwealth Bank of Australia (CBA) breached his contract of employment when it failed to comply with the process set out in its redundancy and redeployment policy.

The CBA, having learnt from past mistakes, had protective clauses in the policy document which clearly stated that the policy (along with the CBA’s other human resources policies) did not form part of the contract of employment and therefore did not create any binding obligations on the CBA.

Whilst the Federal Court confirmed that protective clauses of this nature are effective in preventing human resources policies from being incorporated into the contract of employment, Besanko J made the controversial ruling that:

  1. there is implied duty of mutual trust and confidence in all employment contracts; and
  2. a serious breach of a company policy amounts to a breach of the implied duty (thereby giving rise to an action for damages for breach of contract).

Justice Besanko determined that had the CBA complied with the relevant policy, the executive would have had a 25% chance of redeployment within the CBA. This resulted in over $300,000 in damages being payable to the executive for loss of opportunity (and was on top of legal costs and the $182,000 that the CBA had already paid to the executive in respect of his redundancy entitlements).

Whilst the implied duty of trust and confidence has been recognised in the UK for some time, Justice Besanko’s decision is the first time that an Australian court has been willing to find there is a duty of mutual trust and confidence implied by law in all employment contracts.

Given the widespread implications of the decision, it unsurprising that the CBA has appealed the decision to the Federal Court of Appeal. Whilst this gives rise to an element of “watch this space”, given the push in recent years for Australian courts to adopt the English approach to this issue, it would be surprising if the Court of Appeal overturned the central notion that employment contracts contain an implied duty of mutual trust and confidence.

What does this mean for employers?

The duty of mutual trust and confidence means that both the employer and the employee have a duty not to conduct themselves in a manner that is likely to destroy or seriously damage the relationship of trust and confidence between employer and employee (unless there is reasonable and proper cause for the conduct).

Whilst the precise implications and the extent of the implied duty are not yet known, the CBA decision makes it clear that serious breach of a human resources policy will be a breach of the duty.

What should employers do?

In light of this landmark decision, we recommend that clients take the following steps:

  • Ensure that contracts of employment (or policy documents themselves) contain a clear statement to the effect that HR policies and procedures are not binding on the employer and do not form part of an employee’s contract of employment. We note however that this in itself will not prevent claims regarding breach of the implied duty (but will help to prevent other claims).
  • To the extent possible, ensure that policies contain aspirational rather than prescriptive language. This will make it much more difficult for disgruntled employees to make out a “serious breach” of the policy by the organisation.
  • Review policies to ensure that they reflect the organisation’s intentions and practices and do not unnecessarily confer obligations on the organisation.
  • Provide training to line managers regarding their obligations and responsibilities under human resources policies and the potential risks to the organisation that flow from non-compliance.
  • Give consideration to whether you want to expressly exclude the implied duty of mutual trust and confidence in employment contracts.

How can we help?

Our Workplace Relations Health and Safety team can provide you with advice and assistance in relation to each of the above steps. In particular, we have a suite of standard human resources  policies available for purchase at a fraction of the cost of having them developed specifically for your organisation. Alternatively, for an additional fee, the team is able to tailor these documents to meet your organisation’s specific requirements.