The reasonable notice trap – The importance of written contracts

As the nation begins to emerge from the COVID pandemic and businesses slowly recommence their ‘as usual’ activities, employers are understandably keen to return to commerce as soon as possible. No doubt, many sectors of industry were hit hard by the pandemic; industries such as hospitality, retail, travel and tourism, professional sports and the arts, and despite the welcome assistance of the Federal Government’s JobKeeper programme, in its various forms, redundancies were inevitable.

Employees at all levels were either subject to modification in their job role and/or remuneration, or lost their positions entirely and now that it appears that there is some light at the end of a long and dark tunnel, those positions need to be refilled.

Employers who are now able are looking for employees. However, it behoves the responsible employer to maintain discipline with respect to industrial rules and regulations and such discipline begins with an agreement between employer and employee on appropriate and lawful work conditions under a written contract of employment.

Notice Provisions within a Contract

 A written contract of employment signed by the parties serves a number of very important functions, chief among which is to set out in writing the terms on which the relationship is based so there is no uncertainty. However, too often we are informed that no relevant written contract exists, or it cannot be found. This leaves the door open for a Court to imply terms into the contract.

One of the most litigated areas of contract law in the employment arena, is the issue of the implied term of reasonable notice. This implied term is only enlivened where there is no current enforceable written contract of employment providing for the relevant notice to terminate the contract.

The national employment standards (“NES”) provides only minimum notice periods, and at least for employees not covered by an enterprise agreement or modern award, these notice periods are merely that, minimums.  The NES does not proscribe the required contractual notice required to terminate an employment contract. The minimum notice in the NES provides for:

1. 1 weeks’ notice for 1 year or less of continuous service;
2. 2 weeks’ notice for more than 1 but less than 3 years continuous service;
3. 3 weeks’ notice for more than 3 but less than 5 years continuous service; and
4. 4 weeks’ notice for more than 5 years continuous service.

Furthermore, should an employee be over the age of 45 years and have served more than 2 years’ continuous service, they are entitled to an additional week’s notice.

Notwithstanding, what prevails where there is no written contract of employment, or no operative contractual notice period? Under such circumstances, it is left up to the Court to make the determination as to what “reasonable notice” would be in the relevant circumstances.

What is Reasonable Notice?

Without a written contract of employment, agreed on by both parties, reasonable notice will depend on a raft of factors. For examples, seniority of the role, length of service, difficulty in finding alternative employment at a congruent level, age of the employee etc.

The New South Wales Supreme Court was recently required to make such a determination in the matter of Roderick v Washington H Soul Pattinson Co Ltd (No 2) [2020] NSWSC 1224 (“Roderick”). In this case, the employee, was employed by the employer as a senior executive from 2006 to 2018 in various roles in finance.  Without notice, and for subjective reasons, the employee’s employment as Finance Director was terminated.

Current Case Law

By way of background, Ms Roderick (“Plaintiff”) was employed by Washington H Soul Pattinson & Company Limited (“Defendant”) from the period 26 June 2006 to 12 April 2018. The Plaintiff was initially employed as Chief Financial Officer however in 2014 she was promoted to Finance Director, appointed to the Board and made a director of the Company. In January 2015, the Plaintiff was provided a draft employment contract upon appointment as Finance Director. This new contract was not signed. During the period December 2015 to December 2017, the Defendant invited the Plaintiff to participate in both the Long-Term Incentive (“LTI”) plan and Short-Term Incentive (“STI”) scheme. On 12 April 2018, the Plaintiff’s employment was terminated without notice on the basis that “she was not the right fit” and a new CFO was appointed the next day.

At the same time as the promotion, the employee was provided with a draft executive director employment contract. The employee attempted to discuss the draft employment contract with the remuneration committee, but a meeting never took place. The contract remained unsigned.

Ms Roderick commenced proceedings for notice of 24 months and payment of long terms and short-term incentives. At trial, the employer’s evidence was that the employee was ‘failing’ as finance director or otherwise not performing. The Court determined that such evidence was insufficient and in Ms Roderick had never been informed of any performance concerns. As such the Court, turned itself to the question of the notice required to be provided to the Plaintiff.

Irrespective of previous signed contracts, the employee was promoted to an entirely new role, with greater responsibilities. The Court found that the provision of the new unsigned contract to the Plaintiff was demonstrative of the parties’ intention that the original contract would not continue to apply to the new role. The Defendant had argued that in the absence of the Plaintiff signing the new contract her old employment contract continued to apply. In addition, the Court found that the new role was entirely different from the old role and together with the clear intention to create a new contract, it could not be concluded that the old employment contract continued.

In then determining the issue of “reasonable notice” that should be implied in the contract of employment, the Court found that, due to her length of service, her age, being 49 at the time of termination, the senior positions she held, and her failure to find appropriate alternate employment since her termination, 12 months’ notice of termination was an appropriate period of reasonable notice. The Court also then examined her claims for an award of a short-term and long-term incentive, and in both cases found in favour of the employee, despite the Defendant’s argument that she had performed poorly. The Court held that the Defendant’s failure to assess the Plaintiff’s performance and entitlement against agreed KPI’s was itself a breach of her contractual entitlements. The final award in favour of the Plaintiff meant that the Defendant was required to pay Ms Robinson in excess of $1 million in damages.

Advice to Employers

This case is illustrative in two important respects:

1. Employers ought to always ensure they have a valid, relevant signed employment contract in respect of their employees that is securely stored; and
2. Employers should have appropriate performance management structures in place to ensure that if there are performance issues that they are identified and dealt with appropriately, so they can be relied on if the employer wishes to take action.

Irrespective of the seniority of an employee, their length of service, the roles they previously fulfilled, or their otherwise recognised previous successes and competency, it is vital to ensure the foundational employment documents and procedures are appropriately followed. Employers should ensure they have unambiguous and clearly defined contracts of employment signed to by the employee, no matter what position the employee holds.

Given the enormous change COVID-19 has brought to many businesses, if this has caused changes in the way you engage with your staff, their positions, duties, remuneration or any other crucial element of their employment, these changes should be reflected in a revised employment agreement, signed by the employee. As the Roderick decision demonstrates, failure to do so can be very costly.

 We are Here to Help

Contracts of employment can be complicated and, depending on the role and industry, may involve a raft of industrial instruments, including modern awards and enterprise bargaining agreements. We are here to assist in unpacking these complicated yet vital documents. If you require further information in relation to any aspect of this client alert or assistance in dealing with an employment law related issue, please feel free to contact us.

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