For the first time the Federal Court of Australia has found an implied term of mutual trust and confidence to exist in an employment contract under Australian law. What does this mean for employers everywhere, ask Dr Graham Smith and Ned Overend.

For the first time the Federal Court of Australia has found an implied term of mutual trust and confidence (the Implied Term) to exist in an employment contract under Australian law.

The contract of employment

The relevant contract considered by the Court provided that, if the Executive's position was made redundant and the employer was unable to redeploy him in its operations, he was to receive a redundancy entitlement commensurate with his service. An appendix to the contract provided that the employee should be familiar with policies of the employer which applied to his employment. Those policies included the Redundancy, Redeployment, Retrenchment and Outplacement Policy (the Redeployment Policy).

It was specifically stated in the manual that held the Redeployment Policy that these polices do not form part of the employment contract. In this regard Justice Besanko followed the decision of Yousif v Commonwealth Bank of Australia (2010) 193 IR 212 that held, in the absence of countervailing factors, a policy did not form part of the contract where it (the policy) expressly stated otherwise.

Despite holding that the Redeployment Policy did not form part of the employment contract Justice Besanko still found that a serious breach of that policy would gave rise to a breach of the Implied Term and therefore to a claim for damages.

The implied term of mutual trust and confidence in contracts of employment?

Justice Besanko relied on the English decsion of Malik v Bank of Credit and Commerce International (in liq.) [1998] AC 20 which received support from the High Court in Koehler v Cerebos (Aust) Ltd (2005) 222 CLR 44 in deciding that the Implied Term did exist in a contract of employment in Australia and that such a term would be breached in circumstances where:

  • an employer does not have a reasonable and proper cause for their conduct; and
  • such conduct is likely to destroy or seriously damage the relationship of confidence and trust between the employer and employee.

Justice Besanko noted that not every breach of an employment policy would give rise to a breach of the Implied Term, what was required was a serious breach.

Key points

  • A serious breach of employment policies will not only be considered a breach of the Implied Term but may result in a Court awarding damages to an employee;
  • Expressly excluding policies from the contract of employment will not prevent a breach of the Implied Term in situation where there is a serious breach of the policy; and
  • Following this decision it will not be enough to generally exclude employment policies or specific policies from a contract of employment to avoid breaching the Implied Term the Implied Term itself will need to be expressly excluded from the contract.

Next steps for employers

To avoid inadvertently breaching the Implied Term employers should:

  • systematically review their employment policies;
  • monitor compliance with their policies;
  • consider expressly excluding the Implied Term from contracts of employment by an express written term; and
  • look out for developments in the area, including a potential appeal.