What happened?

This decision of the Full Court of the Federal Court is another sharp reminder to employers about the need to ensure their policies do not inadvertently become contractual. 

In Romero v Farstad Shipping (Indian Pacific) Pty Ltd [2014] FCAFC 177 (22 December 2014), the Full Court held that, while aspects of the Farstad's Workplace Harassment and Discrimination Policy (Policy) were merely 'aspirational', the policy still formed part of the employee's contract of employment. 

Importantly, the Court noted that Farstad's offer letter said that 'all Farstad Shipping Policies are to be observed at all times' and the employee had received a copy of the Policy, was required to sign it, and also received training about its content.

The Court also concluded that Farstad had failed to properly comply with the Policy when conducting an investigation and, accordingly, the employee's contract had been breached.

What were the facts of the case?

The employee, Lisa Romero was a second officer with Farstad Shipping (Indian Pacific) Pty Ltd (Farstad).  While at sea, she had a conflict with her ship's Captain, Captain Martin. Following her disembarking from the voyage, she sent an email to Farstad outlining her concerns and stating that she felt bullied by Captain Martin. She stated, however, that Captain Martin's behaviour was a matter for Farstad management to address. 

Importantly, the Full Court found that Ms Romero's email did not constitute a formal or informal complaint under the Policy. Notwithstanding, Farstad decided to investigate the matter as if a complaint had been made. In doing so, it also considered a claim by Captain Martin that Ms Romero was incompetent as a second officer.

In finding that the Policy was incorporated in Ms Romero's contract of employment, the Full Court noted that:

  • Ms Romero's letter of engagement stated that 'Farstad Shipping Policies are to be observed at all times'
  • the Policy itself provided that it applied to all employees, contractors and visitors; and
  • employees were trained in the Policy's operation and subsequently required to sign it.

Importantly, neither the letter of engagement nor the Policy said that the Policy was not contractual.    In considering its language, the Full Court found that aspects of the Policy were 'merely aspirational'.  However, it found that certain specific obligations were clearly ascertainable and quite capable of precise identification. In this respect, it stated that, in situations where clear language is used and sufficient emphasis placed upon the need for compliance (implicitly by both parties) with the terms of a company policy then, especially where that goes to fundamental conditions of employment, the parties would be expected to regard such terms as contractually binding.

The Full Court then considered whether the Policy had been properly complied with. Relevantly, the Policy stated, among other things, that Farstad 'will' do certain things, such as handle complaints promptly, with confidentiality, impartiality and with sensitivity to a complainant's needs. It also clearly expressed that it was to be an employee's decision as to whether or not a complaint would be investigated.

Ultimately, the Full Court found that Farstad failed to comply with its obligations under the Policy by:

  • investigating the matter in circumstances where Ms Romero had not officially made a complaint or requested that the matter be investigated,
  • failing to properly document the investigation,
  • failing to carefully and systematically investigate Ms Romero's allegations, but rather 'rolling up' her supposed complaint with the complaint made by Captain Martin as to her competence, and
  • in doing so, demonstrating 'partiality' towards Captain Martin.

The Full Court then remitted the question of repudiation and damages to the Court below.

Why is it important?

First, if an employer's policies are incorporated in its employees' contracts, a failure to abide by them will constitute a breach of contract. 

Depending on their seriousness, breaches of incorporated policies could give rise to a major damages claim. For example, if a contractual policy says an employee will be treated fairly, and they are dismissed in breach of this, damages would reflect how long the employee would have remained had they been treated fairly less any replacement earnings and a discount for the possibility of leaving for other reasons. In extreme cases, plaintiff lawyers can claim damages for the remainder of an employee's working life.

The Court did not consider the issue of damages in Farstad – they remitted this to the Court below.

Second, the Court held Farstad's investigation to a very high standard  – for example, finding breaches of the Policy in failing to properly document the investigation; investigating the allegations in a rolled up manner rather than in a careful and systematic way and being partial to the ship's captain in the investigation.

Finally, even if policies are not contractual, an employee may claim an employer has engaged in misleading and deceptive conduct if they breach a policy.

What should I do?

You need to be careful when drafting policies and contracts, to ensure that a failure to follow the terms of a policy does not constitute a breach of contract.

If you have not done so recently, you should review both your contracts and policies to ensure they expressly say that policies are not incorporated into employees' contracts. This is something you should consider if an opportunity arises to vary current employees' contracts of employment, on promotion and certainly when employing new employees.

The case also highlights the need for employers to build some flexibility into their policies and, as part of this, to reserve the right to depart from their policies if they wish.

Want more information?

The full text of the Full Court's decision can be found here: Romero v Farstad Shipping (Indian Pacific) Pty Ltd [2014] FCAFC 177

The decision appealed from can be found here: Romero v Farstad Shipping (Indian Pacific) Pty Ltd [2014] FCA 439