Why Employment Contracts are essential

In a decision that demonstrates why all employers should have written employment contracts in place, the Federal Circuit Court has awarded six months’ salary to a General Manger who was terminated after just 13 months service with his employer.

In the case of Miller v Sunland Park Pty Ltd & Hutchens, the Court heard that Mr Hutchens (who was a director and shareholder of the employer) had brought the General Manager onto his staff to ‘take over the running of the business’. Staff were told that if they had any issues pertaining to the business, that they should address the issues with the General Manager.  The General Manager was employed on a starting salary of $60,000 plus superannuation.  A written contract of employment was not entered into between the parties.

It was decided between the General Manager and Mr Hutchens that the General Manager would undertake some significant travelling overseas in an effort to expand the business into overseas markets. The General Manager spent time preparing for this trip.  In particular, he made an application to the Australian Trade Commission that related to the employer’s claim for reimbursement of expenditure for the trip.  It was the General Manager’s evidence that providing the employer qualified, Austrade would reimburse the employer for expenses on a 50/50 basis.  Austrade would also assist the General Manager in establishing contacts overseas.

The General Manager’s evidence (which was corroborated) was that Mr Hutchens provided the General Manager with a company credit card. This decision was raised after the General Manager had attended an Austrade seminar, where Austrade had actively encouraged the use of credit cards for overseas expenses so that the expenditure could all be registered on one statement.  Critically, the General Manager’s evidence was:

“… that Mr Hutchens told him not to use his own credit card for usage overseas for private expenditure but to instead use the company Mastercard for everything including cash withdrawals. He said that it would be easier that way and that reimbursement of expenditure for personal purchases could be sorted out on General Manager’s return to the office.”

After returning to Australia, the General Manager’s wife with the authority of Mr Hutchens, began collating the documentation (which included the General Manager’s receipts for expenses) so that the documentation could be passed on to another business that dealt with the Austrade application.  Mrs Miller was engaged to collate the documentation and the General Manager told Mr Hutchens that Mrs Miller would only charge $19 per hour to complete this work.  The hours recorded to complete this work would be submitted via invoice to the employer for processing and payment.

At a later time, Mr Hutchens approached Mrs Miller and made serious allegations as to the General Manager’s conduct, including that he had been drawing out thousands of dollars of company money without authorisation and that he suspected that he had a gambling problem.  After some discussion, Mr Hutchens agreed with Mrs Miller that his mind would be put at ease by having the relevant accounts reconciled.  It was agreed that Mrs Miller would undertake this task without further charge to the company in the circumstances.

Approximately 1 month later, Mr Hutchens attended the Millers’ home where he accused the General Manager of criminal conduct in drawing up the invoice for Mrs Millers services and having it paid.  He further accused the Millers’ of ‘being cheats and conmen’.  Later that day in the office, a discussion ensued with Mr Hutchens stating (on Mrs Miller’s evidence):

“I’ve had enough of you (referring to General Manager), I’m terminating your employment. I’m suspending you and I’m instructing Rosie not to pay you your last week’s wages. Finish what you are doing and go. Hand over your keys to Rosie.”

Allegations by Mr Hutchens

At the hearing of the matter, Mr Hutchens made 11 allegations against the General Manager, including:

• That the General Manager had used the company credit card for personal use without authorisation;
• That the General Manager had used the company credit card whilst ‘holidaying’ during his overseas trip;
• That the General Manager had put the company to additional expense by spending longer in certain locations than was required to complete the job related task;
• That the General Manager had never accounted for his annual leave while holidaying during the overseas trip;
• That the General Manager failed to immediately return the credit card upon his return to Australia and that he continued to use the card upon his return, including that he had used the card to pay for a particular fine he had received and to register his motor vehicle;
• That the General Manager caused his wife to issue an invoice to the company and then caused the invoice to be paid without Mr Hutchen’s authority; and
• That the General Manager was dishonest in the preparation of the Austrade claim.

Decision

The General Manager commenced a common law claim for breach of the contract of employment on the basis that the allegations of conduct that led to his summary dismissal had not been established and that he was entitled to reasonable notice of termination.

Judge Simpson accepted the evidence of the General Manager, his wife and another former employee of the employer and criticised the credibility of the evidence provided by Mr Hutchens, stating:

“… Mr Hutchens was an unimpressive witness. Much of his evidence was implausible and suggested to me that he was concocting evidence that he thought would either strengthen his case or damage the applicant’s case.“

Judge Simpson rejected Mr Hutchens’ claims that the General Manager had acted improperly.  There was evidence led by a former employee that Mr Hutchens regularly viewed the relevant accounts in relation to spending by the General Manager whilst overseas and Simpson J held that it ‘didn’t accord with common sense’ that the General Manager would use the credit card dishonestly when he knew that Mr Hutchens would see the entries so soon after each transaction.

Given his finding that, on the balance of probabilities, there was no dishonesty proven in relation to the General Manager’s conduct, Judge Simpson proceeded to find that there had been no behaviour to justify summary dismissal of the General Manager’s employment.  Consequently, there had been a breach of contract by the employer.

Given that there had been no written contract in place between the parties, and in particular, no provision that provided for notice of termination, Judge Simpson moved to determine the amount of notice that the General Manager should have been given in the circumstances.

Judge Simpson held that 6 months wages ($30,000) was a reasonable period of notice in the circumstances, taking into account the General Manager’s wage, his length of service, his age, seniority, duties and the likelihood of finding other suitable employment.

Judge Simpson explained how the common law will operate in the absence of a suitable termination clause:

“[219] As there was no express provision in the employment contract in relation to termination, the gap is to be filled by the common law by means of an appropriate implied term. An apparently indefinite hiring may be terminated by either party giving reasonable notice of their intention. What is reasonable notice for an employer to give in any case is to be determined by reference to the circumstances as at the date of termination.   It will depend on factors such as the employee’s age, length of service, qualifications, the nature of the employee’s responsibilities, how highly they are paid and the anticipated duration of the employment.

[220] The general rule is that the longer the employee has worked for the employer and the more senior and important the position they occupy, the longer their entitlement. Senior managers can generally expect at least six months’ notice even when they have been in their job for only a short period of time.”

Further, on Mr Hutchens decision to suspend General Manager without pay, Judge Simpson said:

[221] It is not permissible at common law for an employer to suspend an employee without pay even in circumstances where it is thought that the employee has breached his or her contract of employment in some way.   If an employer suspends, it must be on the basis that the employee continues to be paid their full entitlements.”

Implications of this case for Employers

This decision comes as a timely reminder to employers to ensure that they have properly drafted contracts of employment in place with your employees, in particular those in senior management positions.  For example, if a written contract had been put in place in this case which included a termination on notice clause, then the Court would not have had to consider the determination of ‘reasonable notice’ and would have therefore saved the employer a considerable amount.

Mark Bunch, Partner