Oral employment agreements

Not all employment contracts are in writing. Here are some observations about the law which applies to the interpretation of oral employment agreements.

“4.     Consideration

[53]    Neither party made submissions regarding the appropriate test or criteria to be applied in assessing whether Mr Kia was an employee.

 

[54]    The principles and approach to an oral contract in the employment context were recently considered by the Full Court of the Federal Court in EFEX Group Pty Ltd v Bennett (EFEX).65

 

[55]    In Katzmann and Bromwich JJ’s joint reasons, they affirmed that where the rights and duties of the parties are “comprehensively committed to a written contract”, and the contract is not a sham, varied, waived or the subject of an estoppel, the obligations established by that contract are decisive of the character of the legal relationship.66

 

[56]    However, in EFEX, there was no written contract at all. Much like the matter before me, the contract reached between the parties in EFEX was wholly oral, with sparse details of the agreement.

 

[57]    In considering such a situation, Katzmann and JJ affirmed the following principles drawn from relevant cases:

(a)      Where there is no written contract and no evidence of a particular conversation during which the contract was made, “evidence of the parties’ conduct must necessarily be considered in order to draw inferences as to whether the meeting of minds necessary to create a contract has occurred, and what obligations they have thereby undertaken”.67

 

(b)     Where there is no written contract, the identification of the parties’ contractual rights will proceed differently. However, the fundamental task and focus remains the same: what are the parties’ contractual rights and obligations, and how are they to be characterised? This task is not to be subsumed by consideration of how the parties behaved in the performance of their contract.68

 

(c)      The terms of an oral contract may be able to be inferred from the circumstances, such as the parties’ conduct or a course of dealing between them, or implied where necessary for business efficiency.69

 

 

 

(d)     Regardless of whether a contract is written or oral (in whole or in part), the characterisation of the relationship between the parties depends on their contractual rights. It does not depend on circumstances, facts or events that do not affect those rights.70

 

(e)     The principles of contract interpretation apply to the terms of an unwritten contract that can be ascertained, inferred or implied. Regard may be had as to the circumstances of how the contract was made, as well as events and matters known to the parties at the time of the agreement. Generally, things said or done after a contract is made are not legitimate aids to its construction.71

 

(f)      Once the contours of the legal relationship have been identified, there can be consideration of whether the relationship was one of employment. This may involve assessment of the extent to which the alleged employer has the right to control how, when and where the alleged employee performs the work and the extent to which the alleged employee can be seen to be working in their own business.72 Another way of framing this consideration is to examine whether, by the terms of the contract, the person is contracted to work in the business or enterprise of the alleged employer.73

 

[58]    Lee J concurred with the plurality’s decision in EFEX. His Honour also affirmed that it is well-established that post-contractual conduct evidence is admissible to resolve what was said in forming an oral contract. Such conduct may be considered not only for the purpose of inferring whether a binding agreement had been reached, but also for the purpose of identifying its necessary terms.74

 

[59]    I now turn to consider these principles in the context of the current matter.

 

[60]    As outlined in paragraph [8] of this Decision, it was difficult to assess Mr Kia’s and Mr Majd’s evidence. I also add that I found it difficult to discern the rationale for many of the actions Mr Kia and Mr Majd took. I have therefore placed greater weight on the documentation and text messages that were provided. I have also had regard to the fact that as the applicant, the onus is on Mr Kia to prove that he is within the Commission’s jurisdiction.

 

[61]    Having considered the evidence from Mr Kia and Mr Majd, I make the following findings.

[62]    There was no written or oral contract between Mr Kia and Mr Majd when Mr Kia commenced working at the business in August 2023. The purpose of that work was for Mr Kia to determine whether he wanted to buy into the business. There could therefore be no employment contract and Mr Kia was not an employee at this time.

 

[63]    In September 2023, Mr Kia and Mr Majd made an oral contract that Mr Kia would become a half-owner of the Respondent. A term of the agreement was that Mr Kia would give Mr Majd $115,000 in return for 50% of the Respondent’s shares. I find that Mr Kia was not an employee at this time; he was an owner of the business.

