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Focus: Workplace Relations – September 2009

3 September 2009

In this issue: we look at whether a term of mutual trust and confidence will be implied in an employment contract; the issue of an employer's intention in relation to a forced resignation; new legislation to reform company executive retirement and termination benefits; and the term 'in the course of employment' in a NSW workers' compensation case.

Implied term of mutual trust and confidence

In brief: A term of mutual trust and confidence will not be implied in a contract of employment if the employee is adequately protected against unfair employer decisions by legislation or awards. Lawyer Carl Xu reports on a recent decision by the Full Court of the Supreme Court of South Australia.1

How does it affect you?

  • A term of mutual trust and confidence will be implied in an employment contract only where it is necessary.
  • If an employee is already well-protected against unfair treatment by legislation or an award, the term will not be implied into the contract.
  • Importantly, the court examined only the narrow question of whether a term of mutual trust and confidence should be implied in the contract under consideration, not whether the term should be implied in all employment contracts.2
Background

Mr McDonald was employed as a teacher in South Australia from 1996 to 2003. For most of that period, he was deployed to Brighton Secondary School, where he was asked to manage the school's computer networks and teach several computing classes. He suffered stress-related illnesses and sued the State (the Department of Education) for breach of contract and constructive dismissal.

As summarised in our Focus last year, the Supreme Court of South Australia held that Mr McDonald's employment contract contained an implied term of mutual trust and confidence. In that decision, Justice Anderson found that the State breached this term by failing to:

  • support or supervise Mr McDonald;
  • manage Mr McDonald's workload; or
  • address Mr McDonald's complaints of workplace harassment and bullying.
Full Court decision

On appeal, the Full Court unanimously reversed Justice Anderson's decision.

The Full Court applied the basic contract law principle that a term can be implied into a contract only if it is necessary for the proper operation of that contract.3

In England and Wales, the implied term of mutual trust and confidence is accepted as necessary, and it has evolved into a more general duty that employers must treat their employees fairly.4

In Mr McDonald's case, the Full Court found that such a term was not necessary, because the statutory framework governing his employment provided safeguards against unfair treatment by his employer.5 In particular, he was appointed as a permanent teacher under the Education Act 1972 (SA) (the Act), which:

  • prescribed the limited circumstances in which his employment could be terminated;
  • set out the mechanism for disciplinary procedures; and
  • established a Teachers Appeal Board, which could review any adverse decision made by the State and hear any complaint one officer had against another officer of the State.

In addition, industrial awards applying to Mr McDonald provided specific, detailed procedures to deal with any grievances and disputes.

The courts have already shown a reluctance to allow the term to operate in the context of the termination of employment. This is because the statutory unfair termination regime, including the various exclusions and cap on compensation awards, reflects a parliamentary intention to limit the implied term at that stage of the relationship. This appeal decision shows a willingness to take that approach further, and to apply it whenever the context of the employment relationship suggests the term should not apply.

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Employer's intention is not relevant to constructive dismissal

In brief: Employees forced to resign by their employer do not have to prove their employer intended them to resign to show that the termination was at the employer's initiative. Senior Associate Jo Musk and Lawyer David Batten report on a recent decision of the Full Bench of the Australian Industrial Relations Commission.6

How does it affect you?

  • Forced resignation amounts to dismissal under the Fair Work Act 2009 (Cth), allowing for an assessment about fairness.
  • Employers will be judged on their conduct, rather than on their intention, when determining whether their actions have forced an employee to resign.
  • Employers taking disciplinary proceedings against an employee should adhere to their obligations under any agreements, otherwise their conduct might be construed as forcing the employee to resign.
Background

Ms Peary worked for Australian Hearing as office manager in Lismore. After falling out with several staff members, a management plan was developed in 2008 requiring Ms Peary to work for three months in the Ballina office 32 kilometres away. This coincided with Ms Peary first taking sick leave for depression. The management plan stated that she was to return to the Lismore office pending resolution of the conflict with other staff. However, a return to the Lismore office became impossible because she was not permitted by Australian Hearing to participate in mediation until she had completed more than six sessions with a psychologist at her own expense. Ms Peary's depression worsened and she subsequently resigned. She filed an application for unfair dismissal.

Australian Hearing sought to strike out the application on the basis that Ms Peary had resigned. Under the Workplace Relations Act 1996 (Cth) (and now the Fair Work Act 2009 (Cth)), employees cannot claim unfair dismissal on resignation unless they can show that they were forced to resign because of the conduct, or a course of conduct, of their employer. Australian Hearing argued that the word 'forced' indicated that resignation must be an intended consequence of the conduct engaged in by the employer.

Findings

The Full Bench found that the relevant section of the legislation did not require an employee to prove that the employer intended to force the employee to resign. The section was directed at the state of mind of the employee, not the employer. It was found that Australian Hearing had forced Ms Peary to resign.

The conduct of Australian Hearing that was regarded as significant included:

  • its failure to return Ms Peary to the position for which she was employed, namely office manager in Lismore, at the end of the three-month period, and requiring her to continue in temporary arrangements it had imposed;
  • its requirement that she undergo treatment from a psychologist at her own expense (which she could not afford) before she could participate in mediation;
  • working conditions at Ballina were less than satisfactory (Ms Peary was isolated, performing a lesser role, and had to travel an additional 32 kilometres to reach the office); and
  • its requirement that she provide a written response to a disciplinary allegation on the day her sick leave certificate expired, and its threat to withdraw her hire car.

