Employment contracts: does a step back from implied terms mean that the goal posts are moving?

Trust and confidence – Barker

In the 2014 case Commonwealth Bank of Australia v Barker (Barker), the High Court of Australia determined that there is no implied term of mutual trust and confidence in contracts of employment in Australia. This was considered by some as a sign that the foundations relied upon in employment contracts may be shifting, creating uncertainty for employees and employers alike

The development of the implied term of mutual trust and confidence in the United Kingdom, was a shift away from the historical construct of employment as a “master and servant” relationship, towards recognition of the necessity of a relationship between employer and employee for employment to exist.

The implied term of mutual trust and confidence essentially required employees and employers to not act in a way that was likely to destroy or seriously damage the employment relationship. As the wording suggests, the term provides an obligation and protection for both employers and employees. However, traditionally employees have more frequently made claims for breaches of the implied term of mutual trust and confidence.

The position of the High Court in Barker was that it’s not the role of the Courts to imply such terms in law, and that such a term should be implemented in legislation by Parliament. This is arguably correct. However, in the meantime this leaves a gap which could affect both employees and employers. There is also a concern that the Courts may use the Barker decision as precedent to query the operation of further implied terms.

Will reasonable notice be next?

Several recent decisions have questioned the interpretation and operation of a long held implied term of reasonable notice of termination. Reasonable notice (and payment in lieu of notice) is implied when a contract of employment does not specifically state a period. Often this is contentious with high level executives who may be entitled to up to 12 months paid notice under the implied term of reasonable notice.

In the recent decision of Kuczmarski v Ascot Administration Pty Ltd, the Court held that there is no need to imply a reasonable term, if the employment is covered by an Award which specifies a notice period. In another recent decision ofElwin v Edwards Motors Pty Ltd, the Court held that the Fair Work Act provides a minimum notice period, which means that there is no room for the reasonable notice term to be implied. There is still some uncertainty about whether “minimum notice” and “reasonable notice” are substantially the same, or whether there is room for both concepts to exist simultaneously. 

These recent decisions challenge the traditional view of employees being protected by implied terms, but are in line with the decision of Barker.

Alternatives to trust and confidence

While the duty of mutual trust and confidence is out, at least for the time being, the Courts have identified other implied terms that may have the same effect, such as the implied duties of cooperation and good faith. There is some concern as to whether either of these implied duties will have the same effect as the implied term of mutual trust and confidence.

The duty of cooperation relates to the performance of parties under a contract. The parties must reasonably cooperate with each other to meet their obligations under the contract. For example, if an employee is required to start at a given time, the employer must cooperate by providing access to the workplace. While this ensures some level of reasonable behavior, this implied term is limited to the obligations and benefits specified in the contract, and does not encompass the wider employment relationship to the same extent as trust and confidence.

The duty of good faith is also a contractual based term, requiring parties to act in good faith in their dealings, but is largely untested or widely accepted by the Courts in this context. It is unclear, if good faith was to be accepted, to what extent it would cover the employment relationship.

So what does this mean?

The High Court’s decision in Barker does not mean that employers and employees can now treat each other with a lack of trust or confidence. Nor does this mark the end of all implied terms. What it does mean however is a degree of uncertainty with respect to the enforceability of implied terms in contracts of employment.

It is more important than ever to have clear and complete employment agreements and policy documents, which set out, in full, the obligations of employers and employees so that there can be no doubt as to the terms of employment.

If you require assistance with drafting or updating your employment agreements or policies, contact our employment solicitors today.

Written by Associate, Jill Brajkovich.

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