22 April, 2015
In Brief
- In the lead up to remuneration reviews and salary negotiations, employers should consider their existing contracts of employment to determine whether they offer maximum protection for the business and are in line with best practice.
- Both recent case law and employer experience indicates that carefully drafted terms and conditions of employment can give employers greater protection against post-termination claims and better chances of enforcing key terms of employment, including restraints of trade and termination provisions.
- In this article we provide employers with six key questions to consider to help identify whether their contracts suffer from common issues that we see, including some which have been considered by the courts recently.
Background
While many employers review and revise template contracts of employment for new employees, it is generally less common to have in place a formal process to review and update existing employment contracts.
Once a contract of employment has been agreed with an employee, the employer will often not be able to make unilateral changes to the terms of employment, rather, consent must be obtained and consideration provided. With salary review processes approaching, now is an opportune time for employers to consider revisiting existing employees’ contractual terms to see what improvements might be made.
Below we set out six questions to consider to help you identify some of the key drafting or contract hygiene issues – before they become issues for your company.
1. Are Your Written Employment Contracts Up To Date?
One of the most common issues we see is that senior employees have contracts of employment which date back to their previous positions with the company and have not been updated since. Changes which are outside the contemplation of the prior written contract can mean that the 'old' contract no longer applies and a new (unwritten) contract has been formed. Often the most problematic outcome of this is that the express notice period no longer applies and reasonable notice will be implied. In addition, some important protections, such as post-employment restraints, may no longer apply. The courts are often called upon, particularly in termination cases, to determine whether employees’ written contracts still survive despite changes to their employment.1
To guard against this, employers should issue new contracts of employment where there are changes to an employee’s employment, or at least expressly preserve the old terms and conditions in a letter setting out the changes.
2. Do You Have The Flexibility You Need?
In the current climate there is a clear focus on cost reduction and structural changes initiated to improve the overall performance of businesses across different industries. Where changes are made to employees’ benefits, roles, duties or reporting lines, employers can be exposed to the risk of breach of contract and/or redundancy claims.
If your company is looking at restructuring, moving, or divesting parts of the business, flexibility to make changes, without requiring the agreement of the employee, can be critical. A well drafted contract of employment can make it clear that the employer has the flexibility to make reasonable changes to the employee's role, duties, and reporting lines without affecting their ongoing employment or their terms and conditions of employment and without triggering a potential breach of contract or redundancy claim.
3. Are Your Policies And Procedures Incorporated And Binding On The Company?
Since cases such as McCormick v Riverwood in 2000, Goldman Sachs v Nikolich in 2007 and more recently in Romero v Farstad Shipping in 2014, various courts have held that where a contract imposes an obligation on employees to comply with policies and procedures (but is silent on the employer’s obligations) those policies and procedures may be incorporated into the contract, making them contractually binding on both the employer and employee. This means that a breach of the policy can give rise to a breach of contract claim, even where a policy is not available to employees generally.
Failing to clearly, carefully and appropriately position the operation of policies within an employer's employment framework can be costly. Last month an employer was required to pay a senior executive more than AUD 3m when it found that the company was contractually required to comply with its redundancy policy.2 While the redundancy policy was not available to employees, under the contract of employment the employee agreed to be bound by company policies, as amended from time to time. The contract did not specify whether or not the employer was bound by those policy or whether they formed part of the contract of employment. The New South Wales Supreme Court found that the policy had been incorporated into the contract of employment and bound both parties equally.
Employers need to strike a balance between ensuring that employees are aware of, and comply with, their policies and minimising their exposure to a breach of contract claim. The drafting of contracts alone will not be sufficient to prevent policies from become contractually binding. However, clear drafting in contracts of employment can go a long way to ensuring that policies do not impose binding (and enforceable) obligations on employers.
This will also be assisted by ensuring that the language of the relevant policies and the way they are represented to employees is consistent with the intention not to create mutually binding obligations.3
4. Are Your Termination Provisions Drafted In The Best Way For You?
As discussed in our previous update published in January this year, employers frequently face evidentiary challenges when required to establish that serious misconduct has occurred which justifies summary dismissal. The case of Bartlett v ANZ4 referred to in that update, is a good example of how the drafting of termination provisions can be useful for employers if a termination is subsequently called into question.
