It is not uncommon to be confronted with a situation where a senior employee has to have their employment contract terminated for reasons other than misconduct. One of the big questions is always “how much notice should I provide”?
In some instances the contract is clear on termination arrangements. In many other instances, the contract is silent and the business will have to decide what “reasonable notice” should be provided to the employee to meet legal obligations.
In this Alert, Special Counsel Shane Entriken and Solicitor Claire Tuffield provide some commentary on “reasonable notice” as it relates to the termination of employment, and cover a few key cases from 2014.
How can reasonable notice be implied?
It is not new that when an employee’s employment is terminated (except for misconduct) an employee is entitled to be provided with notice (or payment in lieu of actual notice).
Where a contract of employment is for an indeterminate period, and in the absence of any express term in an employment contract (or legislative provision such as an award) setting out the notice to be provided on termination, a term will be implied at common law that either party can terminate the contract (without cause) upon the giving of reasonable notice to the other.
You might think that under the Fair Work Act 2009 (Cth) there should be no instance where notice needs to be implied into an employment contract because all employees in Australia are covered by the National Employment Standards (NES), a workplace agreement or a modern award, which include specific provisions in relation to notice for termination.
Well these minimums do exist, however in the case of mid to senior level executives on common law contracts the NES minimums for notice on termination will usually not be regarded by a Court as appropriate.
When will reasonable notice be implied?
The Court in BP Refinery (Western Port) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283 outlined the issues a court should consider before it will impute terms into a contract.
The terms must:
- be reasonable and equitable;
- be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
- be so obvious that “it goes without saying”;
- be capable of clear expression; and
- not contradict any express term of the contract.
How long is reasonable?
The Courts will consider various factors when determining what reasonable notice is in each individual case, including the employee’s:
- difficulty in finding comparable employment;
- seniority of the position; and
- length of employment with the employer.
The period of notice can range anywhere from a couple of weeks to a couple of years.
As always, each case must be considered on its own facts. However, the primary purpose of notice is to enable the employee to secure comparable employment. Therefore, if the employee is senior (both in terms of age and responsibility), has been in the employment for a long period of time, or is otherwise not able to easily obtain similar work, the greater this risk that an employee could claim that they are entitled to reasonable notice in the manner of years rather than weeks.
Whilst usually measured in months there is increasing authority to suggest that year’s worth of notice will be appropriate in certain situations.
Key cases from 2014
In a recent Federal Court adverse action case an employee (Ms Shea, Director of Corporate Affairs), claimed that she was entitled to damages for loss for five years, or until she obtained suitable employment (Shea v TRUenergy Services Pty Ltd (No 6)  FCA 271).
The Judge in the TRUenergy Case did not find in Ms Shea’s favour. However, his Honour did indicate that five years was an unduly long period, but taking into account the limited number of similar positions and the impact of the proceedings, one year would be unrealistic, and that two years would be more appropriate. Ms Shea had only been employed with the employer for five years.
The Supreme Court of New South Wales recently found that the amount of reasonable notice implied into a contract with a long serving senior employee (Ms Ma, Financial Controller) was ten months (see: Susanna Ma v Expeditors International Pty Ltd; Susanna Ma v Expeditors Pty Limited  NSWSC 859):
- Ms Ma’s contract did not have an express termination clause in her contract and her employer attempted to pay her five weeks’ base salary in lieu of notice. Ms Ma alleged that her employer was in breach of an implied term of her employment contract by failing to provide reasonable notice of termination. Ms Ma claimed that reasonable notice in her case was 12 months notice (or payment in lieu of notice).
- The Court confirmed that absent any express evidence, a term of reasonable notice is to be implied into an employment contract. The Judge looked at various factors and found that Ms Ma should have been paid, not five weeks, but ten months reasonable notice based on a salary package of about $750,000 (base pay of $70,000 plus incentive payments).
- Relevant factors in this case included that Ms Ma: was 49 years old; had been working for the employer for over 24 years; had managed a team of 14 employees (although was not in the highest management group) and received substantial remuneration which was reflective of her seniority and the level of trust in her ability. The Judge also found that significant weight should be attributed to the fact that Ms Ma had been unemployed since her dismissal and her prospects of finding comparable employment were low.
- In Susanna Ma’s case the Court also found that Ms Ma’s accrued long service leave should have been based on her salary that included substantial incentive payments. The end result was that Ms Ma was entitled to an award of over $1 million.
In a more recent Supreme Court of South Australia decision the appeal bench upheld a ruling that an executive employee (Mr Hand, CEO) was entitled to 12 months notice of dismissal (see: District Council of Barunga West v Hand  SASCFC 90):
- Mr Hand had been employed by the local council for over 40 years under an oral contract which did not specify duration or notice of termination.
- The local council terminated Mr Hand’s employment and provided nine and a half months' payment in lieu of notice.
- Mr Hand argued that his dismissal was invalid and in the event that the local council had been entitled to terminate upon the giving of reasonable notice (which in this case he denied), in his case reasonable notice was more than nine and a half months.
- The local council’s position was that Mr Hand’s employment was governed by the SA Municipal Salaried Officers Award, which allowed dismissal on five weeks’ notice. In the alternative they argued that it was able to dismiss Mr Hand’s employment without providing notice (for cause), on reliance on alleged conduct which was discovered after the dismissal took effect. Lastly, they also argued that they could have dismissed him on reasonable notice at common law, i.e. nine and a half months (which they paid him).
- The Court held that Mr Hand’s contract was not covered by the award and that the contract of employment contained an implied term allowing termination (without cause) on the giving of reasonable notice of 12 months (not nine and a half months).
Tips for employers?
Have well drafted contracts of employment in place. Without an express (and current) agreement in place, employees who are terminated (without cause) are entitled to be provided with reasonable notice, which is largely unpredictable within certain established limits. The following questions may be left for the Court to decide:
- The length of the notice, i.e. will reasonable notice be five weeks or two years; and
- How will the notice amount be calculated, i.e. does it include incentive payment and bonuses like in Ms Ma’s case (where she was awarded in total over $1 million in damages)?
Where employees have a current and unambiguous employment contract the notice obligation will be provided (or paid) in accordance with the express terms of the agreement. For this reason - employers need to ensure that their employment contracts are up to date and provide sufficiently certain termination clauses.