Two former directors of ABN AMRO Australia Holdings Limited (AAAH) have claimed employment entitlements they argued were owed to them on the basis of policies in place at the time they were made redundant. In a wide-ranging judgment1 , the NSW Supreme Court considered the issue of the contractual force of company employment policies in Australia.

The Court’s finding that a redundancy policy formed part of Mr James’ employment contract will be of interest to Australian employers, who may be prompted to review the interplay between their employment contracts and employment policies.

The Redundancy Policy

Mr Angus James was the CEO of an ABN AMRO Group company. In October 2008, ABN AMRO Group was sold to a consortium, including Royal Bank of Scotland plc (RBS), which gained control of AAAH.

AAAH had a “closed” redundancy policy in place. The redundancy policy was kept by HR and while employees knew of its existence, it was not available on the company’s intranet and its contents were never published.

The redundancy policy stated that it provided “…principles and guidelines to follow in the event that an individual or group of staff is made redundant”, and stated that “In all cases where redundancy arises, staff will be treated fairly, equitably and consistent with the organisations values.

Specifically, the redundancy policy stipulated that redundancies were to be calculated in accordance with the policy to include accrued contractual and statutory entitlements, a severance payment and, depending on the circumstances, an “ex-gratia payment” based on the average of the prior two years’ bonuses.

A “communications pack” was also developed to allay the concerns of the employees of AAAH following the takeover. That pack included the following response in relation to FAQs about employee conditions:

Q: Will there be redundancies?

“…in the case of redundancy, the consortium has guaranteed to all staff that all existing ABN AMRO policies and practices related to redundancies will remain in place for a period of at least two years after the bid goes unconditional…”

The communications pack was announced to all staff of AAAH, but did not result in any publication of the redundancy policy to staff.

Incorporation of the redundancy policy into Mr James’ contract

Mr James claimed that the redundancy policy was incorporated into his contract of employment and so he was owed a severance payment and an ex-gratia payment equal to the average of the bonuses he received for the previous two years.

His contract of employment specified, in relation to the policies of the company, that he “…agree[d] to be bound by the policies of ABN AMRO as may exist from time to time.” It also expressly stated that ABN AMRO was able “to vary, change or terminate existing policies” as its prerogative.

The Court found that the redundancy policy had contractual effect as between Mr James and his employer as it was incorporated into his contract of employment. The judge observed that, while the language of the contract clearly showed that the intention was to impose an obligation on Mr James to obey company policies as they exist from time to time, the parties could not have intended that the company would not also be so bound. He said:

“To my mind, the undertaking by the employee to be bound by the employer’s policies as they exist from time to time makes sense only if, implicitly at least, the employer also undertakes to be bound by, or to observe, the terms of those policies.”

It was held that the language used in Mr James’ employment contract, whereby he agreed to be bound by the company’s policies, suggested that he agreed to be bound because the policies form part of the contract of employment. The Court determined that the company policies, and specifically the redundancy policy, equally bound the employer as the obligations that policy set out were not unilateral.

Specifically, the redundancy policy was drafted in terms of imperatives placed on the company in circumstances where an employee was made redundant. For example, it stipulated the “Process and Procedures” to be followed, the functions of the HR team in preparing the calculations, the benefits to be provided and the terms of the letter to be sent to the employee in the case of redundancy.

Another factor considered by the Court was that, because of his position, Mr James knew of the existence of the redundancy policy and had some knowledge of its substance, including specifically that it provided for an exgratia payment in some circumstances.

The evidence revealed that there was not only a practice of affording an ex-gratia payment to redundant employees, but also a presumption of making such a payment for senior employees. The result was an award to Mr James of close to AUD 3 million by way of redundancy payment.

The conundrum of company policies

This decision demonstrates the fine balance employers face in attempting to create and impose obligations on employees through written company policies without inadvertently creating a situation where those same policies are deemed to have contractual force with a detrimental result for employers.

The lesson for employers to take from this judgment is two-fold:

First, employers should take the opportunity to review standard clauses in offer letters and contracts of employment to check that, where reference is made to company policies, their intention in relation to compliance with those policies is unambiguous.

Secondly, employers should consider the content of their existing internal policies and whether there are aspects of those policies that, if enforced, could be costly for the business. The tendency in recent years has been for Australian employers to draft very detailed and prescriptive policies and company manuals – this case suggests that if there is a possibility that those policies may (although this was not the intention) be held to have contractual force it may in some cases be that less detail is actually better than more.

In the case of both employment contracts and policies, clear and careful drafting of key documents can go some way to protecting the employer’s interests and avoiding unintended consequences.