Macrossans Lawyers Brisbane law firm

Paper presented by Andrew Knott and Belinda Weir Macrossans Lawyers, Brisbane, Australia

A FUNNY THING HAPPENED ON THE WAY TO THE COMMISSION

Implied Terms in Contracts of Employment

For most of the 20th Century (and for a substantial part of my career) it was necessary to remind (or even bring to the attention of) clients that employment was fundamentally a contractual relationship. That is that the law of contract (the law of legally enforceable agreement) was its conceptual basis.  In those days many of the terms of most employment relationships were imposed by statute or award or custom, or some form of collective agreement arising out of negotiations between employer representatives and unions. The contractual basis was far from obvious. 

PART I - INDUSTRIAL CONTEXT¹

Centralised Conciliation and Arbitration

Following the introduction of the statutory systems of conciliation and arbitration in the 1890s and early 20th Century, the most common model involved statutory provisions in relation to various forms of leave, with numerous other matters to be dealt with in very detailed awards. These included close regulation of matters such as number of hours, span of hours, payment of overtime, meal breaks, meal allowance and grievance procedures.  Such conditions were determined by a centralised State or Federal Commission in cases brought by employer bodies and industrial unions.

The conditions laid down sometimes formally determined the terms of the arrangement and sometimes (though purporting merely to lay down minimum conditions) in fact operated as the terms of the relationship. It is not surprising that such methods were used during the industrial era. That method of determination of rights was consistent with the general mores and cultural practices of that era. One of the consequences of centralised industry-wide arbitration of this kind was to lead to substantial uniformity of employment rights. Concepts such as "comparative wage justice", rather than power-based individualistic negotiation, determined the employee's rights and the employer's obligations.

Enterprise Bargaining

Over the last two decades, there has been a substantial move away from this model to a model often described as "enterprise bargaining".  Here the focus is on the particular enterprise or workplace, though negotiations are often still conducted by representatives such as employer advocates and unions. Collective determination of rights and duties is on a smaller scale. Typically, these statutory schemes contain protection for minimum conditions by such means as the "no disadvantage test".

Individual Bargaining

It appears that the thrust of the proposed changes presently under such vigorous discussion will further reduce the roles of commissions and representative organisations such as unions.  The discussion clearly contemplates individual employers and employees dealing directly with each

other to decide the terms of employment. Under this model the no disadvantage test would be removed and the minimum conditions would be reduced to (apparently) half a dozen or fewer.

Importance of Market Power

It is not the purpose of this paper to review the arguments for and against these proposed changes. However, it should be noted that the reality of the notion of "equality of bargaining power in the labour market" is fundamental. Presumably, variations in relative market power between employers and employees across time, regions, occupational groups and skill levels will create a dynamic and fluid situation in which market forces will influence substantially the (varying) conditions of employment.

PART II - LEGAL CONTEXT

The Resurrection of Contract

For present purposes, the major point arising from the second, and even more so the third model, is the resurrection of contract law. Political discourse and legal reality are consistent on this point. Contract will as a matter of law play a bigger role in the determination of conditions. That legal position will reflect the change in the means of determination of employment conditions discussed above.

An interesting "Back to the Future" experience is available by examining commentaries on employment law in New Zealand in the early and middle 1990s. The New Zealand Parliament passed the Employment Contracts Act 1991 which, as is contemplated in Australia, dramatically reduced the statutory centralised model. It became necessary to examine explicitly fundamental principles of employment law. In one of my texts (Butterworths (NZ) Employment Law Guide, 2nd Edition, 1995) for example, Appendix A headed "Contract of Employment" takes up 134 pages including approximately 50 under the title "Implied Terms".

It is already clear that employment lawyers, human resources managers and persons in similar occupations will be required to think not just in terms of the traditional subject matter of "Industrial Law" or "Employment Law" but more broadly across a range of legal topics, especially commercial law and contract law. The weaknesses or the remedies, the rights or the obligations, may well lie in these areas of law. There is much homework for industrial lawyers and human resources managers to devote themselves to should the new environment survive political and constitutional challenge.

Other Sources of Law not Contractual

To complete the picture it is necessary to note that employment relationships may also involve obligations arising not from agreement and not from statute but from other areas of law. For example, under the law of tort (civil wrongs) duties are imposed on each party not to cause injury to the other through negligent behaviour. The law of equity (concerned particularly with good conscience and issues of morality) imposes obligations of a fiduciary nature in some circumstances.

