A Federal Court ruling has found that an employer engaged in misleading and deceptive conduct during pre-employment negotiations and awarded the employee $333,422 compensation by way of loss and damage.
In Rakic v Johns Lyng Insurance Building Solutions (Victoria) Pty Ltd (Trustee), 1 Ms Rakic, an experienced employee in the insurance industry, was working for Pattersons Insurerbuild Pty Ltd (Pattersons) when Johns Lyng Insurance Building Solutions (Victoria) Pty Ltd (Johns Lyng) sought to poach her to become its General Manager.
In setting out the terms of Ms Rakic’s remuneration package during the pre-employment negotiation process, Johns Lyng proposed a reduction in base salary of around $100,000 in comparison to her pay at Pattersons, but included a contractual entitlement to 2.5% of the net profit of the business for the 2012/2013 financial year, and 5% equity in the business after her first six months of employment.
In the course of the pre-employment negotiations, Johns Lyng made a series of representations to Ms Rakic as to the profitability of the business. In a meeting over coffee at Brunettis Cafe in Carlton (Brunettis Meeting), Mr Didier, a director of Johns Lyng, described the insurance building business to Ms Rakic as the “jewel in the crown business”, the “founding business”, and as a “strong and respected business for many years”.
The equity and profit share system was meanwhile described by Mr Didier as “quite a successful model” which had been in place for a number of years and which had been very successful for him personally. Critically, Ms Rakic was also assured that the 2.5% net profit would remedy the shortfall in salary. An email sent following the meeting showed a strong positive trend in the form of substantial profits for the 2011 and 2012 financial years and forecasted even greater profit for the 2013 financial year, at around 116 percent of the 2012 financial year profit.
On this basis, Ms Rakic accepted the offer of employment at Johns Lyng. However Johns Lyng failed to meet the profit expectations which reduced Ms Rakic’s share of the profits. Ms Rakic subsequently brought a claim against Johns Lyng on the basis that the statements made to her during the recruiting process concerning the future profitability of Johns Lyng constituted misleading and deceptive conduct within the meaning of sections 18 and 31 of the Australian Consumer Law (ACL). She sought damages on the basis that she had relied on the representations to her detriment. Johns Lyng argued that the true cause of its diminished net profit was unforeseeable and therefore that the representations made to Ms Rakic concerning expected profits were reasonably-made at the time.
In analysing whether Johns Lyng had engaged in misleading and deceptive conduct in the course of pre-employment negotiations with Ms Rakic, the Court looked at the following issues:
- whether the representations concerning Johns Lyng's profitability were in fact made to Ms Rakic;
- if the representations were made, whether Johns Lyng's conduct in the making of any such representations was misleading or deceptive;
- if the representations were made and were found to be misleading or deceptive, whether Ms Rakic suffered any loss or damage because of Johns Lyng's conduct; and
- if Ms Rakic did suffer loss as a result of reliance on the representations, the amount of loss and damage suffered by Ms Rakic.
The Court found that representations concerning Johns Lyng's future profitability were made to Ms Rakic, both at the Brunettis Meeting and in the email sent to Ms Rakic following the meeting, which forecast significant profit for the 2013 financial year.
In arriving at this conclusion, the Court noted that it would have been "abundantly clear" that Ms Rakic was concerned with the issue of whether employment with Johns Lyng would be more or less remunerative than her employment with Pattersons, and that, in this context, statements extolling the virtues of the business and magnifying its strength, profits, and success could not have been understood otherwise than as suggesting that those conditions were likely to continue into the foreseeable future.
Moreover, Ms Rakic would have reasonably assumed that Johns Lyng's directors were in a good position to make such predictions. The Court also noted that it was not necessary that Johns Lyng guarantee its profits for the upcoming financial year. It sufficed that the representations were made in terms of high profitability being a likelihood, with the result that there was "nothing unusual" about Ms Rakic having entered into the contract of employment with Johns Lyng on the basis of a likelihood as opposed to a certainty.
The Court also rejected Johns Lyng's argument that the representations made to Ms Rakic were not made in trade or commerce, finding that misleading or deceptive conduct in the course of negotiations for employment may support a cause of action under section 18 of the ACL.
In determining that the representations were misleading or deceptive, the Court noted that there was "very good reason" to believe that the 2011 and 2012 figures would not be surpassed and that Johns Lyng had failed to take account, in the representations made to Ms Rakic, of the "very real risk, indeed the likelihood" of substantially diminished revenues and profits. The Court subsequently found that Ms Rakic had suffered loss or damage because of Johns Lyng's conduct, in that she had relied upon the representations made to her concerning the company's anticipated profitability in entering into the contract of employment.
In assessing the amount of damages to be awarded to Ms Rakic, the Court considered "but for Johns Lyng's conduct, when and for what remuneration would Ms Rakic have left employment with Pattersons?". The Court noted that while Ms Rakic was dissatisfied at Pattersons, she was not so dissatisfied that she would have left for a job that was substantially less remunerative.
The most likely outcome, as determined by the Court, was that Ms Rakic would have worked for Pattersons for around 2.5 years and then left for a job offering a salary equivalent or slightly higher than that which she received at Pattersons. The Court also took into account the fact that Ms Rakic had been made redundant by Johns Lyng, whereupon she gained employment with "The Innovation Group", where she remained for around fifteen months after which she was again made redundant. Whilst at Pattersons, Ms Rakic's employment was not at risk and she would have been able to find replacement employment in her own time and without financial pressure. On this basis, the Court awarded Ms Rakic damages in the order of $333,422.
Bottom line for employers:
Employers must remember that the ACL provisions concerning misleading and deceptive conduct can apply to pre- employment negotiations.
As the ACL provisions concerning misleading and deceptive conduct are civil penalty provisions, significant penalties may be imposed on employers who make misleading statements concerning employment terms and conditions.
When engaging with a prospective employee, employers must ensure that there is a reasonable basis for representations made and avoid "overselling" the company by making representations that are misleading or deceptive. An employee may receive an award of damages if it is established that they have relied on, and suffered loss as a result of, misleading or deceptive misrepresentations made in the course of employment negotiations.
- Representations made to prospective employees are considered conduct in trade or commerce and may be caught by the Australian Consumer Law provisions relating to misleading and deceptive conduct.
- Employers must ensure that there is a reasonable basis for representations made and avoid “overselling” their business by making representations that are misleading or deceptive.