Australia: Headhunting: The risks of making misleading statements during pre-contractual negotiations

Last Updated: 11 September 2016
Article by Lauren Drummond
Most Read Contributor in Australia, September 2019

Headhunting: The risks of making misleading statements during pre-contractual negotiations

In Rakic v Johns Lyng Building Solutions (Victoria) Pty Ltd (2016), the Federal Court awarded an employee more than $330,000 in compensation for the misleading and deceptive conduct of her former employer, Johns Lyng Building Solutions (Johns Lyng).

In 2013, an employee was enticed to leave a position on a base salary of $230,000 and accept a position as general manager of Johns Lyng where her base salary was significantly less. The employee alleged that she relied on representations made by Johns Lyng that a 2.5% annual profit share, which was part of the offer, would make up the difference in salary.

Johns Lyng did not achieve the anticipated profit in 2013. The employee therefore received significantly less pay than represented to her prior to accepting the position. To make matters worse, Johns Lyng terminated her employment in February 2014 due to redundancy.

The employee filed a claim against Johns Lyng in the Federal Court for loss and damage on the basis that it had engaged in misleading and deceptive conduct under the Australian Consumer Law (ACL).

Under s 18 of the ACL, a person is prohibited from engaging in misleading and deceptive conduct "in trade or commerce". Under s 31, a person must not engage in conduct "in relation to employment that is to be, or may be offered" which is misleading, including as to the "nature, terms or conditions of the employment".

The Court found that conduct which occurs in the course of negotiations of an employment contract was "in trade or commerce" or would otherwise attract s 31 of the ACL.

Alleged representations

The employee argued that by the conduct of its agents, Johns Lyng represented the following to the employee:

  1. Johns Lyng's profits and sales for 2013 were likely to meet or exceed its sales and profits from the previous 2 years.
  2. Johns Lyng would remain profitable for at least the next 12 months.
  3. As at March 2013, there was no reason, of which Johns Lyng was aware, that it would not meet its forecast profits in 2013.

The Court found that Johns Lyng had made the representations in the following instances:

  • during a meeting prior to accepting employment, the employee was told that Johns Lyng was very profitable and as such, her 2.5% profit share would make up the difference in pay with her current position; and
  • the employee received an email about the financial position of the company as summarised by the chief financial officer, which showed its sales and profits from the previous 2 years and its profit forecast for 2013.

Representations can also be made by implication or by omission. The Court held the third representation was implied as a result of Johns Lyng failing to qualify any of its statements regarding its profitability and the employee's potential profit share amount.

Since the purpose of those statements was to entice the employee to accept employment with Johns Lyng, the Court held that conduct occurred in the course of pre-contractual negotiations, and thus fell within ss 18 and 31 of the ACL.

Were the representations misleading or deceptive?

The employer's representations about the expected profits for 2013 were as to "future matters". Under the ACL, such representations are taken to be misleading unless there are reasonable grounds for making them.

The Court ruled the first and second representations constituted misleading and deceptive conduct as the employer failed to show there was a reasonable basis for making them. It held that Johns Lyng did not take relevant factors into account, including the fact that Johns Lyng had suffered a significant decline in its number of successful bids for new work, which occurred before the representations were made. Thus, the representations were not made on reasonable grounds.

However, the third representation was found not to be misleading. This is because the employer did not have actual knowledge that it could not achieve the forecast profits in 2013, despite failing to take relevant factors into account that suggested otherwise.

Key lessons

Statements that promise certain outcomes or deliverables should be avoided when seeking to entice prospective employees to join your business, unless there are reasonable grounds to support them.

It is important to ensure that:

  • all information or statements are accurate and, where necessary, include qualifications as to the accuracy of the information;
  • employment contracts contain a clause that the employee has not relied on information/representations not contained in the contract; and
  • any briefs given to head hunters are reviewed carefully, and recruiters are warned against making other statements or promises in relation to employment.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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