In brief

  • The Federal Court has recently handed down a decision which found that a ‘serious’ breach of a redundancy policy by an employer amounted to a breach of the implied term of mutual trust and confidence, even though the relevant policy was expressly excluded from being incorporated into the contract of employment.
  • Employers will need to carefully review and consider the interaction between their policies and contracts of employment.
  • Employers should consider taking advice on steps available to minimise risks in this area, including by careful drafting of relevant policy and contractual documents.

Overview

A recent Federal Court decision has found that an employer’s failure to comply with one of its policies was a breach of the implied term of mutual trust and confidence. In a decision handed down on 3 September 2012,1 Justice Besanko awarded in excess of $300,000 damages for breach of the implied term of mutual trust and confidence in an employee’s contract of employment. In particular, the court found that:

  • there was an implied term of mutual trust and confidence in the contract of employment between Mr Barker and the Commonwealth Bank of Australia, and
  • a ‘serious breach’ of a redundancy policy by the bank amounted to a breach of the implied term, even though the relevant policy was expressly excluded from being incorporated into the contract of employment.

Background

The case involved an employee, Mr Barker, who had commenced working at the Commonwealth Bank of Australia (the Bank) in 1981 and by 2004 was in the position of Executive Manager. In 2009, he was informed that his position had been made redundant. He was then put on paid leave and later advised that his employment would be terminated.

The Bank had in place a policy dealing with redundancy and redeployment (the Redeployment Policy). The Redeployment Policy provided that:

  • the Bank was to notify any affected employee, at the earliest practicable time, of the likelihood of redundancy, redeployment and possible retrenchment,
  • redundant employees were to be reassigned and retrained as appropriate, and
  • any decisions about redeployment and retrenchment were to be based on merit.

The Redeployment Policy (like other of the Bank’s policies) was not incorporated into Mr Barker’s contract of employment.

Mr Barker claimed damages against the Bank in relation to its conduct. One of the grounds for his claim was that the Bank breached the implied term of mutual trust and confidence because it had not complied with the Redeployment Policy.

Breach of the implied term?

Justice Besanko held that there was an implied term of mutual trust and confidence in the contract of employment on the basis that such a finding was consistent with the approach taken in England and the views expressed by four Justices of the High Court in Australia. He noted that the implied term would be breached where:

  • a party does not have reasonable and proper cause for his or her conduct, and
  • the conduct is likely to destroy or seriously damage the relationship of confidence and trust.

Even though the Bank’s policies were expressly excluded from being incorporated into the contract of employment, Justice Besanko found that, while not every breach of company policy would amount to a breach of the implied term, a serious breach of a policy could do so. In the circumstances, the court found that the Bank’s conduct involved a breach of the Redeployment Policy because:

  • there was a significant lack of communication by the Bank in relation to Mr Barker’s redeployment opportunities,
  • the Bank failed to engage in any meaningful way in the redeployment process, and
  • the Bank did not consult with Mr Barker about retraining and no redeployment plan was developed or implemented.

Ultimately, the court found that the Bank’s inactivity within a ‘reasonable period’ meant that its breach of its Redeployment Policy was a ‘serious breach’ and therefore that it was in breach of the implied term of mutual trust and confidence. Mr Barker was awarded damages for economic loss of $317,500, being based on an assessment of the loss of past and future earnings.

Implications of this decision

The decision is important for a number of reasons:

  • as we have previously reported, Australian case law has now recognised the implied term of mutual trust and confidence in contracts of employment. However, few previous decisions have actually resulted in an award of damages for a breach of that term,
  • previous cases have also indicated a reluctance by courts to find that breaches of the implied term might occur in connection with termination of employment – in this case, even though the conduct occurred in connection with redundancy, the court found that the issue did not relate to whether the implied term applies at the point of dismissal, and
  • despite the fact that the relevant policy was expressly excluded from the contract of employment, the decision found that a ‘serious’ breach of a policy could nevertheless amount to a breach of the implied term of mutual trust and confidence – and result in damages.

Employers will need to carefully review and consider the interaction between their policies and contracts of employment. Employers should consider taking advice on steps available to minimise risks in this area, including by careful drafting of relevant policy and contractual documents.