Contractual Terms - A Summary

Whilst the law of contract is concerned with enforcing agreement, the realities of life are that parties often enter into serious commitments with each other without recording all of the terms. Contracts therefore often include both express terms and implied terms (of the various types set out below). 

As a general rule of course, implied terms (unless of a type imposed by law even where contrary to the party's wishes) must be consistent with the express terms. The importance of implied terms is greater in the employment context because so often parties do not turn their minds to the full range of issues and because so often a contract is either purely oral or partly oral and partly written. The classic example of the latter is where the only written documents are, say, a newspaper advertisement and a short letter dealing with issues such as remuneration. (It still amazes me, for example, how often, even with quite senior employment, the parties do not explicitly address the question of termination of the contract.) Presumably one consequence for human resources managers will be an increased need to address with management the need for practices which will reduce uncertainty (and avoid litigation).

It should be mentioned here that, in addition to contractual terms, there could be legal consequences from non-contractual statements such as representations influencing a person into entering into an employment contract. Inaccurate representations may in some circumstances lead to remedies such as a right to terminate or to seek damages for misleading and deceptive conduct.

Implied Terms in Contracts - General Principles

I commence this part of the paper with a brief return to the contract law textbooks. The orthodox classification of implied terms begins with the distinction between terms implied by law and terms implied by fact.

Terms Implied by Law

The implication of a term by law is not based on a view about the intentions of the parties; rather the term is implied by statute or by the courts. 

In relation to terms implied by statute it is important to note that the fact that a statute confers rights on the parties to a particular class of contract does not necessarily and by itself lead to the implication of a corresponding term in such contracts.  That is, the statutory right is not automatically also a contractual right. The basic employment law case on this point is Byrne and Frew v. Australian Airlines Ltd² in 1995 in which the High Court held that a provision of an award in relation to unjust dismissal did not result in an implied term of the contract of employment. The practical significance of this was that breaches of the award could only be enforced by the statutory means provided and not by an action for breach of contract.

Terms implied by the courts must be consistent with the terms otherwise agreed by the parties and with any external binding legal regime such as a statute or an award.

The most fundamental example is the duty to co-operate to achieve the objectives of the contract.  Sometimes, custom and practice or the history of prior dealings result in the implication of a term. This is particularly relevant in employment contracts. (The implication of a term is of course to be distinguished from a clause in an award or industrial agreement referring to "custom" or "practice".)

Terms Implied by Fact

The implication of such terms depends upon a conclusion that the particular parties whose contract is under consideration must be presumed to have agreed to the inclusion of the relevant terms.  (There is a complication, namely that a term implied often enough on the basis of agreement presumed by the courts, may over time effectively become a term implied by law into every contract of that type unless there is some circumstance preventing that implication.)

The leading authority on implying terms of fact involves five requirements:

1                    It must be reasonable and equitable to do so.

2                    It must be necessary to give business efficacy to the contract.

3                    It must be so obvious that it "goes without saying".

4                    The term must be capable of clear expression.

5                    The term must not contradict any express term of the contract.

There is a qualification to this, namely that in relation to contracts which are purely oral or not fully expressed in writing (very common with employment contracts) the High Court has said "the implication of a particular term (must be) necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case". It is important to note the word "necessary".

PART III - IMPLIED TERMS IN EMPLOYMENT CONTRACTS

We now move from the contract law textbooks to the general employment law textbooks to examine the sorts of terms that are commonly implied. This discussion is merely an overview of issues discussed in much more detail in the texts.³ The list is not exhaustive.

The Implied Duties of the Employer During the Employment

1.         The duty to pay remuneration. Whilst normally this is explicit, there is an underlying duty to pay remuneration which, if not agreed, will be required to be "reasonable".

2.         The duty to indemnify. The employer is under an implied duty to indemnify the employee in respect of expenses properly incurred in and about the carrying out of the employee's duties.

3.         The duty to provide work. It has always been a controversial question whether there is a general implied duty to provide work. The traditional view is that there was no such general duty. Even if it is still the case that no such general duty is implied it will be implied in an increasing range of circumstances, for example:

(a)        where the employee is engaged in work of an artistic or specialist nature;

(b)        where the employee is engaged on a commission basis;

(c)        (possibly) where the employee is remunerated on a piece work basis or payment by results.

