Employment contracts; the reasonable notice controversy

At common law there is no doubt that a contract of employment will be interpreted by the courts to include an implied term to the effect that it can only be terminated without cause upon reasonable notice or pay in lieu equivalent to the remuneration which would have been earned during that period in the absence of some other expressly agreed provision dealing with the issue.

Nevertheless the matter is not beyond controversy due to several dubious and unconvincing judicial decisions which have concluded that there is no reason now to imply such a term into employment contracts due to the existence of sec 117 of the Fair Work Act, which as an element of the National Employment Standards legislates minimum notice periods upon employment contracts which it covers.

How some judges have reached this conclusion is beyond me since their reasoning fails to apprehend and deal with

(a) the fact that the Fair Work Act and the NES do not apply to all employment contracts in Australia, for example those which are affected by the Minimum Conditions of Employment Act 1993 (WA);

(b) the Fair Work Act and the NES do not purport to legislate a mandatory period of notice merely a minimum which is hardly grounds to infer that the common law requirement for reasonable notice is otiose; and

(c) why is the existence of the Act and the NES minimum inconsistent with a common law requirement for reasonable notice dependent upon the specific relationship under review? For example what possible logic is there to asserting that the notice period to be implied into the employment contract of the CEO of a major corporation should be the same as a bank teller?

The dilemma raised by these unconvincing decisions was apparently recognized by a Federal Court judge recently who decided not to support them and instead opted for an alternative way of deciding the issue.

 

  1. “It is not uncommon for parties to a contract with a fixed term to continue their relationship after the expiry of that term, without adverting expressly to the terms and conditions which are to apply.  The approach of the courts when this occurs is, I think, now settled.  It is that the parties may be taken to have entered into a new contract of indefinite duration and terminable on reasonable notice, but whether that is so is not a question of law but a question of fact to be determined by reference to the evidence in each case.
  1. In Brambles Ltd v Wail [2002] VSCA 150; (2002) 5 VR 169, the Court of Appeal of the Supreme Court of Victoria referred, at [57], to the following passage in Chitty on Contracts, 28th ed (1999), para 1‑034:

There may also be an implied contract where the parties make an express contract to last for a fixed term, and continue to act as though the contract still bound them after the term has expired.  In such a case the court mayinfer that the parties have agreed to a newly expressed contract for another term.

(Emphasis added)

  1. In the circumstance of that case, the Court of Appeal found, at [61], that the contract in question had not continued “for another term”, but was one which was terminable on reasonable notice:

… The question whether an implied or tacit agreement to continue dealing on the same terms save that the agreement should be terminable on reasonable notice is to be inferred is … an evidentiary or factual question. … The evidence … warrants the finding that after 3 April 1993 the parties proceeded as though still governed by the terms of the original agreement (save that, since it had already expired, either could terminate the substitute arrangement on reasonable notice), …  Whether the implied or tacit contract made after 3 April 1993, which cannot be an extension, is called a renewal is really a matter of definition.  The important point is that it was a new and separate contract.

(Emphasis added)

  1. In Abbott v Women’s and Children’s Hospital Inc [2003] SASC 145; (2003) 86 SASR 1, Besanko J said, at [35]:

[T]he duration of a contract may be for a fixed period, but on the expiry thereof, the relationship of employment may continue.  If that occurs, a Court is likely to infer that the parties have entered into a new contract. …

(Emphasis added)

An appeal from this decision was dismissed (Abbott v Women’s and Children’s Hospital Inc [2004] SASC 67) but the Full Court did not address the question presently under consideration.

  1. In this Court, in Energy World Corporation Ltd v Maurice Hayes & Associates Pty Ltd [2007] FCAFC 34; (2007) 239 ALR 457 at [24], the Full Court endorsed the view that the question of whether an implied or tacit agreement comes into existence on the same terms as the original contract save that it be terminable on reasonable notice is an evidentiary or factual question. See also Viva Olives Pty Ltd v Origin Olives Australasia Pty Ltd [2012] FCA 545 at [12]‑[13] and Cohen v iSoft Group Pty Ltd [2012] FCA 1071 at [45]‑[46]. The appeal in the latter case succeeded (Cohen v iSoft Group Pty Ltd [2013] FCAFC 49; (2013) 298 ALR 516), but I do not understand the Full Court to have disturbed the underlying statement of principle.
  1. In my opinion, the evidence in the present case warrants the conclusion that a new contract arose by implication from the parties’ conduct after 31 January 2016 when the two year fixed term in the Third Contract expired.  At the least, the parties are to be taken to have agreed on a new contract.  The terms of that contract were in substance the terms of the Third Contract, save only that it did not include the fixed two year term.  Instead, the Applicant’s employment became employment of indefinite duration.  The parties recognised that the Applicant’s employment continued on the terms of the Third Contract when they agreed on the Amendment to the Employment Contract which the Applicant executed on 10 November 2016.

