Incorporating policies into employment contract costs employer $3 million

An employer’s unwitting error in incorporating its policies, including a redundancy policy, into a Chief Executive’s employment contract resulted in a significant financial windfall for the redundant Chief Executive.

Interestingly, the ‘Global Markets Head’ of the same business tried to establish a similar claim; however it was found that he was not made redundant, but rather resigned from his position.  The decision was extensive, so for the purposes of this update we will focus on the Chief Executive’s claim.

The facts

The employer at the time, a significant banking business in its own right, merged with another large multinational bank.  Following the merger, the new employing entity made the Chief Executive redundant.  The Chief Executive had applied for the new chief executive role of the merged entity, but was not successful.

The redundancy policy included that a severance payment may be made calculated at 4 weeks for the first full or part year and 4 weeks for each completed year of service thereafter, to a maximum of 78 weeks for some employees.  In addition, it included the possibility of an ex-gratia payment being made calculated as the average of an employee’s prior 2 years’ bonuses.

At the heart of the matter was a particular clause in the Chief Executive’s employment contract that stated:

“You agree to be bound by the policies of [the business] as may exist from time to time.  You acknowledge and accept that it is the prerogative of [the business] to vary, change or terminate existing policies as well as to devise and introduce new policies.”

The Chief Executive argued that this clause incorporated the redundancy policy into the contract of employment.  The employer however, argued that the redundancy policy was a closed policy and did not apply to the Chief Executive.  The employer noted that the Chief Executive was not provided the policy upon employment, he was not required to read it and he was not required to acknowledge it.

The decision

Justice McDougall of the New South Wales Supreme Court found that the redundancy policy had been incorporated into the contract.  He found in this manner on the basis that the contract clearly imposed an obligation upon the Chief Executive to obey the policies of the employer.  He said that it was ‘difficult to conclude’ that the parties would have intended that one party to the contract to be bound by those policies but not the other.

He stated:

“39. To my mind, the undertaking by the employee to be bound by the employer’s policies as they exist from time to time makes sense only if, implicitly at least, the employer also undertakes to be bound by, or to observe, the terms of those policies. As a matter of common sense, such policies might impose obligations on either or both of the employer and the employee. Thus, they might be for the benefit of either or both of those parties.

40. The language of the relevant provision in the contract of employment is the language of contract: the employee agrees to be bound by the relevant policies. That language suggests that the employee is agreeing to be bound by policies as if, or because, they form part of the contract of employment. On that basis, the policies would also, and equally, bind the employer. That follows, at least as to the redundancy policy, because it sets out things to be done by each of them. The obligations are not merely unilateral.”

It was noted that the employer had initially calculated the Chief Executive’s entitlement as being $432,692 as a severance payment and then $2,500,000 as an ex-gratia payment if the policy was found to be applicable.  Having so found, His Honour awarded the Chief Executive $2,932,692 million plus interest in damages as a result of that redundancy policy being incorporated into his contract of employment.

Lessons for Employers

This case serves as a strong reminder for employers that their employment contracts should not be drafted so as to incorporate the employer’s policies and procedures into the employment contracts.  Where policies are incorporated into a contract of employment, and the employer does not comply with the relevant policies in its dealings with the employee, the employee will potentially be able to commence a breach of contract claim.

Aitken Legal recommends that if you consider that there is a risk that your contracts of employment either expressly or impliedly incorporate your business’ policies, that you seek legal advice in this regard.

Some tips for maintaining good workplace policies

This case also reiterates the need for properly drafted and clear workplace policies that reflect the expectations of the business at the time that they are in operation.  Workplace policies are an essential management tool which should clearly communicate to employees what is acceptable and unacceptable conduct in the workplace, and generally set out the expectations of the business.

Having properly drafted workplace policies also assists employers to discharge their legislative obligations, particularly with respect to workplace health and safety obligations, anti-discrimination and sexual harassment claims, and workplace bullying complaints. Where an employer is subject to a complaint in one of these jurisdictions and it does not have a relevant policy in place, this can exacerbate the seriousness of the findings (and potentially the compensation awarded) against the employer.

Aitken Legal recommends that every business should have the following policies as a bare minimum:

• Workplace Bullying
• Discrimination & Harassment (including sexual harassment)
• Drug and Alcohol;
• Email, Internet and Computer Usage;
• Social Media;
• Workplace Health and Safety;
• Grievance Procedure and Dispute Resolution

It is also important to remember that an employer will potentially be vicariously liable for the harassment or discriminatory conduct of its employees unless it can show it took reasonable steps to prevent the conduct.  This would include:

• having the relevant policies and procedures in place;
• ensuring that all employees are trained in relation to those policies and procedures; and
• providing regular refresher training to those ongoing employees.

Aitken Legal also recommends that employers consider investing in the training of their key line managers so that they are aware of how to deal with complaints that may arise according to those policies.  We often see that it is a manager’s failure to properly act in relation to a complaint that increases the risk of a successful claim or action against the employer.