It is likely that the first category will be expanded as, in an economy of the type which is developing, more and more employees are dependant for the maintenance of reputation and skill on work provision. This is one area in which there may well be cases in the future where the employer will be alleged not to have acted in accordance with implied obligations. Indeed, as recently as April 2005 the High Court⁴ observed:

"It is accordingly unnecessary to consider whether the categories of cases in which at common law actual work must be provided for an unlawfully terminated employee or contractor, are closed, although one might question the current relevance of judicial pronouncements made more than 60 years ago in the United Kingdom as to the extent to which an employer might be obliged to dine at home in order to provide work for his cook. It may be that in modern times, a desire for what has been called "job satisfaction", and a need for employees of various kinds, to keep and to be seen to have kept their hands in by actual work have a role to play in determining

whether work in fact should be provided. ... the appellant's remuneration here could be affected by the actual work that he did, a matter which might of itself at common law justify an order that he be provided with actual work to do."

4.         Negative duties. This too maybe an expanding category. Certainly the cases establish that there is an implied duty not to expose the employee to situations involving a reasonable possibility of death or personal injury.

The Implied Duties of the Employee During the Employment

1                    The duty to obey lawful commands. There is an implied duty to comply with commands relating to the performance of the duties of the employee within the general area of what the employee is engaged to do. This duty will not extend to illegal acts or acts exposing the employee to undue danger of death or bodily injury. It is an unresolved controversy as to whether or not commands must be merely lawful or both lawful and reasonable.

2                    The duty to disclose skill and/or care. There is an implied duty imposed on skilled employees to display that degree of expertise and skill which that employee is held out as possessing when the employment was negotiated.  In the absence of such circumstances employees have an implied duty to display the degree of skill reasonable in the circumstances.

3                    The duty of fidelity and good faith. There is a very wide ranging and fundamental duty that the parties will not undermine the substance of the contract.  This duty may manifest itself in many ways and many circumstances.

4                    The duty in regard to relations with fellow workers. There is probably an implied duty to act in a reasonable manner toward one's fellow employees (and presumably others with whom the employee comes into contact in the workplace or in discharging their duties).

5                    The duty not to commit misconduct. There is an implied term that employees will not commit acts of misconduct. Again, this duty may manifest itself in many ways and will be highly relevant in summary dismissal cases.

Terms Implied by Fact (Based on Presumed Intention)

The strictness of the test was discussed above. Whether a term should be implied would be considered in each particular case. However, there is a greater chance of establishing the existence of implied terms on what might be described as lower level issues such as work rules or matters of custom and practice.

1.         Work Rules.  Some employers ensure that work rules are expressly incorporated into the contract either with the initial contractual documentation or by documents signed by the employee during the employment. Failure to do this would not necessarily be fatal to an assertion by an employer that a work rule has become part of a contract.  Sometimes an implication of a term that the work rules are part of the contract may result from the employee continuing to work without objection, but this is more an argument to be run when one has no alternative rather than a basis for action.  It is clearly much more desirable from all parties' point of view that these matters be clear and explicit at the outset. It is to be noted that the work rules may also become relevant even where they fall short of being incorporated by implication into the contract, as there are some suggestions that they may be relevant to determining the extent of the employer's capacity to issue lawful orders (compliance with which is an obligation of the employee).

2.         Custom and Practice.  The High Court of Australia dealt with this two decades ago in an insurance case but the statements of principle are recognised as relevant in the employment context. The four basic principles are:

一     The existence of a custom or usage that will justify the implication of a term into a contract is a question of fact.

一     There must be evidence that the custom relied on is so well known and acquiesced in that everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract.

一     A term will not be implied into a contract on the basis of custom where it is contrary to the express terms of the agreement.

一     A person may be bound by a custom notwithstanding the fact that he had no knowledge of it.

In this case the court held that it was "not possible to say that the custom alleged has been proved to the high standard which the law requires. It has not been shown that the custom relied on is so well known and acquiescent that everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract".