Did the common law term of reasonable notice apply?

  1. The Applicant submitted that after 1 February 2016, his employment was terminable on reasonable notice.  This was because the new contract contained no provision with respect to notice and, accordingly, the common law implied term applied.
  1. Rand, on the other hand, submitted that, even if there was a new contract, the period of notice to be given on either side was found in the Manual in force in 2016.  Clause 5.2 of the Manual provided:

The following table of notice periods will apply unless otherwise stated in the individual’s employment contract.  The actual notice is determined by the period of the employee’s continuous service at the time the notice is given to the employee.

Period of continuous service Notice Period
Not more than 1 year 1 Week
More than 1 year but not more than 3 years 2 Weeks
More than 3 years but not more than 5 years 3 Weeks
More than 5 years 4 Weeks

The period is increased by 1 week if the employee is over 45 years old and has completed at least 2 continuous years’ service with AHG at the end of the day the notice is given. …

 

  1. Rand contended that this provision bound the parties by reason of the implied adoption of the term in the Third Contract concerning “Company Policy”.  As noted earlier, this required the Applicant to “abide by all company policies and procedures as varied from time to time and [as] detailed in the [Manual]”.
  1. In Riverwood International Australia Pty Ltd v McCormick [2000] FCA 889; (2000) 177 ALR 193, the Full Court considered the effect of a term in a letter of appointment expressed as follows:

Company Policies and Practices

You agree to abide by all Company Policies and Practices currently in place, any alterations made to them, and any new ones introduced.

  1. In respect of this clause, North J said:

[106]       However, the use of the expression “abide by” in relation to the Manual is apt to embrace both compliance with the obligations imposed by the Manual, and acceptance of the benefits conferred by the Manual.  This duality of application follows from the primary meaning of the expression “abide by” given in the Macquarie Dictionary, 3rd Edition, 1997, namely, “to accept and to continue to observe [an agreement]”.

  1. Mansfield J considered that the meaning of the term was ambiguous and was to be determined by regard to the circumstance existing when the letter of appointment was signed, insofar as those circumstances were known to both parties, at [147].  Having reviewed the factual matrix, Mansfield J then concluded, at [150]:

… The agreement “to abide by” those policies, in the circumstances, means that the respondent would receive or enjoy the benefits provided for by those policies but only according to their terms, and would himself comply with the terms of those policies as they applied to him.

  1. Many of the circumstances of the factual matrix to which Mansfield J referred in Riverwood v McCormick also exist in the present case. Prima facie therefore, the reasoning in Riverwood v McCormick seems applicable in this case.  It would also be a surprising result if the Applicant was required to abide by the policies in the Human Resources Policies & Procedures Manual applicable to his circumstances before 31 January 2016 but was not so required by the tacit or implied contract which came into existence after that date.
  1. Counsel for the Applicant did not accept that the policies and procedures in the 2016 Manual became part of the Applicant’s assumed contract of employment.  The principal matter on which he relied was the stipulation in the Third Contract that the Applicant’s original start date of 13 August 2002 would continue to be recognised for employment tenure and entitlements.  This meant, he submitted, that the policies referred to were those in force as at 13 August 2002.  For the reasons given earlier, I do not accept that submission.  Instead, the Applicant is to be taken to have agreed to abide by Rand’s current policies.
  1. Of course, the provision in the Manual in force at 3 March 2014 concerning termination by notice could not have had any application to the Applicant given his employment for a fixed term.  However, the term in the Third Contract is to be understood in the way indicated by Mansfield J in Riverwood v McCormick, namely, that the Applicant had agreed to abide by the terms of the policies to the extent that they were applicable to him. When the term is understood in that way, the tacit or implied contract had the effect of requiring the Applicant to abide by the terms of the 2016 Manual with respect to the provision of the notice.
  1. The Applicant received payment in lieu for the period of notice specified in the 2016 Manual.  Accordingly, he has been paid his entitlements.  This part of his claim must fail.
  1. This conclusion makes it unnecessary, strictly speaking, to address all the remaining issues raised by the parties concerning the Applicant’s claim for reasonable notice.  However, in case this matter goes further, I will refer to some of these issues.

