Key Points:

Whether a policy is incorporated into the employment relationship will be determined by the particular factual circumstances of the employment relationship.

When does a company's policy become part of the employment contract and create obligations binding on both the employer and its employees? A recent decision of the Full Federal Court which held that the contract was breached when the company did not comply with the Policy has some useful guidance for employers in this complex and still emerging area (Romero v Farstad Shipping (Indian Pacific) Pty Ltd [2014] FCAFC 177).

Farstad's policy and Ms Romero's complaint

Ms Romero was employed as a second officer by Farstad, under a letter of engagement, which stated that "all Farstad Shipping Policies are to be observed at all times."

Farstad's Workplace Harassment and Discrimination Policy prescribed the standards of behaviour expected of employees, and dictated the manner in which formal and informal complaints could be made by employees and how Farstad would deal with them.

Following a "swing" on the ship Far Swan, Romero emailed Farstad outlining her concerns about how the ship's captain had treated her. While ambiguous, the email did not request a formal investigation. Nevertheless, without consulting Romero, Farstad launched a formal investigation and, following the ship's captain's allegations about Romero's competence, enlarged the formal investigation to an enquiry into Romero's competence.

In her claim in the Federal Court, Romero argued that the Policy formed part of her contract of employment and that Farstad's breach of the Policy amounted to a breach and/or repudiation of her contract. She also claimed damages for breach of the contractual terms as set out in the Policy.

The primary judge, Justice Marshall, held that the Policy was not incorporated into the employment contract. He found that there was nothing in the Policy itself which suggested that it formed part of the contract of employment. The fact that employees were made to sign the Policy was not decisive in rendering it a contractual document. At best, it was a set of aspirations. Even if it had been incorporated into the employment contract, Justice Marshall was not satisfied that Farstad had in fact breached the Policy.

The right approach: the parties' intention to create mutually binding obligations

The approach to be taken is to identify the "parties' intentions as objectively ascertained." While the starting point will be the language of the contract, the Full Court added some important caveats:

  • the contract must be viewed in context, not in abstract isolation; and
  • regard must be had to the purpose and object of the transaction.

Specifically, the Full Court emphasised the "mutuality of obligation"; the Court must start with "the premise that the contract was made in good faith with the object of at least potential mutual benefit by due performance."

The ability to alter policies does not mean they are not binding

The Full Court noted that the mere fact that the contract contemplated that the Policy could be changed from time to time by the employer did not mean that the employer did not intend to be contractually bound to comply with the policies.

The employer's power to change its policies, or introduce new policies, is constrained by an implied term – that the employer would act with due regard for the purposes of the contract of employment and could not do so capriciously or unfairly towards the employee.

Did the Policy form part of the contract?

When applying this approach, the Full Court found that the Policy did form part of the contract of employment:

"The language used in this instance, taking the Policy as a whole, makes it clear that there is an expectation by the company that there will be mutual obligations. In return for the employee complying with the terms of the Policy, the employer gives a responsive assurance that complaints of non-compliance by other employees will be treated in a certain way.

While counsel for Farstad suggested that these elements of the Policy were merely directive, that is, directing the employee as to how to go about making a complaint, on proper analysis they are more in the nature of a bargain with an exchange of undertakings and assurances or promises."

Policies can contain both binding obligations and aspirational aspects

The Full Court found that there was aspects of the Policy which were merely aspirational. However, the relevant part of the Policy contained no uncertainty or vagueness but instead, the mutual obligations "were clearly ascertainable and quite capable of precise identification." The Full Court confirmed that many enforceable contracts contain provisions that can be described as aspirational.

Context, context, context

The surrounding circumstances, especially the manner in which the Policy was communicated to Ms Romero, weighed heavily in favour of this finding. In particular:

  • the Policy was part of an education program contemporaneous with the offer of employment and the employee was required to read and demonstrate an understanding of the Policy;
  • the employee was expected to sign the Policy;
  • the benefit conferred by the Policy was consistent with an equivalent benefit provided by statute, and therefore was a benefit ordinarily conferred in employment contracts;
  • there was regular education and reinforcement of the company's policies, including the Policy.

While none of these matters were decisive, "the cumulative effect of those features of this relationship point towards the incorporation of the Policy into the contract of employment."

Finally, the Full Court had regard to the actual employment context. In the context of ships operating on the high seas, it was especially important from a safety perspective to provide a "calm environment", which adherence to the Policy aimed to ensure.

Was the contract breached?

The Full Court found that Farstad did not comply with its Policy by treating Romero's complaint in a formal manner, notwithstanding that the Policy specifically stated that an employee needs to clearly elect to pursue a formal complaint. Further, Farstad failed to systemically and fairly investigate Romero's complaint, and was in further breach of the Policy by wrapping up the investigation with allegations about Romero's competence.

The Full Court sent the matter back to a single judge to assess the damages that ought to be awarded to Ms Romero.

What can employers do?

The decision in Romero highlights some important considerations for employers to keep in mind when drafting both employment contracts and employment policies.

If employers want to ensure that company policies are not incorporated into the contract then they must think carefully about the wording of the contract and policies. A clear statement in the contract is vital. The statement also needs to ensure that employees are nevertheless obliged to comply with the policies.

When a policy contains "mutual obligations" which are sufficiently identifiable and certain, the policy may be contractually binding on the employer.

In the same manner that contracts often contain recitals that are not binding, policies may contain aspects which are aspirational, but this does not necessarily mean that the policy is not binding.

Employers must take care to apply policies correctly, especially when conducting an investigation.

As this case shows, whether a policy is incorporated into the employment relationship will be determined by the particular factual circumstances of the employment relationship. Employers should therefore seek legal advice on their individual circumstances. If they don't, they might find their course of action – especially when it comes to management and termination – constrained by a policy's process, and be liable for significant damages.