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If You Cannot Find It – You Cannot Rely on It: The Importance of Contract Administration

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4 Aug 2017

With the arduous task of conducting performance appraisals out of the way, many employers understandably think the hard yards have been done. Although carrying out performance reviews may necessitate both positive and negative conversations with employees, depending on the kind of feedback being provided, many employers often disregard a fundamental and imperative step in the process to consolidate such discussions. By this we are talking about the implementation of appropriate paperwork to reflect the outcomes of individual employee performance reviews, regardless of whether such outcomes are positive or negative. For example, if an employee has received criticism and feedback about concerns regarding their performance or behaviour, such matters should be set out in writing to the employee. Further, if an employee is given a warning (or some other form of counselling), this ought to be clearly articulated together with an outline of the way in which the parties have agreed to move forward. Alternatively, where an employee has received glowing praise or a promotion as a result of a performance review, it is equally important to set out the relevant changes to the employment (such as salary increases, changes in title and so forth) and often employers need to consider whether a new employment contract or contract variation letter should be issued.

Although there is much to be said about contract administration, including ensuring that the contract has been appropriately prepared and vetted for the candidate in question, all necessary financial information has been forwarded to payroll and confirmation has been received from the employee indicating their acceptance of the employment offer, for the purposes of this alert, we will explore some of the less obvious and more subtle nuances of employment contract administration. From the outset, it should be noted that the four most fundamental (and frequently overlooked) rules of contract administration in an employment context are:

 

  1. the employment contract should be in writing;

  2. the identity of the employer and the employee should be correct;

  3. the employment contract must be signed by the employee (or accepted in some other reliable way); and

  4. the employment contract should be securely filed in an accessible location.

 

Whilst for many of our readers the steps described above will seem obvious and self-explanatory, it is startling how often clients are unable to produce a signed employment contract, and in some cases any employment contract at all despite being of the belief the employee had signed and returned the contract around the time they commenced their employment. In these circumstances, without being able to rely upon a signed contract of employment, the employer may face unnecessary significant challenges in terminating the employment relationship and seeking to protect their confidential information and commercial goodwill after the employment has ended. For this reason, it is essential that employers diligently implement proper administrative procedures with a view to ensuring that employment contracts are signed and returned by the employee, and have been correctly saved in electronic format to the system and the hard copy kept in a safe location. Not only is it important for employers to ensure they can locate employment records (such as an employment contract), the Fair Work Regulations 2009 (Cth) impose obligations on employers to keep such records which specify, among other things:

  1. the employer's name;

  2. the employee's name;

  3. whether the employee's employment is full-time or part-time;

  4. whether the employee's employment is permanent, temporary or casual;

  5. the date on which the employee's employment began; and

  6. on and after 1 January 2010--the Australian Business Number (if any) of the employer,

during the employment and for a period of 7 years following the date of termination.

 

The next fundamental aspect of contract administration in an employment context is to review the agreement on a regular basis to ensure it is up-to-date and consistent with the role being performed by the employee during their employment. This step helpfully ties into the performance review period by ensuring that employees who receive, among other things, career advancement opportunities, salary increases, modified duties, promotions (or demotions) or warnings are given appropriate supporting documentation. This is especially important in circumstances where the employment contract does not contain a clause indicating that the terms and conditions will apply to the employee in whichever position they hold. In any event, even where the employment contract expressly says it will continue to apply regardless of the employee’s role within the organisation, employers are encouraged and could do worse than to provide employees with a letter confirming the performance review outcomes and any agreed actions going forward. In addition, where there are substantial changes to the employees’ terms and conditions of employment, it is advisable to provide the employee with a contract variation letter reflecting the relevant changes including any additional terms which the employer considers is appropriate as a result of their progression to a more senior role within the organisation. Such terms may include, for example, broader confidentiality and post-employment obligations and employers should consider the measures available to them to protect the business from loss of key personnel. In order to mitigate this risk, we recommend employers include well drafted restraint of trade clauses in their employment contracts and continually review these as employees are promoted.