The period of reasonable notice

  1. The assessment of the notice which would (absent the parties’ agreement to the contrary) be reasonable in the Applicant’s case is to be determined having regard to all the material circumstances existing as at 14 March 2017.  The matters to which courts have regard when determining what is reasonable are well known and include the nature of the employment and the seniority and importance of the position; the employee’s age, qualifications and experience; the length of service; the length of time it is likely to take the employee to obtain alternative employment of a comparable kind; and what the employee gave up to commence the employment from which he or she has been dismissed.  Given my conclusion that the Applicant was not entitled to reasonable notice, it is not necessary to discuss these factors in detail.  I indicate that, had it been necessary to do so, I would have concluded that six months’ notice was appropriate in the Applicant’s case.

The effect of s 117 of the FW Act

  1. Rand submitted that s 117 of the FW Act had the effect of precluding the implication of a term requiring reasonable notice of termination into the Applicant’s employment contract. That was because its operation makes the implication of such a term unnecessary.
  1. Section 117 of the FW Act provides:

117  Requirement for notice of termination or payment in lieu

Notice specifying day of termination

(1)          An employer must not terminate an employee’s employment unless the employer has given the employee written notice of the day of the termination (which cannot be before the day the notice is given).

Amount of notice or payment in lieu of notice

(2)       The employer must not terminate the employee’s employment unless:

(a)          the time between giving the notice and the day of the termination is at least the period (the minimum period of notice) worked out under subsection (3); or

(b)          the employer has paid to the employee (or to another person on the employee’s behalf) payment in lieu of notice of at least the amount the employer would have been liable to pay to the employee (or to another person on the employee’s behalf) at the full rate of pay for the hours the employee would have worked had the employment continued until the end of the minimum period of notice.

(3)       Work out the minimum period of notice as follows:

(a)       first, work out the period using the following table:

Period
Employee’s period of continuous service with the employer at the end of the day the notice is given Period
1   Not more than 1 year 1 week
2   More than 1 year but not more than 3 years 2 weeks
3   More than 3 years but not more than 5 years 3 weeks
4   More than 5 years 4 weeks

(b)          then increase the period by 1 week if the employee is over 45 years old and has completed at least 2 years of continuous service with the employer at the end of the day the notice is given.

 

  1. Counsel for Rand referred to a number of authorities in support of his submission that the implication of the term for reasonable notice was unnecessary.  The first was Westpac Banking Corporation v Wittenberg [2016] FCAFC 33; (2016) 242 FCR 505. One of the issues in that case concerned the question of whether a term of reasonable notice could be implied into a contract and co‑exist with a provision giving rights of termination on specified periods of notice. The Court held that it could not. Buchanan J (with whom McKerracher J and I agreed on this issue) said:

[216]        The implication of terms into particular classes of contract as a matter of law, rather than as an implication from the surrounding facts in a particular case, is grounded in the notion of necessity (Barker).  In that respect, as has been from time to time observed, it is not always easy to see how the two classes of implication can be readily distinguished.

[217]       Thus, even in the case of an implication by law into a class of contracts it remains essential, in my respectful view, to bear in mind the “necessity” which compels the implication.  And, in both cases, it is accepted that no implication may be made which contradicts the express terms of the particular contract.

[218]        It is generally accepted that the common law will imply a term that a contract of employment may be terminated on reasonable notice into such a contract which makes no provision for termination.  In the present appeals it was argued that such a term is implied into every contract of employment unless excluded.  The two propositions are different.  The first is concerned with filling a gap; the second with establishing a position of primary operation.

  1. Later, at [235]‑[236], Buchanan J referred to the statements of principle in the majority and minority judgments in Byrne v Australian Airlines Ltd (1995) 185 CLR 410. The majority said at 422‑3:

… In the absence of any provision in the award and of any express provision in the contract of employment the law would regard it as a legal incident of the contract that it should be terminable upon reasonable notice or summarily for serious breach.

(Emphasis added)

The minority at 449-50 said:

[T]erms of this kind, although treated as implied by law, may be excluded by express provision made by the parties and also as a result of inconsistency with terms of the contract.  The result is that, even if treated as rules of law, they only apply in the absence of an expression of contrary intent.

