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Understanding employment contracts

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Arguably the most essential component of the employer and employee relationship is the employment contract.

The contract should be clear, concise, and include well-defined protections for the employer. Clauses that are unclear or appear innocuous can have serious consequences when scrutinised before court, something that occurs more regularly than employers realise. 

Standard bonus clauses and policy clauses are commonly found in employment contracts. However, employers need to be careful in the wording and qualifiers in these clauses to not be caught out for breach of contract. Without careful wording and follow through, these common clauses can leave the employer liable for a claim from its employees. Below, we look at each clause and several cases that have influenced the writing of these clauses in Australia after employers have faced claims for breach of contract. 

Standard bonus clause

When reviewing bonus schemes in employment contracts, the first question to ask is whether the bonus is guaranteed or discretionary in nature. Standard bonus clauses can appear in different forms, with a standard discretionary annual bonus clause tending to appear as:

Annual Performance Bonus

You (the employee) are eligible to receive an annual performance bonus;

The criterial for the annual performance bonus is… (i.e. satisfaction of KPIs); and

The decision as to whether you will receive the annual performance bonus is entirely within the discretion of the employer.”

The added proviso of clause (c) often causes employers to assume they have the right to withhold an employees’ bonus, even if the employee has met the required criteria. They would be mistaken to assume this, as the case of Silverbrook Research Pty Ltd v Lindley [2010] demonstrates an employer cannot withhold a bonus ‘capriciously’ or ‘arbitrarily’. 

Lindley was found to be entitled to damages after Silverbrook failed to assess whether she had earned the annual bonus over the course of her five years of employment. Lindley’s contract provided for a discretionary annual bonus of $40,000 should she meet her KPI’s. However, Lindley was never set any objectives to be measured by, and never received a bonus from the company. After her resignation, Lindley claimed she had never been given the opportunity to meet the objectives to qualify for a bonus. A director at Silverbrook stated they had made a deliberate decision not to pay Lindley a bonus, a decision that would not have changed even if her bonus objectives had been reviewed annually. 

This case demonstrates that a bonus clause can be enforced against an employer in circumstances where they had wrongly refused to assess or pay the bonus. If an employer has no intention of making these payments, they should be omitted from the employment contract. However, this leaves the employer with a question: what makes an employer when exercising their discretion to award a bonus ‘capricious’ or ‘arbitrary’?

To answer this question, we can look to the 2015 case Russo v Westpac Banking Corporation. Russo’s employment contract outlined that he was entitled to a discretionary bonus and certain Westpac policies, including in respect of redundancies, formed part of his contract. In the redundancy policy, there was a statement outlining that should he (Russo) be made redundant he may be entitled to a pro rata bonus at the discretion of Westpac. The qualifier being Russo must achieve an “effective” rating for his performance ‘at the absolute discretion’ of Westpac.

At his redundancy, Russo received a ‘needs development’ rating following a flawed process which took impermissible matters into account and Westpac did not give a bonus when terminating his employment. It was found that Westpac had ‘capriciously, arbitrarily, or unreasonably’ used its discretion not in accordance with its policies.

These findings demonstrate an employer’s responsibility to pay bonuses in accordance with their criteria, and in a way that is not ‘capricious’ ‘arbitrary’ or ‘unreasonable’. During the hearing, Russo’s manager admitted Westpac had failed to follow bonus policy, contributing to Russo’s lower performance rating. 

While a clause dictating the absolute or sole discretion to decide on the allocation of performance bonus leaves the employer with some flexibility, this needs to be exercised with caution. 

Policy clauses

Policy clauses are implemented by most companies and are used to address discrimination, health and safety, use of company vehicles and so on. These policies are commonly treated as providing directions from an employer. 

Since the 2007 case of Goldman Sachs JBWere Services Pty Ltd v Nikolich, the qualifier in the second sentence below has become a crucial protection for employers in clauses now commonly worded as:

“Company Policies:

You are required to comply with any written policy of the Company. However, the Company’s policies do not form part of your contract of employment.”

In this case, Mr. Nikolich claimed his employer breached the ‘Working With Us’ policy in his employment contract, causing him psychological injury. The policy stated the requirement to take “every practical step to provide and maintain a safe and healthy work environment”. Justice Marshall noted while the contract stated Mr. Nikolich should comply with the policy and practice, responsibility also lay with the employer to comply. The policy was accepted by the Full Court majority as contractual obligation. Mr. Nikolich’s employer was found to be non-compliant with their own policy when they terminated his employment, making them liable for a six-figure sum due to the breach of policy. 

Following this ruling, courts and commissions have accepted that policies will not form part of the employment contract where the above qualifier expressly states this, therefore reducing the risk of breach of contract claims if the employer does not comply. These policies can be complaint handling, disciplinary, performance management, investigations and so forth. Most employment contracts will now include the qualifier, but for contracts where it is not contained, particularly in pre-Nikolich contracts, the company can be held to owe contractual obligations in respect of these policies. This can be seen in the 2022 Elisha v Vision Australia Ltd case.  

Vision Australia dismissed Elisha after a workplace incident, with the Supreme Court finding this “nothing short of a sham and a disgrace” due to lack of procedural fairness and failure to comply with the company’s policies when effecting the termination. Elisha’s contract stated: Vision Australia is committed to a fair, equitable and consistent approach to disciplinary action, and to act in accordance with this procedure, as well as all relevant industrial instruments and contract provisions, for all employees who have completed the minimum employment period as defined in the Fair Work Act 2009.” 

When Elisha received a stand down letter, Vision failed to detail the allegation made and Elisha was not given an opportunity to respond to these allegations in a subsequent meeting. Based off the contract’s wording, the Supreme Court ruled the company’s policies and procedures did form part of the employment contract and it had breached its policies during Elisha’s termination. The contract failed to have a qualifier that workplace policies are not incorporated into the employment contract, opening them to liability.  This Supreme Court decision was ultimately overturned before the Court of Appeal in the Supreme Court of Victoria; however the above principles remain applicable to Australian businesses and provide an example of how liability can be incurred through a failure to adhere to a business’s own workplace policies.

For businesses, the takeaway from these two cases is that employment contracts need to use language that carves out policies from becoming incorporated as part of the employment contract with the qualifier: “You are required to comply with any written policy of the Company. However, the Company’s policies do not form part of your contract of employment.” It is also essential to explicitly state that the company can replace or withdraw workplace policies and, most, importantly ensure that language states that they are not contractual in nature. 

By Holding Redlich Partner Stephen Trew and Senior Associate Michael Hope

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