A recent decision¹ of the Court of Appeal in Victoria serves as a reminder that:

  • changes to an employee’s bonus arrangements or responsibilities can amount to a repudiation of their employment contract
  • an employer cannot enforce a restraint of trade against an employee whose employment came to an end as a result of the employer’s repudiation.

[1] Crowe Horwath (Aust) Pty Ltd v Anthony Loone [2017] VSCA 181

Background

Mr Loone was employed by Crowe Horwath (Aust) Pty Ltd (CHA) as the Managing Principal of its Launceston office. The dispute before the Court arose out of a number of changes that were made to Mr Loone’s role and bonus arrangements following the acquisition of the Launceston office by another company.

In July 2016, Mr Loone told CHA that he would be leaving with immediate effect because CHA had ‘not fulfilled their obligations to me under my employment contract’. Mr Loone asserted that changes to his role and bonus arrangements did not reflect what he agreed to when he signed his employment contact. When CHA tried to enforce Mr Loone’s post-employment restraints, he argued the restraints were not enforceable because CHA had repudiated his employment contract.

What is repudiation of contract?

Repudiation occurs when one party to a contract acts in a manner that conveys an intention to no longer be bound by the contract (or a fundamental obligation under that contract). In this situation, the innocent party can choose to either accept the repudiation (meaning the contract terminates) or to keep the contract on foot.

A common example of when allegations of repudiation arise is in cases where an employer terminates an employee’s employment without notice (usually for serious misconduct). In such cases, employees often assert that, because the nature of their conduct does not amount to ‘serious misconduct’, the employment contract has been repudiated by the employer.

Changes to bonus arrangements amounted to repudiation

Two changes made by CHA to Mr Loone’s bonus arrangements were found to amount to a repudiation of his employment contract. Those changes were the decisions that:

  • Mr Loone’s work on a particular transaction would not be taken into consideration in determining the amount of any bonus payment – the Court of Appeal agreed this was a breach of the clause in Mr Loone’s employment contract which provided his entitlement to the discretionary bonus would be determined by factors including his personal performance.
  • the discretionary bonus payment would be divided into two components (a cash payment and a deferred incentive) – the Court of Appeal agreed this was a breach of a clause in Mr Loone’s employment contract which stated he would be entitled to receive a bonus payment ‘in any year’ if he remained in employment at the time the bonus was paid.

Changes to role amounted to repudiation

Mr Loone’s employment contract contained a clause allowing CHA to require him to occupy a position other than Managing Principal, but only if CHA consulted with Mr Loone about the change and the other position was at least equivalent in status and remuneration to the Managing Principal role.

At first instance, the Court made the finding (not challenged on appeal) that changes implemented in the period since 2015 amounted to a significant reduction in Mr Loone’s responsibilities. The Court of Appeal also upheld the findings at first instance that CHA had not consulted with Mr Loone about those changes and the changes in his role meant that he did not occupy the same status as previously (even though his remuneration was unchanged). This amounted to a repudiation of Mr Loone’s employment contract by CHA.

Enforceability of post-employment restraints

The Court of Appeal agreed CHA could not enforce Mr Loone’s post-employment restraints where his employment had come to an end due to his acceptance of CHA’s repudiation of Mr Loone’s employment contract. The Court of Appeal considered a number of cases in which courts in various jurisdictions have refused to enforce restraints against employees whose employment contract came to an end due to the repudiatory conduct of their employer. In essence, the Court of Appeal decided that, this is the case because a party will not be entitled to equitable relief (in this case, an injunction) where it has not been ready and willing to perform its part of the contract.

Lessons for employers

This case serves as an important reminder that:

  • changes to an employee’s role or remuneration structure can amount to a repudiation of their employment contract
  • an employer cannot enforce a restraint of trade against an employee where that employee’s employment has come to an end because of the employer’s repudiation.

Employers should be vigilant about minimising the risk of an employee asserting there has been a repudiation during business restructures, remuneration reviews and when considering terminating an employee’s employment for serious misconduct.