Buchanan J then continued:

[237]       In most cases there will be no practical difference arising from the two formulations as to their particular effect concerning contracts of employment.  In each case the possible implication is, in my respectful view, secondary, subordinate and tied to questions of necessity in order to make the contract effectively operative.  The implied term of reasonable notice does not represent the imposition of a judicial rule or standard.  The courts have not set out to rewrite individual contracts of employment.

[238]        In the present appeals, the question is whether (as the employees submit) a term requiring reasonable notice may be implied into a contract and co-exist with a provision giving rights of termination on specified periods of notice.  In my view, such a term of reasonable notice cannot be implied in such a circumstance.  It would derogate from existing contractual rights.  It would be inconsistent with express terms of the contract.  It must be regarded as excluded.

  1. It is to be observed, however, that in Westpac v Wittenberg, Buchanan J was speaking to a circumstance in which it had been accepted by the parties that the provisions in the employer’s redundancy policy containing the periods of notice to be given on termination had been incorporated into the relevant employees’ contracts of employment. It is also to be observed that, although the FW Act, including s 117, had come into operation before the terminations of the employment considered in Wittenberg, there was no suggestion that it operated independently of the matters identified by Buchanan J to preclude the implication of the term.
  1. Next, Rand referred to the decision of the Full Court of the Supreme Court of South Australia in Brennan v Kangaroo Island Council [2013] SASCFC 151; (2013) 120 SASR 11. In that case, the Full Court held that an implied term for reasonable notice was not necessary because the industrial award which governed the plaintiff’s employment specified the periods of notice which the employer “must give” in order to terminate the employment of employees. It is apparent that the Full Court’s consideration was based on an understanding that the implied term as to reasonable notice was one of fact, and not of law, at [28][34]. Nevertheless, its decision is consistent with earlier decisions concerning the effect of award provisions concerning notice, namely, Brackenridge v Toyota Motor Corporation Australia Ltd (1996) 67 IR 162 at 188‑9Elliott v Kodak Australasia Pty Ltd [2001] FCA 807, (2001) 108 IR 23 at 38.
  1. Next, counsel referred to two decisions of the District Court of South Australia which are more directly on point.  In Kuczmarski v Ascot Administration Pty Ltd [2016] SADC 65; (2016) 259 IR 233, Auxiliary Judge Clayton upheld a submission that it was unnecessary to imply a term for termination on reasonable notice into the contract of employment of an award‑free employee given the existence and operation of s 117. His Honour’s reasons appear in the following passages:

[53]         Mr Whitington submitted that a term that a contract of employment may be terminated upon reasonable notice will only be implied by law where it is ‘necessary’ to do so in the sense that it is necessary (not just reasonable) to imply the term in order to prevent the enjoyment of the rights conferred by the contract of employment being rendered nugatory or worthless or seriously undermined, or the contract being ‘deprived of its substance, seriously undermined or drastically revalued’.

[54]         He submitted that where termination on notice is dealt with in a contract, award or act it is not ‘necessary’ to imply the term because the topic has been addressed.

[55]         He submitted that it is not ‘necessary’ to imply by law a term into the contracts between employers and employees which are subject to s 117 of the Fair Work Act because Parliament has provided for a period of notice in s 117.

[56]         He argued that the fact that s 117 only provides for a minimum period of notice is not to the point. Whilst s 117 imposes a minimum obligation it is not ‘necessary’ to imply the term requiring reasonable notice because Parliament has already imposed an obligation on employers to give a period of notice. There was no relevant ‘gap to fill’ in light of the operation ofs 117 of the Fair Work Act.

[57]         I accept those submissions.

(Footnotes omitted)