In 1998 Commissioner Simmonds of the Australian Industrial Relations Commission⁵ ruled that it was an implied term of the contract of employment of the applicant that the employer would apply the seniority principle in selecting individuals in that workplace for redundancy.  He then added:

"...on the facts in this matter (I) am satisfied that the use of seniority for selection for redundancy, which was an annual event, was well known to employees and was acquiesced to by them for many years prior to 1996 ... I am also satisfied that the advice to employees that the company was no longer using seniority and was not intended to, nor did it, terminate the employment contracts. It purported to alter the contracts but, as the authorities ... establish, such alteration is not effective unless agreed to. If it purported to amount to repudiation, then, again on the authorities ... it was ineffective unless accepted, and it was not."

The Commissioner did not accept that the employees "did nothing" but added that "even if they had been inactive in response to the company's advice I do not consider that there is any warrant in treating such an action as consent to the change".

Another way in which custom and practice may be relevant is through an impact upon interpretation of statute. In the recent decision of the High Court of Australia in Roncevich v. Repatriation Commission⁶ the court, in a joint judgment of four Judges delivered on 10 August 2005, held that it was arguable that a particular accident "arose out of, or is attributable to, any defence service".  The case involved a sergeant who had attended a dinner at the sergeant's Mess at a military base in honour of an extremely senior soldier who was visiting the base. One factor which clearly impacted upon the interpretation of the statutory provision was that "...at the time of the relevant events it was the expectation and custom of the Army for NCOs on Base to attend at the Mess when a distinguished visitor was a guest".

The English courts in the last few years have been addressing inequitable exercises of employer discretions granted by the contract of employment. This has happened particularly in relation to discretionary clauses about bonuses or commissions where the contract purports to give the employer a complete and unfettered discretion. Two approaches are potentially indicative of the future here. In one the decision was held to be a breach of the term of mutual trust and confidence

discussed below. In the other, it was held that it was a breach of contract for the employer's exercise of the bonus discretion to the "perverse". As one of the English commentators observed, this is "cutting-edge law".

Termination - Reasonable Notice

In the absence of express agreement or external provision in an Award, industrial agreement or statute, the courts imply that both employer and employee have an obligation (except in exceptional circumstances such as serious misconduct) to give reasonable notice to terminate the relationship.

Reasonable notice varies with the range of circumstances discussed in the cases ⁷. It is important to note that reasonable notice can be quite lengthy in the case of specialised and senior employment. Determination by courts that reasonable notice is say 6, 9 or 12 months is increasingly common.

From the perspective of both employer and employee, it is worth considering when negotiating the employment contract whether an express provision could be made. An employee does not wish to be put in the difficult position of having to sue an employer to recover say more than one month's notice in reliance on the reasonable notice provision. From an employer's perspective as well, certainty is valuable. In addition to that, employers may wish to consider issues such as whether they wish to have the right to make a payment in lieu of notice and whether they wish to have the right to give the notice but direct the employee to discharge no further duties. (This has the advantage of maintaining the employment relationship during the period of notice even though the employee is not present in the workplace or discharging duties. The consequence is that the employee remains subject to express and implied duties such as those of fidelity, which can be very relevant to client relationship and market share protection.)

PART IV - THE "BIG ONE" - IMPLIED TERM OF MUTUAL TRUST AND CONFIDENCE

The most frequently judicially recognised implied term in a contract of employment is what has been described as the "implied term of mutual trust and confidence". It is said to require that an employer not without reasonable and proper cause, conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trust between employer and employee.

Therefore, employees (in addition to any statutory rights for unfair dismissal, breach of award conditions and the like) are also entitled to make a claim for a breach of contract where they can demonstrate that their employer has acted to seriously damage the relationship between employer and employee without reasonable cause. The potential scope of such an action is far reaching and should give employers pause for thought.

The development of the various occurrences of the implied term of mutual trust and confidence (and more often, the identification of when it has been breached) demonstrates a growing recognition by the courts that the employment relationship is for many employees, the closest, longest-lasting and most enduring relationship of their lives (aside from marriage)⁸. The rationale was clearly expressed by the English House of Lords in the decision of Malik v Bank of Credit and Commerce International (SA)⁹ when Lord Nicholls said:

Employment, and job prospects, are matters of vital concern to most people. Jobs of all descriptions are less secure than formerly, people change jobs more frequently, and the job market is not always buoyant. Everyone knows this. An employment contract creates a close personal relationship, where there is often a disparity of power between the parties.

