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Mutual trust and confidence now a part of every employment contract


An Australian court of appeal has confirmed that there is an implied term of mutual trust and confidence in all employment contracts, unless there are express terms in a contract which are inconsistent with that implied term.

Written by

Brett Feltham
Partner

Georgos Papanastasiou
Associate

 

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Importantly, if an employer breaches the implied term, damages may be payable, except if the breach occurs at the time of an employee's dismissal.

As a result employers should make sure they treat employees fairly and in a way that does not undermine the relationship of trust and confidence that exists, especially in dealing with employees in the lead up to any possible dismissal.

Background

The decision, by the Full Court of the Federal Court (Full Court) in Commonwealth Bank of Australia v Barker [2013] FCAFC 83, confirmed the decision by the Federal Court at first instance.  For an analysis of that decision at first instance, and for the factual background to the case, see our earlier article.

The majority decision

The Full Court, by a majority of 2 judges to 1, held that the Commonwealth Bank of Australia (CBA) breached the implied term of mutual trust and confidence when it failed to fully explore redeployment options for a senior executive, after it had given him notice that his position was redundant and that his employment would be terminated in one month if he could not be redeployed to another role.

The majority held that a term of mutual trust and confidence is implied into all employment contracts, "having obtained a sufficient degree of recognition, both in England and Australia", other than when the contract contains express terms that are inconsistent with the implied term.  The majority found that the term should be implied because it was necessary in light of the contemporary view that an employment relationship is characterised by common interest and partnership, rather than by conflict and subordination.

What is the content of the implied term?

The essence of the implied term is that "the employer will not, without reasonable cause, conduct itself in a manner likely to destroy or seriously damage the relationship of confidence and trust between the employer and employee".

What this means in practice is not obvious, and "must be moulded according to the nature of the relationship and the facts of the case".  In this case, the operation of the implied term was influenced by:

  • the senior executive being a long term employee, having served close to 30 years with CBA; and
  • the senior executive's employment contract contemplating the possibility of redeployment within CBA as an alternative to dismissal.

These factors meant that the implied term required CBA to take positive steps to consult with the executive about redeployment possibilities and to give him an opportunity to apply for an alternative position within the business.  CBA failed to do so, and cut off the senior executive's work email and mobile phone as soon as he was advised that his position was redundant.

The implied term does not operate at the point of dismissal

The majority also held that the implied term did not operate at the point of dismissal, but acknowledged that distinguishing between acts occurring prior to dismissal and the dismissal itself is difficult. 

In this case, CBA's failure to take steps to help the senior executive explore redeployment opportunities was separate from the termination of his employment.  As a result, the implied term operated, and by breaching it by failing to take those steps, damages were payable by CBA to the senior executive.

The minority view

The dissenting judge disagreed with the majority, holding that the implied term should not be implied into all employment contracts, including on the basis that it was doubtful that the implied term was necessary to give employment contracts commercial and industrial validity.

The dissenting judge was also concerned that it would be difficult to determine what the content of the implied term is and how exactly to comply with it.  In this sense, the risk is that the actual content of the implied term may only be evident after the circumstances in question, which can clearly be problematic for an employer.

The effect of a serious breach of company policy

Significantly, all three judges departed from an important, and controversial, aspect of the decision at first instance in this case. 

At first instance, the Federal Court held that CBA had breached the implied term of mutual trust and confidence by failing to comply with its own redeployment policy.  This was despite the fact that the policy was found to not form part of the executive's employment contract.

The Full Court disagreed with that approach, saying that CBA's failure to comply with its own redeployment policy could not amount to a breach of the implied term, since that policy was not part of the executive's employment contract.

This finding will give comfort to employers, since the decision at first instance had cast doubt on their ability to escape liability for any failure to follow their own policies by specifying, in writing, that policies do not form part of their employees' employment contracts.

What should employers do?

Employers should ensure they treat employees fairly and in a way that does not undermine the relationship of trust and confidence that it has been confirmed is implied into all employment contracts.  Of course, not only are there legal reasons, but also sound labour management reasons, to do so.

This is especially important in the lead up to any possible dismissal of an employee, and would include where an employee:

  • has been suspended and/or is under investigation;
  • is undergoing performance management or counselling; or
  • is participating in the consultation or redeployment phase of a redundancy process – in these circumstances, employers should make sure that they establish or maintain active communication channels with the employee, especially if the employee is on gardening leave and/or has had access to their company email and/or phone reduced or removed.

If there is any doubt about whether any particular action might be considered to be prior to a dismissal, and what action might be considered to be at the point of dismissal, employers should err on the side of caution and seek expert advice.

Although employers may also consider getting expert advice on how their employment contracts might be amended to expressly exclude the implied term of mutual trust and confidence, that approach may not be effective and/or appropriate in the circumstances.

Finally, this decision may be the subject of an appeal to the High Court. Accordingly, employers should stay alert to any developments in this important area.

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