It is a trite proposition that employment contracts are important. One key benefit of having an applicable employment contract in place governing an employment relationship is that the notice an employer is required to give to the employee to terminate employment is, subject to the minimum legislative requirements in the Fair Work Act 2009 (Cth), the period specified in that contract. As a general proposition, the specified periods of notice in employment contracts are rarely more than 6 months (usually for senior executives) and more commonly between 1 and 3 months.
If a court finds that there is no applicable employment contract in place then the employer needs to give "reasonable notice" to terminate the employment relationship - while this might sound benign, reasonable notice will often far exceed the period that would likely have been specified in an employment contract for the same employee.
This was illustrated in the recent NSW Supreme Court decision of Roderick v Washington H Soul Pattinson & Company Limited (No 2)  NSWSC 1224 (Roderick).
One key issue to be determined in Roderick was whether there was an applicable contract governing the employment in place. The employer contended there was (described in the decision as the "original contract"); the employee asserted there wasn't.
At paragraph 117 of Roderick, the presiding judge, Justice Cavanagh stated:
His Honour continued at paragraph 123:
After considering the evidence and applicable law, Justice Cavanagh concluded (at paragraph 194):
His Honour then considered what constituted "reasonable notice" in the circumstances. If the submissions of the employer had been accepted, and the "original contract" governed the employment relationship, the notice period stipulated in that contract (three months) would apply.
At paragraph 195, Justice Cavanaugh stated:
His Honour continued at paragraph 196:
The Plaintiff, who was the Finance Director of the Defendant (a large company that is currently in the ASX 100), and had been employed from June 2006 until April 2018, contended that reasonable notice was a period of 24 months. The defendant submitted that reasonable notice should be determined to be in the range of 3 to 6 months.
Justice Cavanagh considered the factors relevant to determining reasonable notice in this case. At paragraph 200 his Honour stated:
(1) The plaintiff was 49 years old at the time of termination.
(2) She had worked for the defendant since 2006.
(3) She had been appointed Finance Director in 2014.
(4) She was an executive director of a very large public company.
(5) On the basis that the only other executive director was the CEO, she was the second most senior employee in that very large company.
(6) She was a Board member.
(7) Her position was so senior that she reported directly to the Board rather than the CEO.
(8) She was the only woman on the Board at the time of her termination.
(9) Despite being terminated without notice or warning, there is no evidence of any misconduct or improper behaviour on her part which might have justified the manner of termination.
(10) Indeed, in circumstances in which I have preferred the plaintiff's evidence as to what she was told at the time of termination, she was left very much in the position of being unable to explain her abrupt termination to any future employers.
(11) The comparable position is thus the position of being a finance director and executive director of a large public company.
(12) In my view, it is a matter of common knowledge that there are considerably fewer women in such positions than men. It is only necessary to look at the composition of the Board of the defendant to receive confirmation of such ongoing imbalance. Statistical evidence relied on tends to suggest numbers increasing up to 30%.
(13) She would be unlikely to receive a reference from the defendant.
(14) Her fixed salary was high and taking account of entitlements under the Incentive Schemes, her remuneration was very high.
(15) On the defendant's own evidence (comparisons of her remuneration package with the medium package) her package was well above average."
While each case ultimately turns on its own facts, these reflect the types of matters a court would generally consider in determining reasonable notice.
The defendant submitted that in determining reasonable notice for the plaintiff, the court should have regard to the agreed notice period in the contracts of other senior employees, including the CEO. Justice Cavanagh gave this approach short shrift, stating (at paragraph 202):
One factor given close attention by the judge was the difficulty the plaintiff had in securing alternative employment. This is consistent with the primary purpose of notice being a period to enable the employee to obtain such employment. In this regard, his Honour stated (at paragraph 208):
After considering the relevant factors and various authorities on reasonable notice (including one case which was considered to be most comparable, where reasonable notice was held to be 10 months), the court determined reasonable notice in this case to be a period of 12 months.
Lessons for Employers
The case illustrates why it is important for employers to have current, applicable employment contracts in effect. To do this, employers should ensure there is an employment contract in place at the start of employment and that the contractual terms are revisited (either by way of a new contract or express continuation of existing contractual terms) when the position of the employee changes, particularly when there is a promotion.
A failure to do so will mean that an employer can only terminate on reasonable notice, which will, in almost all cases, be a period that far exceeds the period of notice that would likely have been agreed in the employment contract. In some cases, it has extended well beyond the 12 months determined in Roderick.
One of the first questions an employment lawyer will ask an employee client is whether they have a current employment contract, often in the hope they don't. For employers, the lack of an applicable employment contract can end up, due to the harmless sounding concept of reasonable notice, being a very expensive omission.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.