Frequently the employee is vulnerable. Although the underlying purpose of the trust and confidence term is to protect the employment relationship, there can be nothing unfairly onerous or unreasonable in requiring an employer who breaches the trust and confidence term to be liable if he thereby causes continuing financial loss of a nature that was reasonably foreseeable. Employers must take care not to damage their employees' future employment prospects, by harsh and oppressive behaviour or by any other form of conduct which is unacceptable today as falling below the standards set by the implied trust and confidence term.

Malik concerned a claim for damages for breach of an implied term of Mr Malik's employment contract, by his employer, The Bank of Credit and Commerce International SA. Malik was summarily dismissed on the basis of a redundancy. After his employment was ended, it became public knowledge that the bank had been operating in a dishonest manner. Malik's claim was brought on the basis that he had been stigmatised by his association with the bank, and was unable to secure ongoing employment in the financial services industry as a result. The bank was found to have breached the implied term of mutual trust and confidence by seriously damaging the relationship between itself and Mr Malik - even when the damage to the relationship was only evident after the employment had ended.

The cases that have implied this duty into the contract of employment have given it broad application. So for instance, there does not have to be any direct maltreatment. Neither does the employee have to be aware of the conduct during the course of their employment - that is, the breach can come to light after the employment relationship is ended.

Some Examples

English courts have developed a wealth of jurisprudence on the area of the implied term of mutual trust and confidence. The following factual scenarios have each been determined to be instances of a breach of the implied term of mutual trust and confidence by the employer resulting in damages being awarded to the employee for breach of contract:

• A supervisor was found to have been constructively dismissed when she did not receive support from her employer because the court determined the employer was "on the side" of the employees that the supervisor was supposed to be supervising. ¹⁰

• A personal secretary was found to have been constructively dismissed when she heard herself being described by her boss, the managing director, as an "intolerable bitch on a Monday morning".¹¹

• A warehouse employee who allowed a customer to borrow a vacuum cleaner (with his employer's approval) was entitled to terminate his contract when he was accused of stealing the vacuum cleaner.¹²

• An 18 year old woman employed as a nanny/housemaid and who resigned voluntarily after forming a consensual relationship with the mother of the house was held to have been unfairly (constructively) dismissed due to the employer (the mother) putting her in an untenable position. ¹³

• An employee who received a warning letter from management accusing him of negligence and inefficiency and who, while suffering from a mental illness, repeatedly requested a meeting with management (which was refused) was permitted to terminate his contract of employment on the basis of management's unreasonable behaviour. ¹⁴

• A junior employee was falsely told there were no vacancies in an office that she wanted to transfer into. The real reason she was denied the job was that the employer had concerns about her performance, but these were not communicated to her. The court determined that

there had been a breach of the implied term of mutual trust and confidence by the employer.¹⁵

Some Australian examples

In Carrigan v Darwin City Council¹⁶, von Doussa J found that the Darwin City Council had breached the implied term of trust and confidence in both its manner of remuneration of Ms Carrigan, and also in its failure to take reasonable steps to rehabilitate her after she suffered a workplace injury. Ms Carrigan was committed to her rehabilitation, but due to a severe injury to her lower back, was unable to fulfil her previous duties as a labourer. Due to significant staffing changes at the HR level in the Council, no particular employer representative took responsibility for the handling of Ms Carrigan's case. This had the effect of "re-victimizing" her throughout the rehabilitation process, as she was unable to get any interest or commitment from her employer to the provision of suitable alternative duties.

The Council was effectively caught by the fact it had written down its commitment to rehabilitation in several policies. The Industrial Relations Commission found:

A commitment to these policies would carry with it a recognition that some expense would be incurred by the Council in the proper fulfillment of its perceived obligations as a substantial public sector employer, and in compliance with its statutory obligations.

Even if it were the case that financial constraints limited the steps which the Council could have taken to provide suitable employment for Ms Carrigan, that fact does not excuse the failure to give reassurance as required by the policy, the failure to take the question of rehabilitation of Ms Carrigan seriously, and the failure to develop in consultation with Ms Carrigan ... a rehabilitation programme which would have indicated appropriate goals and a way of achieving them.

