A recent decision of the Full Federal Court of Australia in Romero v Farstad Shipping (Indian Pacific) Pty Ltd [2014] FCAFC 177 (22 December 2014) found an employer liable to pay damages when it failed to follow its own workplace harassment policy.  The policy was found to be contractual in nature and binding on the employer.  Sound familiar?

It was almost 10 years ago that the Federal Court in Nikolich v Goldman Sachs J B Were Services Pty Ltd [2006] FCA 784 reached the same conclusion and awarded an employee significant damages when the company breached its policies.  Employers cringed.  Lessons, we thought, had been learnt. 

Obviously not.  The Farstad Shipping case demonstrates:

  • how readily company policies can be found to be contractual, thereby exposing an employer to a claim for damages when it fails to follow its own policy;
  • how not to draft a workplace harassment policy;  and
  • how not to conduct an investigation into a workplace grievance.

Let's explore the decision.

The facts

Ms Romero was an officer on a supply ship.  She experienced difficulties with her new Captain during a 12-day voyage.  Ms Romero disembarked the ship and three days later raised her concerns with management in an email.  Ms Romero, however, did not make a 'formal complaint' under the harassment policy.

Ms Romero's manager then complained about her competency and temperament.

Farstad Shipping commenced an investigation.  Farstad investigated Ms Romero's concerns along with the Captain's complaint.  It directed Ms Romero to attend a meeting and, during that meeting, questioned her intensely about her competency.  The tables had turned on Ms Romero.

The employment contract

Ms Romero's employment contract simply provided:  'all Farstad Shipping Policies are to be observed at all times'.  Ms Romero was inducted into the organisation's policies at the start of her employment.  She was regularly reminded of the policies and asked to re-read the policies.  She had to sign an acknowledgement that she had read them.

The harassment policy

The harassment policy had a HR rather than legal focus.  The policy contained the following features:

  • a promise that Farstad would handle complaints 'with confidentiality, impartiality and with sensitivity to the complainant's needs';
  • the establishment of Discrimination Contact Officers to provide employees with access to people to discuss concerns and options before making a complaint;
  • employees had the option to 'decide what action they want to take in terms of resolving the problem' and 'the decision as to how to proceed must remain with the employee';
  • employees could choose informal action or make a formal complaint;
  • investigations would not commence without a formal complaint and employee consent, except in the case of very serious allegations.

As can be seen, the policy was too 'friendly' to the complaining employee, giving the employee too much choice in how their complaint was to be handled by the employer.

The decision

Farstad argued that the policy was merely a direction from an employer to employee.  The Court disagreed, saying:

The wording of the letter of offer taken with the importance of the Policy terms, the education of employees to reinforce the terms of the Policy are all factors leading to [the] conclusion [that the policy is contractual].  While some parts of the Policy may have been aspirational and some parts directive, Farstads obligations in relation to dealing with ... complaints ... were contractual promises given in exchange for employees being obliged to comply with the behavioural requirements imposed on employees by the Policy.

Ms Romero in her email to management wrote that the 'Captain’s inappropriate behaviour needs to change but this is a matter for Farstad management to address'.  Such a remark appeared to be an invitation to investigate the matter.  But the policy had a process for making 'formal complaints'.  As such, Ms Romero successfully argued that she never made a ‘formal complaint’.  Farstad had not followed its policy in commencing an investigation before there was a 'formal complaint'.

The Court found Farstad:

  • commenced an investigation when no decision to pursue action had been made by Ms Romero;
  • impermissibly combined the two complaints (Ms Romero’s and the Captain’s complaint) into one investigation;
  • ambushed Ms Romero when interviewing her, focusing on the Captain's complaint;  and
  • failed to properly document the investigation with a record of interview of Ms Romero.

The lessons

Policies do not need to be contractual to be effective.  Adding a 'policy' clause in a contract does not make a policy legally effective.  Employers can, at any time in employment, issue a direction that employees follow its policies and practices. 

Having a policy clause only potentially exposes an employer to more uncertainty.  If there is to be a policy clause, then the clause (and the policy) should explicitly say it is not contractual.

When drafting policies, employers need to consider the content and tone of a policy.  Moderate policy language so it does not read like a contract.  Sometimes being too concerned about what the company will do, or being employee friendly, misses the point that policies are about expectations of employee behaviour.  Let industrial instruments and legislation govern what employers must do; policies are about educating employees on their behaviour.

Farstad took the wrong approach; it went too far in its policy.  It was about encouraging employees to complain.  As a result, Farstad had no flexibility to manage difficult personal conflicts at work. 

Is it time to review your methodology for drafting and using employment contracts and policies?