CBA v Barker: Managing company policy and employment contracts

In this edition, two important court decisions highlight the importance of clearly written employment agreements:

  • in CBA v Barker, the High Court finds no duty of trust and confidence in employment contracts, and affirms when policies do and don’t become a part of the employment contract; and
  • in Heugh v Central Petroleum Ltd, a CEO is entitled to compensation as its employer had not acted ‘reasonably’.

CBA v Barker: Managing company policy and employment contracts

Commonwealth Bank of Australia v Barker [2014] HCA 32

A recent High Court decision held that a ‘mutual duty of trust and confidence’ should not be implied into contracts of employment in Australia. This decision also confirms that a company’s policies do not become a part of the employment contract unless they are implied by necessity, or it is expressly stated, creating greater certainty for employers

The case

Stephen Barker was employed at the Commonwealth Bank of Australia (CBA) for over 27 years. In 2009, CBA informed Mr Barker that it had decided to make his position redundant. Mr Barker’s employment contract (Contract) provided for compensation to be paid to Mr Barker if CBA could not redeploy him. CBA was unable to do so and on 9 April 2009 his employment was terminated, with compensation of $182,092.16.

He then sued, alleging that:

  • CBA breached an implied term of the Contract, being a duty of trust and confidence, by failing to properly follow the Redeployment Policy to find him a new position; and
  • that his Contract incorporated the CBA Redeployment Policy and the CBA Equal Employment Opportunity Policy.

Mr Barker succeeded in his trial, and in the subsequent appeal, but lost in the High Court. However, CBA undertook not to recover legal costs from him.

The findings of the High Court

The issue for the High Court was: is a term of mutual trust and confidence to be implied into all contracts of employment in Australia?

The High Court unanimously said no, and found in favour of CBA.  CBA therefore did not breach the Contract by failing to take extra steps in connection with redeploying Mr Barker at the bank.

Implications for employers

Mr Barker’s case is significant for employers.

First, the fact that an implied mutual duty of trust and confidence does not exist creates greater certainty for employers.  A term that states that an employer will not ‘without reasonable cause, conduct itself in a manner likely to destroy or seriously damage the relationship of trust and confidence’ is not to be implied into a contract.

Second, the terms of an employment contract are now more certain. Policies will only be included in an employment agreement, requiring the parties to abide by them, if it is expressly stated as such, or if a court finds it is necessary to imply them.

Third, an employer does not have the additional obligations of maintaining trust and confidence when dealing with employees in circumstances of dismissal or redundancy. However, existing employment laws will continue to apply in the context of a termination of employment, such as unfair dismissal laws, adverse action protections, express contractual provisions and provisions in Modern Awards relating to termination and redundancy. Employers should continue to carefully observe them in the context of all employment arrangements.

Some practical tips

In designing policy and drafting contracts of employment, there are some practical and simple steps that an employer can take.

Depending on their objectives, employers can:

  • expressly exclude policies from the employment contract; or
  • for flexibility in their favour, draft provisions requiring employees to abide by policies and procedures, but retain flexibility in their favour by stating that employers are not, and that the employer has the discretion to deviate from them.

It is also significant that Mr Barker’s contract contained a clause outlining what would happen in the event of a redundancy. Importantly, this clause has the effect of limiting the payout to be made in the event of redundancy, because it is an agreement as to how compensation will be calculated in that event. Had redundancy occurred without such a clause, it would have been up to the Court to determine what amount should be awarded. Given that Mr Barker was claiming amounts in the order of $1.83 million, this amount could have been quite significant.

Conclusion

This case confirms the current legal landscape of employment law; an employer does not have to maintain a duty of trust and confidence.

However, existing unfair dismissal and adverse action laws continue to apply. The High Court found no need to disturb the current landscape of employment law, given that the law already provides for a comprehensive regime of unfair dismissal and industrial relations laws.

When drafting employment contracts, employers should think carefully about whether policies should be incorporated into the contract or not. This case makes clear the effect of contracting in or contracting out of policies, allowing employers and employees a higher degree of certainty.

CEO awarded $1.6 million payout

In another case (Heugh v Central Petroleum Ltd (no 5) [2014] WASC 311) which deals with employment contracts rather than legislation, the former chief executive of ASX listed mining company Central Petroleum Ltd (CP), Mr John Heugh, was awarded $1.6 million in damages and interest by the Supreme Court of Western Australia for being terminated in breach of his employment contract. Mr Heugh’s salary took him outside the application of the unfair dismissal provisions (a salary threshold of $133,000 from 1 July 2014) of the Fair Work Act 2009 (Cth) (Act).

