The Supreme Court of New South Wales has handed down judgment in a case which involved attempts by two employees to enforce benefits under a company policy relating to redundancy.

The case is noteworthy because the employees based their claims on a number of common law and equitable causes of action which are not regularly invoked in employment disputes. The decision of the Court, therefore, provides guidance as to the degree to which employers may be required to treat policies as binding commitments. 

Facts

The two plaintiffs were senior executive employees of the defendant company. Their employment came to an end following a business merger which resulted in an excess of senior managers.

The employer maintained a written policy describing the process that would apply when employees were surplus to requirements and the benefits which those employees would receive upon their employment being terminated for redundancy.

The policy was not published or otherwise made available to staff.  However, after the merger the employer made representations to employees, including the two plaintiffs, that they would be entitled to payments calculated in accordance with the redundancy policy.

The redundancy policy stated that redundant employees would receive a severance payment of four week’s pay for each year of service capped at 52 weeks, with a provision to increase the cap to 78 weeks at the company’s discretion. In addition, employees would be considered for an ex gratia payment.

One of the plaintiffs (James) was acknowledged by the company as being entitled to a severance payment and an ex gratia payment. However he refused to sign a deed of release proffered by the company and, consequently, the payments were not made to him. The other plaintiff (McKeith) was not regarded by the company as being entitled to any payment.

The employees brought proceedings in the Supreme Court of New South Wales to recover severance pay and ex gratia payments.

The hearing

There were four issues of present interest which the Court had to decide:

  • Was the redundancy policy expressly incorporated into James’ contract of employment?
  • Was the redundancy policy otherwise incorporated into both plaintiffs contracts through a course of dealings?
  • If the redundancy policy did not form part of the contracts of employment, was the employer nevertheless estopped from denying the binding effect of the redundancy policy?
  • Was the imposition of a requirement that employees sign a deed of release consistent with the legal obligations of the company?

Express incorporation

James had a provision in his contract of employment which stated that he agreed to be bound by the policies of the employer as they exist from time to time.

The trial judge found that because of this provision, and because of the manner in which the policy was expressed, the policy was expressly incorporated into James’ contract of employment.

Although the policy had not been made available to employees and set out principles or guidelines (rather than strict promises), nevertheless one of the objectives sought to be achieved in the employment contract was the imposition upon James of an obligation to obey the policies as they existed from time to time. In view of this, it would not make sense if the employer was not also bound.

Course of dealings

The other plaintiff (McKeith) did not have a provision in his contract of employment which imposed an obligation to comply with policies.  So it was argued on his behalf that there had been a consistent course of dealing between him and the employer which resulted in the policy becoming part of the contract of employment.

A “course of dealing” occurs when the contract at issue between the parties is preceded by a series of transactions over time. This may have the effect of incorporating terms into the contract.

In this case, the course of dealings relied on (which were essentially the representations made by the employer following the merger) had actually taken place after the contracts of employment were made and in a context which did not suggest that they were put forward as intended to have a contractual content.

Accordingly the judge held that the plaintiffs had not proved any relevant course of conduct from which it could be inferred that the redundancy policy was incorporated into their contracts of employment.

Estoppel

The representations that were relevant to the course of dealing argument also formed the basis for an argument in estoppel.  On behalf of the plaintiffs it was put that the representations reflected a conventional state of affairs to which all parties subscribed and it would be unconscionable to permit the employer to depart from that conventional understanding.

An essential ingredient in making out an estoppel is that the “innocent” party has relied upon the conventional state of affairs and would suffer detriment if there was departure from it.  In this case the plaintiffs argued that they relied upon the conventional state of affairs in deciding to remain employed within the organisation. However, no evidence was led as to alternative forms of employment that they could have taken up and which would have been more advantageous to them.

The trial judge found that the plaintiffs failed on this cause of action because they had not relied on the conventional understanding to their detriment.

Deed of release

The redundancy policy contemplated that the departing employee would be given a deed of release to execute, with final payment to be made once execution had occurred.

The company had given James a deed of release but he had refused to sign it on the basis that the release was too wide.  The release would have had the effect of preventing James (who had been a director of company in the group which was the trustee for the executive incentive plan (EIP)) from seeking indemnity or contribution from the company (or any of its related bodies corporate) in the event that disgruntled employees for whom shares were held under the EIP decided to take action against the trustee and directors

The trial judge held that the deed of release that may be required as a condition of payment under the redundancy policy was to be no more than a deed which released each of the parties from the obligations (including discretionary obligations) specified in the redundancy policy.

Because in this case the deed contained a blanket release by James in favour of the employer, all related companies and their respective employees and officers, the trial judge ruled that it went beyond what was contemplated by the terms of the redundancy policy.

Outcome

James succeeded in his claim for severance pay and the ex gratia payment.  The policy formed part of his contract of employment and his refusal to sign the Deed should not have prevented him from getting the payments required under the policy because the Deed itself did not confirm with the policy.

McKeith, who did not have the benefit of express incorporation of the policy, was not entitled to anything because the policy had not otherwise become part of his contract or the basis for an estoppel.

Significance

The case serves as a further reminder of the care that employers should take to:

  • ensure that their policy documents do not create
  • unexpected legal obligations; and understand and deal with those legal obligations where they do arise.