The Supreme Court of South Australia, in its recent decision in State of South Australia v McDonald, has limited the circumstances in which the implied duty of trust and confidence (imposing duties of fairness and reasonableness on employers) will be implied into employment contracts. The duty will only be implied if it is necessary in order to provide protections to the employee that do not otherwise exist in the employment contract or in applicable legislation or industrial instruments.

Although, on first reading, the McDonald decision may seem to be a win for employers, the implied duty of trust and confidence tends to cause employers problems in relation to more senior employees who are not covered by awards, agreements or the unfair dismissal regime (and arguably do not therefore have adequate protections without the implied duty). Despite the decision in McDonald, such senior employees may still be able to argue that there is an implied duty of trust and confidence in order to ensure they are afforded procedural fairness and equity, for example, in the termination of their employment.

The implied duty of trust and confidence

The implied duty of trust and confidence is mutual (i.e. it places obligations upon both employers and employees). Upon employers, the implied duty of trust and confidence means that an employer should not, without reasonable and proper cause, conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of trust and confidence between the employee and their employer.

The existence and scope of the implied duty is not settled. However, the Industrial Relations Court in Perkins v Grace Worldwide (Aust) Pty Ltd in 1997 confirmed that the implied term of mutual trust and confidence was implied into all employment contracts as being a necessary ingredient in any employment relationship. This position was also adopted by the High Court in 2005 in Koehler v Cerebros and by the NSW Supreme Court in 2007 in Russell v The Trustees of the Roman Catholic Church for Archdiocese of Sydney.

However, the specific obligations upon employers arising out of the implied duty are uncertain and are still being developed by case law. Generally, the requirement upon an employer is to treat its employees fairly and reasonably and to refrain from abusing its power or acting improperly (e.g. in the conduct of a disciplinary investigation, in deciding to terminate an employee, or in carrying out the termination).

The common law duty of trust and confidence is not, however, intended to duplicate or replace any statutory or other protections/entitlements which the employee has (e.g. under the unfair dismissal regime).

State of South Australia v McDonald

On 30 July 2009, the Supreme Court of South Australia considered the application of the implied duty of trust and confidence and held on appeal that no such duty need be implied into Mr McDonald’s employment contract.

Facts

Mr McDonald was a school teacher who was also given, in addition to his teaching duties, responsibility for the repair and maintenance of the school IT equipment. Mr McDonald asserted that he was not trained to do the IT work and was unable to cope with the stress caused by his workload and additional responsibilities.

Mr McDonald raised grievances with his employer, the Minister for Education. However, allegedly, those grievances were not adequately addressed and Mr McDonald was given no support by his employer. Instead, Mr McDonald was allegedly bullied and harassed by various colleagues and

victimised as a result of having raised grievances. Mr McDonald asserted that his employer breached, among other things, the duty of trust and confidence which was implied into his employment contract.

Decision at first instance

At first instance, the Judge concluded that the duty of trust and confidence was implied into Mr McDonald’s employment contract and, by its actions and treatment of Mr McDonald during his employment, his employer had acted in a way likely to damage the trust and confidence between the parties. Therefore, damages should be paid to Mr McDonald to compensate him for his loss of earnings and entitlements.

The decision at first instance was discussed in detail in our September 2008 issue of Enterprise.

Decision on appeal

On appeal, the Supreme Court concluded that the judge at first instance had not explored whether it was actually necessary to imply the duty of trust and confidence into Mr McDonald’s employment contract. A term should only be implied into an employment contract where the matter is not adequately dealt with in the contract itself; therefore, it is necessary to impose an obligation of trust and confidence on the employer so as to prevent it from making unreasonable and unfair decisions or otherwise unreasonably prejudicing the employee without sanction.

As a teacher, Mr McDonald’s employment was heavily regulated by statute, regulation, industrial instruments (awards and agreements) and departmental policies. The Supreme Court considered that these instruments already provided significant protections for Mr McDonald in his employment. Therefore, it was not necessary for the proper operation of Mr McDonald’s contract to imply an additional duty of trust and confidence into the employment contract.

What this means for employers

Because the decision in McDonald limits the circumstances in which the duty of trust and confidence will be implied into employment contracts, fewer employees may attempt to rely on the implied duty in order to challenge the actions of their employer. If they do, their case will be less likely to succeed if their employment contract (and any incorporated policies and procedures) and/or any relevant statute, award or agreement already provide sufficient protections for them in the particular circumstances.

However, the implied term of trust and confidence usually becomes an issue for employers in relation to employees who are not covered by the unfair dismissal regime, and most often in termination situations. In order to minimise the chances of a successful breach of contract claim for breach of the implied duty of trust and confidence the employer should ensure that it is acting fairly and reasonably both in making the decision to terminate and in giving effect to the termination (i.e. following a fair termination procedure). Following the decision in McDonald, this does not change.

Lessons for employers

  • Draft employment contracts so that they contain all necessary terms and conditions for the effective operation of the employment relationship (including the termination of that relationship). This means that there will be fewer gaps which the courts may feel compelled to plug with implied terms.
  • If you have a grievance policy or a complaints procedure, make sure you comply with its terms in relation to any grievance made by an employee. If there is no such grievance policy, the implied duty of trust and confidence may impose an obligation to address the grievance fairly and expediently by reaching a reasonable conclusion as to whether or not the complaint/allegations have been substantiated, having properly investigated the matter.
  • If you have a performance management, disciplinary or termination policy, make sure you comply with its terms before proceeding to terminate an employee. If there is no such policy dealing with termination, the implied duty of trust and confidence may impose an obligation to meet with/write to the employee to put to them the reasons why the company is considering terminating their employment and to give them an opportunity to respond and to make submissions in their own defence. Such submissions should be considered before deciding to terminate.