Why termination clauses and contracts of employment are so important!

Many business owners and CEOs think that contracts of employment are a nice to have or even not necessary at all. But a recent civil case Daigle v SCT Operations Pty Limited [2022] NSWDC 364 (19 August 2022) demonstrates why having robust contracts of employment containing clear termination clauses is so important.

In this case which was heard in the District Court of NSW for breach of contract Judge Robert Montgomery said that “by imposing a minimum standard, section 117 does not on its face preclude or modify, the general rule at common law that if the parties to a contract of employment make no provision as to the circumstances in which it may be brought to an end, the law will imply a term to the effect that the contract is terminable by either party upon reasonable notice”.

So, what the hell does that mean you might be asking? Well let’s unpack it for you.

Background

SCT operations employed a geotechnical engineer for a period of around 16 years until 2021 when his role was made redundant. The employer used section 117 of the Fair Work Act to calculate his entitlements, so they paid him 5 weeks’ pay in lieu of his notice plus 12 weeks redundancy pay. Which all sounds fair because that’s the law right?

Well, the employee thought not and lodged a claim that this was not a reasonable notice period for someone who was so senior and who had been employed for such a long time. In the ruling the judge found that he was contractually entitled to 8 months’ notice as his termination payment as well as an additional payment for his final bonus. YIKES!

How did this happen?

Well, the biggest issue was that the employee’s latest employment contract lacked a termination clause. He had had two contracts in the life of his employment, the first contract did have a termination clause and the second did not.

Dentons partner Paul O’halloran states that the ruling is important because it shows that s117 doesn’t prevent common law from implying a term of reasonable notice that exceeds the minimum statutory notice period.

It means the minimum notice periods are just that, and this is why it is so important to have a proper contract of employment and to regularly re-issue them, particularly if someone is being promoted or their original contract is extremely old and outdated.

So in cases where the contract is silent on termination notice periods the law can imply a term of reasonable notice and this can take into account a variety of factors including:

  • Employees length of service
  • Their age
  • Ability to find another job
  • Nature of role, trade or profession or the industry they work in

So, this is extremely relevant for long-serving employees or Executives, particularly if their contracts have not been updated for a really long time. This may also apply to casuals. A while back we had a client that had a group of casuals that had been employed for over ten years and some of them did not even have a contract of employment. We recommended they re-contract everyone, but they didn’t see the point. Fast forward a few months and decided to make some of them redundant. The affected employees then joined forces and started questioning their entitlements under redundancy and notice provisions. Essentially, they claimed they were permanent not casuals and the employer had not offered them conversion even though they should have. You can see how these situations become extremely messy very quickly.

We actually see this as the biggest risk or problem for many businesses. Contracts may have been issued at the commencement of employment and things such as the person’s role or the actual laws may have changed so if you have an outdated contract, and you are silent on such matters you are exposing yourself to risk from common law claims such as this one.

The judge issued SCT Operations to make a payment of $132,555.58 to the employee plus they had to pay the costs of proceedings.

So, what should I do?

We highly recommend conducting regular employee file audits to ensure that every one of your employees has an up-to-date contract of employment. You can always re-contact employees when laws change, or their employment conditions change. We know that the first line of defence is a killer contract and you if you don’t have one you are really exposing yourself on multiple levels. We see a great contract as your insurance policy so who doesn’t want to be protected from having to defend such claims in the future?

If you need assistance to do this, then reach out and we are happy to help.

Written by Head Guru

Emily Jaksch

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