The neglect of the Council to address these issues may be explained in part by the fact that there was no Human Resources Manager from November 1994 through to March 1995, and that when Mr Thirlwell was appointed he was not familiar with the obligations imposed on the employer under the Work Health Act. However in considering whether the Council was in breach of the implied term alleged, it is not to the point that the Council may not have intended to disregard its obligations. The question is whether the Council's conduct as a whole is such that its effect, judged reasonably and sensibly, is such that the employee could not be expected to put up with it. In my view the approach of the employer to rehabilitation had this effect.

In Fraser and Anor v Transport Accident Commission¹⁷, the employee (outside of work) shot and wounded his former tenant. He claimed self-defence and was not proceeded against in a criminal proceeding. However, his employer, the Transport Accident Commission, terminated his employment on the basis that there was a risk that he could become violent with clients in the course of completing his employment duties.

The employer attempted to argue that Mr Fraser had breached the employee's obligation of trust and confidence by engaging in behaviour outside of work that impacted on his ability to perform his employment duties. While the court accepted that behaviour outside of work could result in a breach of the implied term, it determined that in this case, the employer's concerns were misfounded.

In Gambotto v John Fairfax Publications Pty Ltd¹⁸, the NSW Industrial Relations Commission determined in a preliminary way that if the writer and literary critic, Antonella Gambotto had suffered irreparable damage to her reputation post employment, a breach of the implied term of mutual trust and confidence could have occurred - even if the employment relationship no longer existed.

Ms Gambotto alleged that during her employment with John Fairfax, she had professional difficulties with the editorial staff of the Sydney Morning Herald. Despite these difficulties, there was no specific animosity upon the employment relationship ending. However, it was alleged that once she was no longer employed, she became the subject of vitriolic and persistent criticism of her work and her qualifications. She alleged she suffered stress, financial loss and her employment opportunities were restricted. The Commission was not prepared to accept that just because this conduct occurred post-employment, Ms Gambotto was not entitled to claim that Fairfax had breached the implied term of mutual trust and confidence.

In Heptonstall v Gaskin (No. 2) ¹⁹, the Supreme Court of NSW was unprepared to strike out proceedings on the basis that the implied term of mutual trust and confidence was not part of the law of Australia. The case concerned a teacher who was subjected to a lengthy investigation by his employer. The investigation was ultimately resolved in favour of the employee, but he commenced proceedings on (one) basis that the length of time involved in resolving the matter constituted a breach of the implied term of mutual trust and confidence on the part of the employer.

Some Examples from the Field

Despite the best intentions of HR practitioners, managers and supervisors are prone to error. Ordinarily, when an organization has a trained HR staff member, the potential for error in employer-employee relations is diminished. This is why there is currently an exemption in the unfair dismissal provisions of Federal Workplace Relations Act for small businesses - a recognition that such organizations are less likely to have dedicated HR staff to ensure that dismissals are fair.

However, the implication of terms into employment contracts (particularly the implied term of mutual trust and confidence) does not discriminate between small, medium and large businesses - it cuts across all employment relationships. Therefore, the size of a business and the absence of a dedicated HR professional to ward off trouble is not a defence to a breach of contract claim where the employer acts to breach the mutual trust and confidence - no matter how good the intentions of the employer might be.

Recently, I was asked to advise a small business owner to assist them in terminating the employment of an employee whom they felt could not be trusted anymore. In the course of obtaining instructions, I asked questions to discover with more particularity the reasons why the trust had disappeared from the relationship. I discovered that the primary concern of the employer was the fact that the employee was openly conducting an extra-marital affair, and that this did not sit well with the employer's moral standards.

As I was quick to point out to the well-meaning, but misguided employer, an employee conducting an extra-martial affair with a person who was not an employee, while morally questionable, would not be likely to be upheld in court as a justifiable basis for a termination. By imposing their own moral standards on an employee's behaviour (which was behaviour that had no bearing on the employee's work performance) the employer (if the employee's contract was terminated) would most likely have breached the implied term of mutual trust and confidence - that being, the

employee's confidence that their employment would not be terminated for such a non-work related reason.

In another matter, we were able to use a potential breach of the implied term of mutual trust and confidence as a weapon on the part of an employee who we were advising. Historically, there had been concerns about the employee's performance, but the position at the time we were instructed was that all previous concerns had been addressed and that he was performing well. The employee advised us that at the middle-management level (that is, before the issue got to the HR Department), a "dossier" of alleged misdeeds and performance issues was being compiled. The purpose of the dossier was unknown to our client, but understandably, we were concerned about the collection of the information, and our instructions that middle-management was directing other staff members to provide information for inclusion in the dossier.

