Contract termination: Follow the correct process
With employers increasingly concerned about their obligations to employees on termination of employment, particularly in cases of redundancy, it pays to make sure you understand your contractual obligations as well as your statutory obligations.
A recent decision of the Victorian Supreme Court shoes how important it can be to follow the terms of the employment contract to the letter, in order to avoid unintended damages resulting from a termination of employment.
By way of example, let's look at the case of a Dr Gray, the principal of a Catholic school in a Melbourne suburb. Gray's contract of employment entitled her employers, the administrators of the school, to terminate her employment by giving six month's notice.
So far, so good.
The employer had a contract in place that provided clearly for the rights of the parties on termination. However, the employer decided to terminate Gray's employment with immediate effect, and gave her six month's pay in lieu of notice.
Not such a big deal... you may think.
However it was found by an arbitrator, whose decision was upheld by the Supreme Court, that the contract did not allow termination by payment in lieu of notice. The employee was entitled to serve out her six month notice period, and the employer's actions were a breach of contract.
The arbitrator found, and the court agreed, that this breach disadvantaged the employee, because it was considered that she would have been at an advantage in seeking new employment if she was still in current employment. Damages were awarded for the breach.
There was also another unusual aspect to the case. The termination took place in circumstances where there had been a disciplinary investigation against the employee, supposedly in accordance with a process set out in the contract.
This arose because of a number of staff complaints against Gray. However the findings of the employer's inquiry were not ultimately relied on by the employer, because it chose to terminate by giving six month's pay in lieu of notice.
Despite the fact that it had no direct legal relevance to the right to terminate her employment, Gray claimed damages for breach of contract arising from the employer's conduct of the inquiry. She claimed that the employer's failure to give her an opportunity to be heard on all staff complaints, which were the subject of the inquiry, and its failure to warn her that the inquiry could lead to termination of her employment, were a breach of the duty of trust and confidence owed by the employer.
Gray was awarded damages, even though the employer terminated her employment for reasons that were not related, under the contract, to the inquiry. It was the conduct of the employer, not the termination of employment, which constituted a breach of the implied term and resulted in damages being awarded.
This aspect of the decision provides a salient warning for employers in difficult times. It may demonstrate the gradual movement of the implied duty of trust and confidence toward a kind of implied right not to be unfairly dismissed.
In fairness this is not quite what the decision means. What it does show is that employers must approach the disciplining and termination of employees in a forthright and transparent manner.
Most critically, employers must make sure they don't overcomplicate reasons for terminating a worker's employment. For example, often employers will be tempted to describe a termination as a redundancy when it is not. As the Gray case shows, taking this approach can not only have unfair dismissal consequences, but may also lead to a breach of the employment contract of senior employees.
The lessons for employers:
- Make sure your contracts of employment enable the employer to terminate employment by giving payment in lieu of notice, as well as by actual notice.
- Being as transparent as possible about the reasons for termination can avoid problems with unfair dismissal claims and claims for breach of contract.
Peter Vitale is the principal of CCI Victoria Legal