The case demonstrates that there is little point in trying to avoid an unfair dismissal claim by requiring the employee to resign without making sure the resignation is part of a considered, negotiated and binding settlement.

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The 'Golden Handshake' Bill – update on reform of directors' and executives' termination payments

In brief: On 24 June 2009, the Federal Government introduced the Corporations Amendment (Accountability on Termination Payments) Bill to the Federal Parliament. Senior Associate Veronica Siow and Law Graduate Jonathan Adamopoulos consider how the proposed legislation will affect the regulation of benefits paid to company directors and certain executives on retirement or termination.

How does it affect you?

  • If passed, the Bill will significantly reduce retirement or termination benefits that can be paid to company directors, senior executives and key management personnel (executives) without shareholder approval.
  • An executive will no longer be able to vote (in any capacity) on a shareholder resolution for the payment to him or her of a retirement or termination payment above the new threshold.
The current law

The Corporations Act 2001 (Cth)7 allows for payment of benefits to an executive on retirement or termination up to seven times the executive's total annual remuneration. Benefits above that require shareholder approval.

Key proposed amendments
  • The Bill extends to those in managerial or executive office. For non-disclosing entities, this will be the directors of the company or body corporate. For disclosing entities, such as publicly-listed companies, this will also include key management personnel and the five highest-paid group and company executives.
  • The threshold above which shareholder approval is required will be reduced to the equivalent of one year's base salary.8 The Bill provides a mechanism for calculating that threshold, including by averaging salary over the past three years.
  • The Bill prohibits an executive or their associate from voting at a shareholder general meeting on a resolution to approve a larger benefit, unless the executive is acting as a proxy; has been appointed in writing; and is voting in accordance with the principal's written instructions.
  • Proposed maximum penalties for non-compliance are $19,800 for an individual and $99,000 for a body corporate.

The proposed changes will affect only benefits under contracts of employment that are executed on or after the commencement date of the Bill, or where a contract is varied or extended on or after that date.

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In the course of employment

In brief: Lawyer Katharine Lee reports on the NSW Workers Compensation Commission's recent decision in The RedRock Company Pty Limited v Scharrer9 regarding the meaning of the term 'in the course of employment'.

How does it affect you?

  • Employees will be acting in the course of their employment while attending parties or functions hosted by their employer that the employer expects them to attend.
  • An employee is 'on a journey'10 when driving home in a company car from a staff party. However, where an employee is drunk and their conduct amounts to serious and wilful misconduct, the employee will not be entitled to workers' compensation if they incur a serious injury.
  • Where an employer directs an employee not to do something, and the employee disregards that direction, resulting in injury to the employee:
    • the employee's action is not for the purposes of, and in connection with, the employer's trade or business; and
    • the employee's action is not in the course of employment.
Background

Ms Scharrer had an accident in 2001 while driving her company car home from a company Christmas party. She sustained serious injuries, and received workers' compensation benefits up until mid-2005. This was in spite of the fact that:

  • her manager told her she had drunk too much to drive home;
  • she was driving significantly over the legal blood alcohol limit; and
  • she was disqualified from driving for nine months following the accident.

The RedRock Company Pty Ltd (RedRock) subsequently terminated the workers' compensation benefits, and Ms Scharrer applied to the NSW Workers Compensation Commission.

Decision

On 4 March 2009, Arbitrator Oldfield held that:

  • Ms Scharrer was injured in the course of her employment;
  • the injuries caused serious and permanent disability;
  • the disqualifying provisions of section 14 of the Workers Compensation Act 1987 (Cth) did not apply; and
  • she was entitled to workers' compensation benefits.
Appeal

RedRock sought leave from the Workers Compensation Commission to appeal. On 1 July 2009, Deputy President O'Grady allowed the appeal, noting the Arbitrator had failed to properly apply matters of principle when considering whether Ms Scharrer was acting in the course of her employment at the time of the injury.

Deputy President O'Grady went on to revoke the Arbitrator's decision. He agreed that, when attending the RedRock Christmas party, Ms Scharrer was acting in the course of her employment. However, in disobeying her manager and driving under the influence of alcohol, she took herself outside the scope of her employment.

The case is a timely reminder, as the Christmas party season approaches, that attendance at work parties or functions (including the journey home) can be 'in the course of employment' if attendance is regarded as compulsory, and if employees are complying with their employer's directions.

Footnotes
  1. State of South Australia v McDonald [2009] SASC 219.
  2. Paragraph 236.
  3. Byrne v Australian Airlines Ltd (1995) 185 CLR 411 cited in paragraph 207 and applied in paragraphs 234 to 271 of the decision.
  4. Paragraphs 228 and 232.
  5. Paragraphs 269 and 270.
  6. Australian Hearing v L Peary [2009] AIRCFB 680 (28 July 2009).
  7. Part 2D.2, Division 2.
  8. The Draft Regulations currently provide that the base salary will be the equivalent of the total of all benefits such as cash salary, fees, non-monetary benefits and other short-term employee benefits.
  9. [2009] NSWWCCPD 72.
  10. Under section 10 of the Workers Compensation Act 1987 (Cth).

Published 3 September 2009

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