Finally, you may have the most comprehensive contracts of employment, all appropriately signed by the relevant employees, and also procured the necessary variation letters, warnings and the like, but if they cannot be located they are as good as useless. We often hear from our clients that they cannot find the relevant signed employment contract, or that the variation letter was prepared but not given to the employee (or on most occasions, there is no reliable evidence showing the document was provided to the employee). This is often what creates enormous practical problems for the organisation. In an unfair dismissal environment, if you cannot prove that you provided the employee warnings (because you do not have them in writing or they cannot be found), the employee will almost certainly be successful. Similarly, if you wish to rely on a restraint provision, but find that the employee has been promoted into a different role but no new contract has been retained or it cannot be found, the business will not be able to protect its goodwill including its customer connections and confidential information. It is therefore vital for all employers to establish reliable and secure processes for maintaining, retaining and recovering essential employment documents.

The recent decision of Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSC 163 demonstrates the importance of appropriate contract administration. In this particular case, Mr Loone was employment by Crowe Horwarth (Australia) Pty Ltd (“CHA”) pursuant to a written employment contract as Managing Principal of CHA’s Launceston accounting office. CHA was acquired by the Findex Group, who then commenced restructuring the business. As part of this restructure, CHA significantly changes Mr Loone’s duties, such that he argued he was no longer the Managing Principal.

Mr Loone had contributed significantly to CHA’s successful acquisition of another accounting firm in 2014 and 2015. Mr Loone believed the associated profits from the acquisition should have been considered as part of CHA’s calculation of his yearly bonus. However, on 1 July 2017, Mr Loone was informed that those profits would be excluded from the calculation of the bonus pool for the Launceston office. In light of these circumstances, and substantial changes to his position, Mr Loone considered that the actions in failing to consider his efforts in procuring the sale, breached the bonus clause in his contract, which required CHA to take into account his personal efforts in determining the bonus payable to him. He considered the breaches as fundamental and constituting a repudiation by CHA of his contract of employment. Mr Loone terminated his employment on the basis of repudiatory breach by CHA.

Among other things, the contract contained a restraint of trade clause that prevented Mr Loone from soliciting CHA’s clients, and from conducting any business similar to or in competition with CHA within a 5km radius of the office for a period of 12 months following termination. In turn, CHA filed proceedings to enforce Mr Loone’s post-employment obligations.

The Court held that despite the fact, for the most part, that the restraint of trade clause was enforceable, and Mr Loone’s employment contract provided CHA absolute discretion to determine the bonus, the contract required CHA to consider Mr Loone’s personal performance and failure to include the acquisition in Mr Loone’s bonus calculation, meant it had failed to consider his performance in beach of a fundamental obligation under the contract. In addition, the Court found CHA’s actions in changing Mr Loone’s position without consultation as required by the contract constituted a repudiation of the contract. As a result, both the trial judge and the Court of Appeal held that CHA had repudiated the employment contract and could not rely on the post-employment restraints.

In light of this decision, it is important for employers to not only ensure their restraint of trade clauses are well drafted but also to be mindful that their own actions do not lead to the employment contract being held inoperative, thus making the restraints unenforceable. Of particular importance is the role appropriate contract administration may have had in preventing the outcome faced by CHA. Had CHA consulted with Mr Loone regarding changes to his role and made a written record of these discussions, it would have been able to show it had not breached the contract. In addition, had they made a record showing they had considered Mr Loone’s performance when considering his bonus, again they would have defeated his claim. It is likely however, that CHA was not even aware of the terms of Mr Loone’s contract when making these decisions, and they certainly did not look at his contract prior to making the decisions regarding his bonus and position.

If you wish to discuss any aspect of this article or require specialist advice or assistance in relation to your employment relations framework, please do not hesitate to contact us.

This alert is not intended to constitute, and should not be treated as, legal advice.