Is your organisation contractually bound by its redundancy policy or practice, even if it is not published or provides only discretionary benefits? Are you concerned that the humble staff ‘FAQs’ may unintentionally create binding rights? A recent decision of the NSW Court of Appeal offers insight into these issues.

Are policies part of the employment contract?

For some time now, employers have been aware of the risk of being bound by promises and aspirational statements in their policies and procedures. It is not uncommon for employers to expressly exclude these documents from the terms of their employment contracts, or to keep certain policies and procedures confidential to management (i.e. ‘closed’ to staff) and drafted in discretionary terms.

ABN Amro had in place a ‘closed’ redundancy policy. The ‘closed’ policy set out that, should the redundant employee sign a deed of release, they would be entitled to a severance payment and discretionary ex gratia payment. Former ABN Amro employees, Mr James and Mr McKeith, claimed they had a contractual right to the benefits of the ‘closed’ redundancy policy (including the ex gratia payment). In April last year, the Supreme Court of NSW (in James v Royal Bank of Scotland; McKeith v Royal Bank of Scotland [2015] NSWSC 243) upheld Mr James’ claim, awarding him more than $2.9 million in damages. Relevantly, while Mr James’ employment contract required him to comply with ABN Amro’s policies, the contract did not expressly exclude terms of the policies.

Unlike Mr James, Mr McKeith’s claim was unsuccessful for a number of reasons, including the absence in his employment contract of a clause requiring compliance with ABN Amro’s policies.

The NSW Court of Appeal, however, has taken a different view. It disagreed that the policy compliance condition in Mr James’ employment contract resulted in the redundancy policy being incorporated into his contract of employment. The fact the redundancy policy was not published to staff and was not provided to Mr James at the time he entered into his employment contract were material to the Court’s finding.

Staff FAQs – are they contractually binding?

The dispute over the status of ABN Amro’s redundancy policy arose in the context of a GFC corporate take-over by a consortium, of which the Royal Bank of Scotland was a member.

During the take-over process, there was a recognised need to encourage staff to stay and a communication pack was provided to staff. Mr James and Mr McKeith received the pack. The pack included FAQs which, regarding redundancy, included a response confirming the consortium guaranteed that existing ABN Amro redundancy policies and practices would remain in place for a period of at least two years. The NSW Court of Appeal concluded that the FAQ response was an offer by the Royal Bank of Scotland (albeit communicated by ABN Amro) to all staff to be bound by the ABN Amro redundancy policy. That offer could be accepted by continuing to work for the business. Mr James and Mr McKeith were both found to have continued in their employment in reliance on this promise and, as a result, were contractually entitled to the benefit of the redundancy policy.

Limits on exercise of discretion

Perhaps the most significant finding for Mr James and Mr McKeith was that the Royal Bank of Scotland did not breach the redundancy policy by declining to pay them an ex gratia payment. Indeed, it was held that it was not an arbitrary, perverse or irrational exercise of the discretion to:

  • ask Mr James to sign a deed of release on the terms offered in return for an ex gratia payment under the redundancy policy
  • decide that, after a certain date, ex gratia payments would not be offered to employees under the redundancy policy due to insufficient funds being available in the bonus pool. No ex gratia payment was offered to Mr McKeith as a result of this ‘blanket’ policy.

As a result, Mr James (who refused to sign the deed of release offered) and Mr McKeith were only entitled to severance payments of $432,692 and $375,961 respectively – a far cry from Mr James’ initial damages order of $2.9 million and the ex gratia payment of $4 million sought by Mr McKeith.

Implications for employers

Claims for damages for breach of company policy or practice remain a real risk for employers. Ultimately, it is the intention of the parties that will determine whether a company’s policies or practices are incorporated into an employment contract.

The implications of this case mean employers must:

  • ensure contracts are well drafted and expressly deal with the status of policies and practices
  • expressly state that ‘management only’ policies are not intended to be contractually binding
  • avoid making promises or assurances to give employees comfort, whether in the form of one on one discussions, group presentations or FAQ documents, as reliance on these promises or assurances may well give rise to a binding agreement
  • be mindful that, while the courts have recognised an implied term that an employer’s discretion can be exercised in a manner contrary to an employee’s interests, it must not be exercised ‘arbitrarily, capriciously or unreasonably’.