Another issue addressed by the Courts recently relates to the interaction between summary termination and termination on notice. In Melbourne Stadiums,5 a Full Court of the Federal Court confirmed that once a contract has been lawfully terminated (whether by either party on notice, on the grounds of redundancy or otherwise), the employer cannot later summarily terminate, as the contract can only be terminated once. However, in this case, as the employer had not properly exercised its right to terminate on notice, it was able to summarily dismiss the employee, and therefore avoid any obligation to make payments in lieu of notice. This will not usually be available to an employer where employment has been properly terminated with notice. The Full Court did note that employers can address the risk that misconduct justifying summary dismissal is discovered after the contract has been lawfully terminated for other reasons, by including a contractual term entitling the employer to repayment of monies paid in lieu of notice by way of damages.
These cases remind us of the need to develop appropriate termination clauses for the particular circumstances. The best approach may differ depending on a range of factors including the employee’s seniority, the length of notice of termination provided and whether this is consistent with, or exceeds the minimum notice period under the National Employment Standards. Adapting contracts of employment to give employers the best protection will require careful drafting and thorough legal review.
5. Are Your Post-Employment Restraints Likely To Be Enforced?
In most jurisdictions, restraints of trade are notoriously difficult to enforce and must be carefully drafted to ensure that they do not go beyond what is reasonable to protect the employer’s legitimate business interests. Employers commonly make the mistake of not tailoring 'template' restraint clauses to suit individual employees’ roles and responsibilities.
However, where clearly drafted in terms of being directed to the specific role of the employee and the employer’s interests, restraints of trade are more likely to be upheld by the Courts, as evidenced in the recent Tasmanian Supreme Court decision in Bulk Frozen Foods6 where the restraint was upheld, despite the cascading provisions creating 8,190 different combinations of possible restraints.
To improve the prospects that a restraint will be upheld, restraints should be reasonably confined in terms of area and period of operation, taking into consideration the particular employee’s role, the extent of their access to confidential information, their physical location and breadth of interactions across different areas of the business and their ability to develop relationships with customers, suppliers and other employees.
6. Are Your Executive Contracts Compliant With The Corporations Act – Or Will You Need To Seek Shareholder Approval For Termination Payments?
Employers need to consider the best structure for payments to their executives (including their mix of remuneration, incentives and termination payments) to ensure that their contracts of employment do not oblige them to make termination payments which could put the company at risk of breaching of the Corporations Act 2001 (Cth) or the ASX Listing Rules.
Benefits provided to certain executives on termination may be capped unless shareholder approval is obtained. The cap was reduced back in 2009 with some existing contracts 'grandfathered' under the old arrangements, so that much greater amounts could be paid out to these employees without approval. Now, over five years on, genuinely grandfathered contracts are becoming few and far between.
For listed companies, seeking shareholder approval (particularly outside the usual annual general meeting) can be a costly, and potentially unsuccessful, exercise. Well drafted clauses in contracts can save the company lengthy and costly negotiations with departing executives, provide flexibility in payments on, and after, termination, ensure the amount payable on termination is clear and, if desired, avoid the need to seek shareholder approval for the provision of termination benefits.
Actions For Employers
Employers are encouraged to review their existing employment arrangements, including their template employment contracts, to ensure that they benefit to the maximum extent from the learnings above. Some of the issues referred to above will require careful consideration and legal advice should be sought before rolling out updates across the board.
End Notes:
- For a recent example see Murphy v Westpac Banking Corporation [2014] FCA 1104 (14 October 2014).
- See James v Royal Bank of Scotland; McKeith v Royal Bank of Scotland [2015] NSWSC 243.
- See Romero v Farstad Shipping (Indian Pacific) Pty Ltd [2014] FCAFC 177 for discussion of the relevance of these issues to the incorporation of policies.
- Bartlett v Australia and New Zealand Banking Group Limited [2014] NSWSC 1662.
- Melbourne Stadiums Ltd v Sautner [2015] FCAFC 20.
- Bulk Frozen Foods Pty Ltd v Excell [2014] TASSC 58 (3 November 2014).
For further information, please contact:
Miles Bastick, Partner, Herbert Smith Freehills
miles.bastick@hsf.com
Paul Burns, Partner, Herbert Smith Freehills
paul.burns@hsf.com
Kirsty Faichen, Partner, Herbert Smith Freehills
kirsty.faichen@hsf.com
Anthony Longland, Partner, Herbert Smith Freehills
anthony.longland@hsf.com
