Australia: Employer obligations: fundamental change ahead?

Last Updated: 2 May 2014
Article by Josephine Hart and Tim Lethbridge

On 6 April 2014, in the case of Commonwealth Bank of Australia v Barker, the High Court heard submissions on whether an obligation of mutual trust and confidence should be implied by law into an employment contract. If the High Court finds in favour of the respondent (the employee, Mr Barker), the likely result is that such a term will be implied by law into every employment contract unless excluded by express terms or where it would operate inconsistently with the express terms of the contract.

The implied term of mutual trust and confidence means that the employer will not, without reasonable and proper cause, conduct themselves in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between the parties.

The respondent, Mr Barker, had been an employee of the Commonwealth Bank ("the CBA") for 27 years. On 2 March 2009, the CBA informed Mr Barker that his position was redundant. In place at the time was a Redeployment Policy which, amongst other things, obliged the CBA to facilitate steps to achieve Mr Barker's redeployment within CBA. A specific clause within the contract also required the employer to take reasonable steps to redeploy Mr Barker within the organisation. Although there were attempts made by a human resources officer to give effect to this policy and contract term, these attempts failed because certain staff of the CBA had cut off Mr Barker's email and phone access on the day he was informed of his redundancy but failed to tell the human resources officer of this fact. This resulted in the human resources officer's attempts to contact him about potential redeployment failing.

There was nothing in Mr Barker's employment contract to suggest that the Redeployment Policy was incorporated as a term of his contract, and he failed on this ground - both at first instance and on appeal. In fact, the express clause in the bank's policy manual stated that the terms of the policies did not form part of Mr Barker's employment contract.

However, the trial judge found that the term of mutual trust and confidence was implied into his employment contract, and that a "serious breach" of the Redeployment Policy constituted a breach of this implied term. Accordingly, judgment was ordered in favour of Mr Barker for the sum of $317,500.

The CBA appealed to the Full Court of the Federal Court, where Mr Barker was again successful, although on a slightly different basis. The Full Court agreed (by majority 2-1) that the mutual trust and confidence term was implied into the employment contract. They did not agree however that this meant that a serious breach of a policy would necessarily breach this term. Rather, they found that the implied term required the appellant to take positive steps from 2 March 2009 to consult with Mr Barker about the possibility of redeployment and to provide him with the opportunity to apply for alternative positions within CBA. Reliance was placed on the term of the contract that contemplated redundancy or redeployment as an alternative to termination. The bank's failure to give due consideration to this term amounted in a breach of the implied term of mutual trust and confidence. As discussed below, the obligations imposed on the CBA by the term of the contract appear almost identical but do not involve reliance on the policy itself.

The CBA has appealed to the High Court, arguing that the mutual trust and confidence term is not, and should not be, part of Australian law.

The 'Johnson exclusion area'

The implied term of mutual trust and confidence has been accepted in a number of Commonwealth jurisdictions, most notably in the United Kingdom since 1998 as a result of the case of Malik v Bank of Credit and Commerce International. The implied term has however been limited in the UK by what has become known as the "Johnson exclusion area" (named after the case that decided it), meaning that the implied term will not apply to dismissal. Instead the implied term will only apply to conduct or events leading up to a dismissal.

This is primarily because the UK, like Australia, has a statutory unfair dismissal scheme. The Courts are understandably concerned not to create a cause of action which effectively makes the unfair dismissal regime (which is limited in a number of respects) redundant. The Johnson case explained that the implied term of mutual trust and confidence is incorporated into employment contracts as a method of ensuring that the relationship between employer and employee is continued. It would therefore not be appropriate to consider the implied term in the context of dismissal.

Yet it has been acknowledged that the distinction between what relates to 'dismissal' and what does not can sometimes be a subtle one. It also gives rise to certain anomalies - for example, it creates a right to recover damages in the less serious case of suspension of employment, but not in the case of dismissal.

Australia also has a statutory unfair dismissal scheme and it appears to be accepted that if the implied term of mutual trust and confidence is accepted as Australian law, it will come with the same 'exclusion'.

In Barker, the obligation to assist Mr Barker with redeployment was found to be sufficiently disconnected with his dismissal not to fall within the exclusion, despite the fact that the obligations relating to redeployment only arose as a result of his impending dismissal.

It can be readily seen that, even with this 'exclusion' in place, the implied term of mutual trust and confidence is likely to be tested by potential applicants who would otherwise be limited to their entitlements (if any) under the statutory unfair dismissal regime, by pointing to some conduct that occurred prior to their dismissal as constituting a breach of the implied term.

Where to from here?

If the High Court rejects the implied term of mutual trust and confidence, this area of law will return to 'business as usual' after a period of significant uncertainty.

If the High Court upholds the implied term, as previously mentioned above, it is likely that the term will be implied in to every employment contract, unless expressly excluded. Furthermore, employers may face a new avenue for employees to make claims for perceived wrongs which do not otherwise breach the express terms of the employment contract or give rise to any statutory remedies. In particular, employers will need to apply even greater focus to the content of their internal policies and compliance with those policies, especially in circumstances where those policies are incorporated into the employment contract. If the High Court were to agree with the formulation of the trial judge in Barker, this would effectively mean that a "serious breach" of any policy would be a breach of the employment contract. If the High Court were to agree with the formulation of the Full Court, the position is less clear. As mentioned above, the Full Bench rejected the suggestion that a breach of the policy could be a breach of the implied term, however if a term of the contract either incorporates the employer's policies, or contains provisions that are remarkably similar to the terms of the policies, then it is likely that a breach of the implied term will be found.

Whatever the High Court ultimately decides, the Barker case should serve as a reminder of how important it is to comply with internal policies and to ensure open communication between employee and employer. This dispute, which has (as things currently stand) cost the CBA over $300,000 plus costs of at least that sum again, could have been avoided altogether if those entrusted with the job of terminating Mr Barker had communicated properly with the human resources officer whose job it was to effect the redeployment policy.

We will provide a further update once the High Court hands down its judgment.

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.

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Josephine Hart
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