Pre-emptively, we wrote to senior management and made them aware of our client's knowledge of the dossier and our view that the tacit consent of the employer to the collection of such data (in circumstances where our client had previously been cleared of any wrongdoing) could lead to a breach of contract claim. The employer directed middle-management to cease the collection of information and litigation was thwarted.

Is the implied term of mutual trust and confidence part of Australian law?

No appellate court in Australia has definitively answered this question. However, we are certainly heading that way. It is already recognized as part of the law of England and also New Zealand.

Arguably, the prevalence of case law in England has to do with the absence of a right for an employee to bring a constructive dismissal claim - a claim where the employee has in fact terminated their own employment, but can demonstrate that they did so due to the employer's conduct in treating them unfairly in connection with that employment. Employees who are constructively dismissed in Australia are entitled to bring claims for unfair dismissal, but in England, no such right existed. This led to courts determining that the "necessity" of the situation of an employee who had been constructively dismissed led easily to the implication of the implied term of mutual trust and confidence into most employment relationships.

In New Zealand, what is relevant is the increasing number of cases based on the implied term after the enactment of the Employment Contracts Act, a piece of legislation designed to reform workplace relations in the way currently being proposed by the Federal Government. It would be fair to say that if the implied term of mutual trust and confidence is not already part of Australian law, it is likely to become part of the legal framework in the near future. While we may not currently have the "necessity" as exists in the case of English employees, if the ability of employees to take action for unfair dismissal becomes limited in the way currently being proposed, arguably, the necessity arises, and the need for the court to imply the term occurs. To put it more simplistically, as one door closes, another one opens for a disappointed employee. 

Consequences for Employer of Breach

An action for damages is the most obvious consequence. This may arise whether or not the relevant conduct has resulted in the ending of the employment relationship. However, at least the following are possible:

(a) a claim for damages for breach of contract;

(b) a statutory unfair dismissal claim;

(c) (possibly) injunctive relief or an order for specific performance.

However there is another potential consequence of major significance to employers. If a breach of the implied term of mutual trust and confidence is sufficiently serious, the consequence may be that the employee is discharged from the employee's obligations under the contract of employment. This would mean for example, that it may not be possible to enforce restrictive covenants.  The implications for market share protection (the objective underlying such restrictions) is obvious.

Risk Management - How Can Business Protect Itself?

The examples set out above might give some professionals cause for despair. Not only does HR continue to have to monitor the performance of all "toxic" managers and supervisors who deliberately, negligently or incompetently breach employment contracts. More often (in our experience), bad management is the least of HR's problems. It is the managers and supervisors who engage in well-intentioned, but misguided attempts to manage employee conduct, performance and behaviour who end up in the most difficulty with potential breaches of the implied term of mutual trust and confidence. The locus of subtle employment relationship sabotage is usually in the most unlikely places.

Godfrey²⁰ opines that an employer who attempts to use their dominant bargaining position to the detriment of the employee is likely to be constrained by the implied term arguments. She says that the renaissance of this type of legal argument means that an employer will be less able to unilaterally change policies, relocate employees, alter working hours, and award salary increases and bonuses. In light of the proposed changes in the Federal Industrial Relations arena, and the suggested moves towards increasing the rights of employers to dictate terms and conditions, it is not surprising that practitioners are heralding a new dawn of implied term litigation.

The unions and the churches are correct in suggesting that curtailing unfair dismissal rights means that fewer employees will be entitled to access the jurisdiction of the courts for remedy of an unfair employment arrangement. This is correct. The cost of litigation to most people is unrealistic. An action for damages for breach of contract could be conservatively estimated to cost an employee five times as much as an action for unfair dismissal in the Industrial Relations Commission. However, with the expected rise in unionism pending the coming changes to the legislation, as well as the increasing numbers of employees earning salaries commensurate with specialised skills and qualifications, it is not outside of the realm of fantasy to suggest that increasingly employers (who might have believed themselves to be able to hire and fire at will) will find themselves on the receiving end of a statement of claim alleging breach of an implied term of the employment contract. How then does an employer managing the risk of these claims?

A comprehensive and dispassionate audit of employment practices is always a good idea - and the audit should progress from start to finish of the employment relationships.

