Representations made to departing employees may come back to bite you!

In a recent decision of the Victorian Court of Appeal (Court of Appeal), Spotless Management Services Pty Ltd (Spotless) was ordered to pay its former Chief Information Officer, Anthony Stevens, $477,400 plus interest as a result of Spotless having handed Mr Stevens a document which contained a calculation of his redundancy package, including non-contractual entitlements, prior to his termination.

Key points

• Victoria’s Court of Appeal has awarded an employee more than $477,000 because his employer failed to honour an agreement which had been made about the entitlements the employee would receive on termination.

• The agreement was constituted by the employer having provided the employee with a document setting out its calculation of the payment that the employee would receive if he agreed to the termination of his employment.

Background

After a new management team took control of Spotless, Mr Stevens met with the Managing Director and CEO, Bruce Dixon, on 23 August 2012 to discuss continuing in his role at Spotless (23 August Meeting). Mr Stevens claimed that Mr Dixon told him at that meeting that under a restructure, Mr Stevens would no longer perform the role of CIO (CIO Role) and would instead be offered the role of General Manager— Airports (General Manager Role). Mr Stevens told Mr Dixon that he saw this as a demotion, including because, in Mr Steven’s view, the General Manager Role did not have a large profit centre. Mr Stevens claimed that Mr Dixon advised him that if his employment was terminated by way of redundancy, he would be paid his full entitlement. Mr Stevens claimed that Mr Dixon verbally agreed that Mr Stevens’ retention bonus, which had previously been paid by issuing him shares in Spotless, would be paid in cash.

In September 2012, Mr Stevens met with Spotless’ Chief Operating Officer, Vita Pepe, and told her that he did not believe that the General Manager Role was viable. Mr Stevens presented options for the General Manager Role, including an option that the General Manager Role be made redundant. Ms Pepe claimed that when Mr Stevens was asked whether he wanted to leave Spotless, he confirmed that he did. Ms Pepe asked Mr Stevens to consider his position over the weekend.

On 17 September 2012, Mr Stevens met with Mr Dixon and Ms Pepe (17 September Meeting). At the meeting, Ms Pepe informed Mr Dixon that Mr Stevens had expressed a desire to leave Spotless. Mr Stevens claimed that, at this meeting, it was agreed that his employment would be terminated on the basis of redundancy and that he would be paid a termination payment comprising of 12 months’ pay in lieu of notice (in accordance with his written contract of employment) (Notice Payment) and a retention bonus of 12 months’ pay (Retention Bonus). Mr Stevens claimed that Mr Dixon said to him, “[y]ep, Ant, you’ll get paid your entitlements”.

Immediately after the 17 September Meeting, Spotless prepared a Manual Salary Calculation document specifying Mr Stevens’ termination payment entitlements (Termination Pay Calculation). The Termination Pay Calculation included the Retention Bonus and the Notice Payment. Spotless provided this to Mr Stevens and he confirmed that it was correct and agreed to finalise his departure from Spotless.

On 15 October 2012, prior to Mr Stevens’ last day of employment, Spotless processed Mr Stevens the termination payment. Due to a processing error by the Spotless payroll department, Mr Stevens was paid the Retention Bonus but not the Notice Payment. As a result of the error, the termination payment calculations were brought to Spotless’ National HR Manager’s attention to check that they were correct. The National HR Manager considered that Mr Stevens was not entitled to receive the Retention Bonus which had been paid to him. As the amount of the Retention Bonus was the same as the amount of the Notice Payment, Spotless decided to offset the amount of the Notice Payment against the amount which had been paid to Mr Stevens in respect of the Retention Bonus.

Mr Stevens argued that he and Spotless had entered into an oral agreement that he would be paid the Retention Bonus, and ultimately brought proceedings against Spotless.

Spotless argued that there was no agreement to pay Mr Stevens the Retention Bonus

Spotless argued that, at the 17 September Meeting, Mr Dixon’s reference to Mr Stevens getting paid his “entitlements” was a reference to Mr Stevens only being paid his contractual entitlement to the Notice Payment and did not also refer to the Retention Bonus. Further, Spotless argued that the Termination Pay Calculation that was provided to Mr Stevens was only an estimate of his termination payment and did not constitute an offer to Mr Stevens.

In the alternative, Spotless argued that even if it did agree to pay Mr Stevens the Retention Bonus, such an agreement was not enforceable because there was no consideration exchanged between Spotless and Mr Stevens in respect of the agreement.

The decision

At first instance, the Supreme Court of Victoria found that Mr Stevens was not entitled to the Retention Bonus on the basis that there was no discussion between Mr Stevens and Mr Dixon about a possible redundancy and the payment of the Retention Bonus.

However, on appeal, the Court of Appeal overturned the trial judge’s findings and ordered Spotless to pay Mr Stevens $477,400 plus interest in respect of the Retention Bonus.

Whilst the Court of Appeal found that there was no agreement made between Mr Dixon and Mr Stevens in relation to the Retention Bonus during the 23 August or 17 September Meetings, it did find that Mr Stevens agreed to leave his employment with Spotless in reliance upon the Termination Pay Calculation which was provided to him after the 17 September Meeting. On this basis, the Court of Appeal found that Spotless had agreed to pay Mr Stevens the Retention Bonus upon termination.

In respect of Spotless’ argument that no consideration was provided by Mr Stevens in exchange for Spotless agreeing to pay the Retention Bonus, the Court of Appeal found that the consideration that was exchanged was Mr Stevens’ willingness to “leave gracefully”, such that there was a valid agreement.

Bottom line for employers

• Employers negotiating a separation with employees must be careful of any representations made regarding the payments the employee will receive on termination, and ensure that the accuracy of the payment amounts stated—such representations may give rise to an agreement to pay the employee that amount in exchange for the employee agreeing to separate.