December 19, 2012

“Trust and Confidence” in Employment Contracts

The Federal Court recently awarded damages on the basis of an implied term of “mutual trust and confidence” arising from an employment contract.  This decision has major implications for employers.

THE FACTS

Mr Barker was an employee of the Commonwealth Bank of Australia (CBA) who was made redundant.  At the time of Mr Barker’s employment, the CBA had a policy of redeploying employees to other positions as an alternative to redundancy wherever possible.  This policy was not incorporated into CBA employment contracts, but it was recorded in the CBA’s HR Manual. In a letter dated March 2009, Mr Barker was informed that his position had been made redundant, but that it was the CBA’s preference to redeploy him.  Despite the letter, after 27 years as an employee, Mr Barker’s employment was terminated by the CBA on 9 April 2009.

FEDERAL COURT DECISION

Mr Barker argued that the redeployment policy in the CBA’s HR Manual was incorporated into his employment contract; however, the HR Manual contained a specific clause that stated: This manual is not in any way incorporated as part of any industrial award of agreement entered into by the Bank, nor does it form any part of an employee’s contract of employment. The Court accepted that this clause resulted in the exclusion of the HR Manual and the policies it contained from Mr Barker’s employment contract. The Court held however, that the CBA failed to take timely and meaningful steps to redeploy Mr Barker before his employment was terminated, despite the policy and the letter.  The Court held that it was not incumbent on the CBA to redeploy Mr Barker, but that ‘it was incumbent on the [CBA] to take timely and meaningful steps to comply with its own policy.’ Other relevant considerations for the Court in reaching its decision were that Mr Barker was a long-term employee of the CBA, and that he was asked to leave the bank on the very day that he was advised of his termination. Mr Barker was awarded damages of $317,500 for losing the opportunity to be redeployed in accordance with the CBA’s policy.

THE RATIONALE FOR THE DECISION

The decision could form the basis of a new head of damages in breach of employment contract cases.  The Court based its decision on an implied term of trust and confidence, which operates: where a party does not have reasonable and proper cause for his or her conduct and the conduct is likely to destroy or seriously damage the relationship of confidence and trust between employer and employee Until now, employers have usually been able to escape liability for failing to follow their own policies if the policies stated that they were not part of the employment contract.  It appears that this statement will not necessarily protect an employer where it seriously breaches its own policies.

WHAT SHOULD EMPLOYERS DO?

  • Review employment contracts and policies, and where necessary, make amendments to reflect an intention to expressly exclude the implied term of mutual trust and confidence; and
  • Seek advice before adopting any process such as a redundancy or redeployment program.