What promises are being made and expectations created in your recruitment process? For example, do you hold your business out as being family friendly, flexible and non-discriminatory? How will your business react if a request for flexible hours is made? Do you permit senior management to work at home? If so, is it reasonable to let other less senior employees do the same - particularly if they have family responsibilities?

What are employees told about performance reviews and salary increments? Are bonuses awarded on an individual or team basis? Do other employees know the level of bonuses being paid to their colleagues? What would happen if they did? Even if you forbid employees from talking about their

bonus, is there a risk that their colleagues will find out anyway? What sort of message do different incentives send to your staff about employee worth and value to an organization?

What are the expectations in your business about "golden handshakes"? In a recent case, I had to advise an employee who was constructively dismissed in circumstances where he believed he was entitled to approximately 1 years' salary by way of redundancy. This was despite an edict from the employer that no more redundancies would be payable. My client's sense of entitlement derived from a policy that had not been implemented for about 6 months - and in his view, the employer had deliberately changed the policy to deprive him of what he believed were his legitimate entitlements.

The message from these particular examples is simple. A failure to communicate consistently with employees about company goals, expectations and standards means that the potential for discrimination and disenfranchisement arises - often to the point of a breach of an implied term of the employment contract. The messages need to be consistent and they need to be reasonable - dispassionate, free of malice and objectively justifiable. The messages also need to be consistent across the employment sphere - in induction programs, performance reviews, company policies, staff intranets and in ending the employment relationship.

At its most basic, the way to reduce the risk of breaching the slightly intangible implied term of mutual trust and confidence comes down to the culture of the business. If senior management are motivated by a desire to see the business succeed with their employees (rather than at the expense of their employees), the potential for employee unrest is certainly diminished. The moment employees perceive that management is unsupportive of their employment goals (by acting capriciously and with favouritism) the breach of the implied term of mutual trust and confidence will rear its ugly, litigious head.

¹ For some penetrative insights see "Mutual Trust and Good Faith: Can Private Contract Law Guarantee Fair Dealing in the Workplace?" by Joellen Riley [2003] 16 AJLL 28² Byrne and Frew v Australian Airlines Ltd (1995) 185 CLR 410; (1995) 131 ALR 422; (1995) 69 ALJR 797; (1995) 61 IR 32; [1995] HCA 24³ For example B Creighton and A Stewart "Labour Law" 4th Ed Federation Press, 2005 especially Chapter 13 "Individual Rights and Obligations" ⁴ Blackadder and Ramsay Butchering Services Pty Ltd [2005] HCA 22 (27 April 2005) www.austlii.edu.au/au/cases/cth/HCA/2005/22.html⁵ Brooks, Veit, Pascale and Kelly v Australian Dried Fruit Sales Pty Ltd (trading as Sunbeam Foods) , www.airc.gov.au:8080/isysquery/irld5a0/3/doc⁶ Roncevich v Repatriation Commission [2005] HCA 40 (10 August 2005); www.austlii.edu.au/au/cases/cth/high_ct/2005/40.html ⁷ B Creighton and A Stewart "Labour Law" 4th Ed Federation Press, 2005 especially Chapter 15, "Termination of Employment Contracts" especially at 418-421 ⁸ Lord Bingham of Cornhill, Former Lord Chief Justice of England in From Servant to Employee: A Study of the Common Law In Action 2001, www.sal.org.sg/media_speeches_al2001.htm⁹ [1998] AC 20 at 37-38¹⁰ Associated Tyre Specialists Ltd v Waterhouse [1976] IRLR 386 ¹¹ Isle of Wight Tourist Board v Coombe [1976] IRLR 413¹² Fyfe v Byrne [1977] IRLR 29¹³ Wood v Freeloader Ltd [1977] IRLR 455 ¹⁴ Wetherall (Bond St W1) v Lynn [1978] ICR 205¹⁵ Post Office v Roberts [1980] IRLR 347¹⁶ Unreported, Industrial Relations Court of Australia, 20 March 1997 ¹⁷ Unreported, Federal Court of Australia VI 1185 of 1997, 5 August 1997¹⁸ (2001) 108 IR 469¹⁹ (2005) 138 IR 103

²⁰ Godfrey K "Contracts of Employment: Renaissance of the Implied Term of Trust and Confidence" (2003) 77 ALJ 764 at 770