Background

John Heugh was employed by CP as managing director. His duties included investigating and negotiating farmout agreements (a type of commercial agreement with a third party, which CP used for fundraising). The CP Board passed a resolution that the CP exploration manager Trevor Shortt, should be responsible for running a farmout process for CP. Mr Heugh did not agree with this decision and it was his opinion that Mr Shortt was not qualified to run such a process and didn’t have the necessary time or resources.

Mr Heugh’s actions

Following the Board resolution Mr Heugh tried to prevent Mr Shortt from taking up the farmout responsibilities. Mr Heugh:

  • met with Mr Shortt in person and told him he was not happy about the Board’s decision;
  • sent Mr Shortt an email stating that he didn’t believe that Mr Shortt had the skills required for the farmout role;
  • attached a ‘warning letter’ to the email (the first step in a disciplinary process to manage unsatisfactory performance), which was designed to show the Board that Mr Shortt had problems performing his current job, so should not be given additional responsibilities. Mr Heugh then explained the purpose of the warning to Mr Shortt and indicated that the warning would be forgotten if the Board resolution was not actioned; and
  • sent another email with an attached ‘farmout responsibility letter’ which informed Mr Shortt of the Board’s decision and asked whether he wanted to take on the additional responsibilities.

The Board’s reaction

The Board did not take kindly to what it saw as Mr Heugh undermining its decision, as well as putting unacceptable pressure on Mr Shortt with the performance warning, which they perceived as a breach of the CP Code of Conduct.

The Board wrote Mr Heugh a letter giving him notice that he had breached his employment contract and needed to remedy the situation by:

  • writing to Mr Shortt with an apology for the unacceptable pressure placed on him;
  • unconditionally withdrawing of the letter of warning;
  • expunging the letter of warning from Mr Shortt’s file; and
  • signing a written assurance to the effect that Mt Heugh would fully comply with, and not undermine, decisions of the Board.

Presumably to ensure that there were no further deviations, the Board provided template documents including a letter of apology, for Mr Heugh to send to Mr Shortt, and the written assurance to the Board. While Mr Heugh did apologise and perform the acts required by the Board, he did not follow the templates exactly.

Termination

In response, the Board resolved to remove Mr Heugh as director, and to terminate his contract of employment if he did not resign. Mr Heugh was sent a termination letter from CP stating that his employment was terminated because he had not:

  • remedied the breaches of his contract as required by the Board (in particular, he had not provided a letter of apology in the form required by the Board); and
  • continued to deny any wrongdoing.

Mr Heugh’s Contract of Employment

Mr Heugh’s contract of employment was unusual in that his employment could only be terminated for a serious breach of the provisions of the contract if the breach was not remedied within 14 days of a notice specifying the breach.

The judge held that the company’s discretion to terminate Mr Heugh’s employment had to be ‘reasonable’. Looking at the circumstances, the judge found that CP had not exercised this discretion reasonably because in his opinion Mr Heugh had remedied the breaches to the extent that was reasonable, and that the Board’s requirement that Mr Heugh had to follow the express wording of the documents to remedy the breach was not reasonable.

The judge also took into account that Mr Heugh was a long serving managing director and that the company had no complaints about his conduct of performance prior to the issues arising from the farmout resolution.

Lessons from the case

There are lessons to be taken away from this case for both employers and employees. Many ASX listed companies will have employees with salaries in excess of the cap on unfair dismissal claims ($133,000) meaning that they are excluded from the unfair dismissal regime under the Act. The alternative avenues available to such employees who want to challenge a dismissal will include the general protections provisions of the Act (for unfair, unlawful and discriminatory treatment in the workplace), anti-discrimination laws, and common law for breach of contract claims – as relied upon by Mr Heugh.

The importance of having clear and comprehensive contractual terms around breaches of contract and termination rights cannot be overstated. In this case having provisions which provide for discretion in determining whether a breach has been remedied does not mean that it is an unqualified discretion. There is always the risk that a court may interpret what is ‘reasonable’ quite differently to an employer dealing with a frustrating employee.

Contractual negotiations between a prospective employee and the employer may involve negotiation around termination rights and benefits and a balance will need to be struck between their competing priorities.  As illustrated here, given the amount of potential damages at stake, it is critical to obtain good legal advice in developing and finalising employment contracts for senior executives.