 

[64]    A further term of the agreement was that any profit made by the Respondent would be shared between Mr Kia and Mr Majd, as submitted by the Respondent. I am persuaded by Mr

 

 

 

Kia’s text messages that show there was a common intention that profits would be shared between himself and Mr Majd. I refer to his text message on 7 October 23 (outlined at paragraph [30]) where Mr Kia states that he has repeatedly explained the income for both of them for the fiscal year and sent through the attachment detailing how the profit should have been split between them.

 

[65]    Over the course of late 2022 to March 2023, Mr Kia and Mr Majd discussed Mr Kia selling his shares in the business back to Mr Majd. I accept that Mr Kia and Mr Majd discussed Mr Kia continuing their arrangement whereby he performed work for the Respondent. I do not accept Mr Kia’s evidence that Mr Majd explicitly asked him to become an employee of the Respondent.

 

[66]    I find that Mr Kia and Mr Majd agreed to vary the terms of the original contract in the following ways:

 

(a)      Mr Kia would sell his 50% of the Respondent’s shares back to Mr Majd;

 

(b)     The payment for those shares would be deferred until the business was sold;

 

(c)      Until the business was sold, Mr Kia would continue to receive a share of the Respondent’s profits; and

 

(d)     Their relationship, whereby Mr Kia would still act as an owner of the Respondent, would continue.

 

[67]    In reaching these findings on the variation of the parties’ original contract, I rely on the following post-contractual conduct:

 

(a)      Mr Kia did sign the relevant ASIC paperwork to divest himself of his shares in March 2023.

 

(b)     The communications between Mr Kia and Mr Majd indicate a common intention that there would be payment to Mr Kia after the business was sold. They also include a common intention that there would be a division and sharing of the profit between them.

 

(c)      In the day-to-day operations of the Respondent, nothing changed. Mr Kia continued to be in charge of rostering (including the determination of his own hours); Mr Kia continued to have a high degree of authority in the Respondent’s business; and nothing changed in how Mr Kia received payments to his bank account – they continued to be irregular amounts deposited on an intermittent basis.

 

(d)     Mr Kia did not sign any employment documentation, such as a contract of employment, a superannuation fund nomination form or tax file number declaration. Mr Kia has at least six years’ experience in running a franchise in Australia. The Respondent also engages employees. Both parties are aware of an employer’s obligations when hiring a new employee.

 

 

 

(e)     Mr Kia’s emails to the business broker denote collective ownership. Even if I accept Mr Kia’s evidence that Mr Majd asked him to correspond with the business broker, I find that the words Mr Kia chose to use (i.e. the use of “we” and “us” in connection with the business) were deliberate and reflect the common understanding of the parties.

 

[68]    This varied contract and the accompanying arrangements remained in place until Mr Majd’s message on 1 December 2023 telling Mr Kia not to return to Muffin Break Karrinyup.

 

[69]    I find that, properly characterised, Mr Kia’s contract with the Respondent under the varied contract was not a contract of employment. Mr Kia was not under the Respondent’s contractual control as to how, when and where he worked. Mr Kia did have a vested interest in working at the franchise as his payments were contingent on the franchise operating profitably and selling well, but this does not translate to Mr Kia being bound contractually to work for the Respondent. I find that Mr Kia continued to work for the Respondent because it benefited him under the contract between the parties, and Mr Kia also wanted to keep an eye on his investment.

 

[70]    For completeness, I address Mr Kia’s argument that he did not receive the same share of the profits as Mr Majd, therefore he cannot be a business partner and thus must be an employee. This argument is misconceived and starts at the wrong point. Mr Kia’s grievances regarding how the profit was to be split is a dispute about the term of their contract, not an indication that he was an employee at the time.

 

[71]    As Mr Kia was not an employee of the Respondent, his application must be dismissed. An order to this effect will issue separately.”

Kia v Nickan Pty Ltd (2024) FWC 512 delivered 17 April 2024 per Lim C