  1. Auxiliary Judge Clayton also held that, if the common law did imply a term requiring reasonable notice into all contracts of employment unless excluded by express agreement or displaced by an award or statute, s 117 had the effect of displacing or excluding that term, at [58].
  1. Her Honour Judge McIntyre held in Pappas v P&R Electrical Pty Ltd [2016] SADC 132 at [105] that a term as to reasonable notice was not required to give business efficacy to the plaintiff’s contract of employment in that case because s 117 established his entitlement to notice.
  1. As counsel for the Applicant pointed out, the approach adopted in Kuczmarski and Pappas, if correct, would mean thats 117 of the FW Act has had the effect of precluding the implication of the common law term for reasonable notice in all cases to which the FW Act applies. Given the decision in the Work Choices Case [2006] HCA 52; (2006) 229 CLR 1, this will mean that the common law term is excluded in the great majority of employment contracts in Australia in which there is no provision for notice and for which an award or enterprise agreement does not specify such a period. If that be so, it may be an unforeseen consequence of the enactment of s 117.
  1. It is at least arguable that the decisions in Kuczmarski and Pappas have not had regard at all, or at least have not attached sufficient significance, to:
  • consideration of the effect of s 117having regard to the manner of its expression and its role in stating a National Employment Standard. In this respect, the views expressed by Judge McNab in McGowan v Direct Mail and Marketing Pty Ltd [2016] FCCA 2227; (2016) 313 FLR 370 at [85] may be pertinent:

[85]         I think the better view [than that expressed in Kuczmarski] is that s.117 is in that part of the Act dealing with National Employment Standards and is intended to provide a minimum period only. It does not displace a right to reasonable notice when the contract of employment is silent on the question of notice. By paying or giving the minimum period of notice under s.117(2), the employer will have satisfied the National Employment Standard and not be liable for a claim of breach of those standards. However, it is strongly arguable that payment or provision of that notice will not necessarily satisfy a claim for reasonable notice. The proposition may be tested where the employment of two employees is terminated. Both are over 45 years of age. One has worked for 5 years in a mid-range role, the other has worked for 25 years and worked her or his way up on a high level role. Both are employed under contracts that make no provision for notice of termination. I doubt that parliament intended that both would receive the same period of notice of termination by the enactment of s.117(2) of the Act.

  • related to this is that the implied term has a dual aspect: conferring the rightto terminate the employment contract but making it subject to the provision of notice. In contrast, s 117 does not in terms grant a right, but prohibits the exercise of an express or implicit right found elsewhere unless the minimum stipulated notice is given: Macken’s Law of Employment (8th ed, Lawbook, 2016), at 371; Gabrielle Golding, Terms Implied by Law into Employment Contracts: Rethinking their Rationale, (PhD Thesis, University of Adelaide, 2017), at 95‑6;
  • the reference by French CJ, Bell and Keane JJ in Commonwealth Bank of Australia v Barker [2014] HCA 32; (2014) 253 CLR 169 at [30] to the implied term for reasonable notice, without any suggestion that it had been effectively supplanted by s 117: see Golding (2017), at 85;
  • the presumption against regarding a statute as modifying or abolishing common law rights unless that is clearly intended: Bropho v State of Western Australia (1990) 171 CLR 1 at 18;
  • the circumstance that the prohibition imposed by s 117is unilateral, whereas the common law implied term usually involves reciprocal rights and obligations (cf Macauslane v Fisher & Paykel Finance Pty Ltd [2002] QCA 282; (2002) 1 Qd R 503 at [16]‑[21]) even though the period of notice which is reasonable in order to exercise the right of termination it grants may vary according to whether it is the employer or employee who is to give the notice;
  • by imposing only a minimum obligation, s 117does not on its face preclude a term requiring greater notice: Kilminster v Sun Newspapers Ltd (1931) 46 CLR 284, at 289; and
  • the circumstance that s 117is of general application, applying to employments of very different kinds and in diverse circumstances (see Guthrie v News Ltd [2010] VSC 196; (2010) 27 VR 196, at [197] (Kaye J)). In that respect it differs from most awards and enterprise agreements which are drafted with circumstances of particular industries and employments in mind. That is to say, awards and enterprise agreements are, to an extent, tailor made for the industries to which they apply. Section 117, being of general application, is not of that character. Account may have to be taken of this because notions of necessity usually involve, or at the least are underpinned by, factual considerations. This may make it inappropriate to reason in an a priori way that the fact that s 117 contains provisions concerning notice is sufficient, by itself, to indicate that there is no basis for the implication of the common law term. There may be cases in which it will be apparent that the rights of the parties under the contract of employment will, despite the effect of s 117, be rendered nugatory or seriously undermined without the implication of a term requiring reasonable notice for a termination.
  1. Despite the potential importance of the issue, I consider it undesirable for the Court presently to express any concluded view.  That should be deferred until it is necessary for the issue to be determined.”

Heldberg v Rand Transport (1986) Pty Ltd [2018] FCA 1141 delivered 2 August 2018 per White J