Misrepresented pay deal costs employer $330,000

The Federal Court of Australia has recently handed down awarding over $330,000 to an employee who was able to establish that her new employer had misrepresented her potential earnings during the recruitment process.

The employee in this case was a veteran of the insurance building industry.  Up until about April 2013, she was employed by an insurance builder for whom she obtained significant results and subsequently received a substantial remuneration.  In March 2013, the Respondent began discussions with the employee in an attempt to recruit her to its business.  In April 2013, the employee commenced as General Manager with the Respondent based on the representations made to her by the Respondent during the recruitment process.

Significantly, the employee’s starting salary with the Respondent was some $100,000 less than she was earning with her former employer.  However, when remuneration was discussed with the Respondent during the recruitment process, the employee alleged that she was told that she would receive a 2.5% share of net profit, and was led to believe that this profit share arrangement would compensate the employee for the lesser salary.

The employee’s employment ended in February 2014.  The employee subsequently sued the Respondent pursuant to the Competition and Consumer Act 2010, alleging that the Respondent had made representations to her, and based on those representations, she had accepted the position with the Respondent.  She alleged that, had she not relied on those representations, she would have remained employed with her previous employer or a similar employer on terms the same as her previous employment.

Relevant legislation

The employee relied on clause 18 and 31 of the Competition and Consumer Act 2010 as the basis for her claim.

Clause 18 states:

“A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.”

Clause 31 states:

A person must not, in relation to employment that is to be, or may be, offered by the person or by another person, engage in conduct that is liable to mislead persons seeking the employment as to:

• the availability, nature, terms or conditions of the employment; or

• any other matter relating to the employment.

Note: A pecuniary penalty may be imposed for a contravention of this section.

The alleged misrepresentations

The employee alleged that three separate events established the misrepresentations which were relied upon for her claim.  The first of these events was a conversation with a Director of the Respondent.  She alleged that during this discussion, she pointed out that the base salary being offered was some $100k below her current salary.  She further alleged that the Director indicated that the profit share arrangement would make up the difference between the remuneration packages.  It was also alleged that the employee was told that the profit share arrangement would increase from 2.5 % to 5% of net profit after 6 months of employment.

The Director denied that he had said that the profit share arrangement would bridge the gap.  However, the Director did accept that the employee had said that the offer made in terms of salary was a lot less than her salary at the time.  He confirmed that when he was asked by the employee what would make up the gap, he explained the profit share structure and its potential.  He also accepted that he knew the Respondent’s profit at that point in time, and he also conceded that the Respondent had been very profitable in preceding years and that he had told the employee as much.

The second event came in the form of an email from a representative of the Respondent, which contained information as to the profit that the Respondent was making in its insurance building business.  The email also contained a figure of what a 2.5% share of net profit would look like for the previous two years, and then a forecasted profit for the current year.

The third event that she relied upon was the failure of the Respondent to inform her of any deterioration in sales or profits prior to her commencement.

Findings

Justice Bromberg accepted that the Respondent had made a representation to the employee that its profits for that financial year would meet or exceed its profits in the previous two years.  His Honour relied upon the Director’s admission that he told the employee that the Respondent had been very profitable.  Bromberg J noted that the email relied upon by the employee did represent forecasted figures only, but he noted that the forecast was provided after 3 quarters of the financial year had passed and therefore in his eyes the forecast represented ‘likely’ figures.

In terms of those forecasted figures, his Honour also found it significant that:

“…[the employee] was seeking reassurance concerning the difference between her remuneration at [her former employer] and what was offered by [the Respondent]. A forecast of profit, in that circumstance, accompanied by a figure equalling 2.5 per cent of that profit, being the percentage offered to [the employee], would reasonably be understood as intended to provide such reassurance. If the email did not convey the FY13 prediction as being a likelihood, it would not have been of any real reassurance to [the employee]. There would have been little point in sending it.”

Justice Bromberg also accepted that it had been represented to the employee that it was likely that the profits of the preceding two years would continue for that financial year and then up to 12 months from March 2013.  He also accepted that the Respondent had represented to the employee that there was no reason that the Respondent would not meet its sales and profitability targets for that financial year.

His Honour then turned to the question of whether the conduct of the Respondent was misleading or deceptive and whether the Respondent had reasonable grounds for making the representation that the profits for the financial year would exceed the previous years’ figures.  He found that the Respondent did not have reasonable grounds where the figures conveyed to the employee failed to take into account the likelihood of “substantially diminished revenues and profits” for that financial year.  His Honour also held that the Respondent did not have “reasonable grounds for predicting that, for the 12 months from March 2013, [the Respondent] would remain as profitable as it had been in FY11 and FY12.”  His Honour noted poor performance in significant areas of the business as the reasons for such a prediction being unreasonable.

As a consequence of the Respondent failing to prove they had reasonable grounds for making those representations, Bromberg J held that those representations were misleading and deceptive.  He went on to find that the employee had relied upon those representations when making her decision to enter into a contract of employment with the Respondent and that such reliance was to her detriment.

Justice Bromberg then discussed the quantum of damages that would be awarded to the employee.  He considered the losses suffered by the employee in accepting employment with the Respondent, as opposed to continuing in her previous employment or employment with similar remunerative conditions.  He also considered the likelihood of promotions/pay increases that the employee would have received.

Ultimately, his Honour awarded the employee $333,422 in damages.

Lessons for Employers

This case demonstrates the potential repercussions for employers who misrepresent potential earnings to prospective employees.  Employees who are able to establish that they were promised one thing, but received a lesser outcome than what was promised, may be able to pursue the employer pursuant to the Competition and Consumer Act 2010. Where an employee is coaxed to leave a high paying role with one employer, but subsequently receives less than what was promised by the new employer, then the damages claims can be quite significant, as was the case here.