An employer which repudiates a contract of employment can find itself liable to an employee for unfair dismissal remedies and/or damages for breach of contract. Repudiation by an employer of the employment contract is often known as a 'constructive dismissal'.
Employers also need to be aware that if a course of conduct does repudiate an employment contract, the consequences can extend beyond an employee obtaining relief for unfair dismissal (being an order for reinstatement or compensation) or damages. They can also include an employer being prevented from relying on post-employment restraints and contractual confidentiality obligations (though an employee may still owe other confidentiality obligations).
Repudiation occurs when a party to a (written or verbal) contract engages in conduct that, on an objective view, demonstrates an inability or unwillingness to be bound by the terms of the contract. Repudiation by an employer usually:
- entitles the employee to terminate the employment contract without notice, bringing the employment relationship to an end immediately
- entitles the employee to seek legal remedies, such as compensation
- terminates contractual obligations imposed on the employee (such as post-employment restraints); and
- constitutes a dismissal for the purposes of unfair dismissal and general protections provisions under the Fair Work Act 2009 (Cth) (FW Act) (and similar State legislation).
The type of conduct which may demonstrate an intention not to be bound by the contract of employment turns on the particular facts and circumstances of the matter. Over time, courts and tribunals have provided insights into what constitutes such an intention. For example, it is well-established that a unilateral reduction in remuneration will constitute a repudiation of the contract. In the Victorian case of Actrol Parts Pty Ltd v Coppi (No 2)1 the Court held this can include the removal of the use of a company car and mobile telephone after an employee has given notice of their resignation.
When restructuring their businesses, employers need to take care to ensure an alteration to an employee's position does not constitute a significant reduction of status or responsibility, even if the employee's remuneration remains the same. In the New South Wales case of Fishlock v Campaign Palace2, the Court held that the appointment of a second 'Creative Director' to the company was a repudiation of the employment contract with the first Creative Director. Although the employee retained their remuneration and title, the Court found their responsibility was significantly diminished and that, by employing the second Creative Director, the employer had demonstrated an unwillingness to be bound by the contract of employment with the first Creative Director.
In Crowe Horwath (Aust) Pty Ltd v Loone3, the Victorian Supreme Court of Appeal found the reduction of an employee's bonus terminated the post-employment restraints on the employee. The employee was awarded $420,000 in compensation and was not restrained from providing services to clients with whom he had had direct dealings through his ex-employer. This case was the first ruling on this matter and it is likely that other Australian jurisdictions will adopt the decision.
In the recent case of Martin v Novita Children's Services4, the Fair Work Commission was required to consider whether the employer had repudiated a contract of employment. In this case, the employee alleged the assignment of all her direct reports to other managers within the business constituted a significant reduction to her managerial status and responsibility. The employee resigned from her employment after the changes were communicated to her and subsequently commenced an unfair dismissal claim alleging her former employer had repudiated the contract of employment.
Gilchrist Connell assisted the employer to successfully defend the employee's claim, by demonstrating that her resignation was premature and not a reasonable reaction in the circumstances.
Employers should observe and respect the terms contained in employment contracts. If an employer no longer wishes to be bound by a particular term in an employment contract, the safest approach is to attempt to reach genuine, consensual agreement with the employee to vary the term. However, given the risks of even attempting the discussion, an employer should first seek legal advice before raising it with the employee.
Gilchrist Connell's Workplace Law team would be pleased to advise and assist employers concerned about exposure to claims of contractual repudiation or any other employment/safety law related matters.
1  VSC 694.
2  NSWSC 531.
3  VSCA 181.
4  FWC 7706.
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.