Employers need to take care when dealing with any promises or representations about the application of company policies, particularly where discretionary incentives or redundancy payments are involved. Two recent appeal decisions show how former employees can sue on promises about bonuses and redundancy payments made to encourage executives to stay on during a merger/takeover.

Overview

The recent decisions of the NSW Court of Appeal in McKeith v Royal Bank of Scotland Group PLC; Royal Bank of Scotland Group PLC v James [2016] NSWCA 36 and Full Federal Court in Westpac Banking Corporation v Wittenberg [2016] FCAFC 33 are a timely reminder for employers about the risk of employment policies and other representations giving rise to breach of contract claims. In the first case, two former bank executives successfully sued RBS for six figure redundancy payments arising under a “closed” policy.  The executives successfully maintained that the policy had become contractually binding as a result of assurances made during a takeover process.

McKeith v Royal Bank of Scotland Group PLC; Royal Bank of Scotland Group PLC v James [2016] NSWCA 36 (9 March 2016)

Two former bank executives have had some success seeking payments under a “closed” redundancy policy that applied at ABN AMRO before the bank was taken over by RBS. 

In March 2015, the NSW Supreme Court granted Mr James over $3 million in damages for redundancy pay, a bonus and interest after the former bank director was retrenched when RBS took over ABN AMRO in 2008. Meanwhile, his colleague, Mr McKeith, was unsuccessful at the initial trial. On appeal, both executives were awarded an average of $400,000 each for redundancy pay; however, Mr McKeith lost his appeal for a $2.5 million bonus.

The NSW Court of Appeal held that RBS had “guaranteed” that it would continue to apply the ABN AMRO redundancy policy to employees affected by the ABN AMRO takeover to encourage staff to remain with the bank. This created a contract between RBS and the executives that they would receive a redundancy payment under the 'closed' redundancy policy if their employment was terminated in consideration of their continuing employment with the bank.

While the NSW Court of Appeal overturned the finding that the redundancy policy had been incorporated into the executives’ employment contracts, the statements and assurances (largely made by ABN AMRO through communication packages to staff during the sale process) created an intention and contractual commitment for the redundancy policy to apply in the event that redundancies occurred. The fact that the policy was not accessible to the employees did not undermine its enforceability.

This decision emphasises the importance of carefully managing all communications to employees during a sale process to control the nature of assurances made to staff to encourage them to stay. In particular, care should be given to all verbal and written representations about the application of policies to ensure they are not promissory in nature or intended to have contractual effect. This is especially the case with policies that govern incentive or severance payments. 

Westpac Banking Corporation v Wittenberg [2016] FCAFC 33 (14 March 2016)

This decision involved seven former St George Bank managers who brought proceedings against Westpac seeking a retention bonus. The managers claimed the bonus was promised to them if they stayed in their jobs during a merger with Westpac.

The incentive had been set up to retain key employees in the lead up to the merger. However, the incentive was not paid by St George because the target was not achieved. The managers claimed “they could have done better elsewhere” had they not been misled about the incentive and stayed with St George. However, as the managers were unable to prove that they had suffered any loss by staying with the bank instead of pursuing alternative employment, the full Federal Court was unable to award the executives damages for any alleged misrepresentation.

Interestingly, the Full Federal Court was critical of the managers who pursued multiple, but contradictory, claims. The Full Federal Court found it was inconsistent to assert a contract as a source of a legal entitlement for a breach of contract claim as well as a source of loss for a misrepresentation claim.

While the appeal was largely dismissed, one of the managers was awarded $60,000 (plus interest) in lieu of notice that he should have received on termination.

Lessons for employers

To avoid similar claims, employers should take steps to minimise the risk of employment policies being contractually binding on the employer. For instance:

  • employment contracts should state that policies do not form part of the terms of the contract;
  • any corporate policy manual or handbook should also provide that policies do not form part of the terms of any employment contract; and
  • any other verbal and/or written representations made about the application of policies should not be promissory in nature.

Times of change, such as mergers or takeovers, can give rise to heightened risks for employers. We recommend any retention arrangements (bonuses, incentive schemes and redundancy/retention payments) be carefully documented, and employers take care to ensure that any employee communications and information packages are not misleading or promissory in nature.