By Charles Power

[Ed Note: Do you know if your workplace policies are contractually binding? If they are, your employees have a legal obligation to follow them – and you do too.

A number of factors are relevant to determining whether a policy is legally binding. Consider whether:

• it is expressly stated in an employment contract that a policy is legally binding;
• there is an established practice of following a particular policy;
• the policy is widely circulated and communicated to employees;
• employees receive the policy before signing their employment contract; and
• employees signed the policy.

In cases where a court must decide whether a workplace policy is legally binding, they will also look at the wording of the policy and the circumstances surrounding its implementation.

In today’s bulletin, Charles Power details a recent case in which a court determined whether a workplace policy was contractually binding on the employee and the employer in relation to a redundancy.

Until next time…]

Case Law: When your redundancy policy becomes a legal promise to employees

A recent Supreme Court of NSW decision highlights how important it is that employers understand how their human resources policies interact with employment contracts.

The background

In James v Royal Bank of Scotland (2015), the former CEO of ABN AMRO was retrenched after 11 years’ service when the Australian business merged with the Australian operations of Royal Bank of Scotland.

ABN AMRO maintained a redundancy policy that had been in place for 6 years by the time the employee was retrenched. The policy:

• provided 4 weeks’ severance pay per year of service;
• provided for the employer to make discretionary ex gratia, i.e. voluntary, payments to retrenched employees “depending on circumstances”; and
• contemplated such ex gratia payments to be contingent on the employee signing a deed of release, i.e. an agreement to give up the right to sue the employer in relation to employment.

The employer declined to pay the employee the redundancy pay. It offered to pay an ex gratia payment if the employee signed a broad deed of release. The employee refused to sign the deed of release and was therefore not paid the ex gratia payment.

The employee’s employment contract did not contain any provision regarding redundancy but it did provide that the employee agreed “to be bound by the policies of ABN AMRO as may exist from time to time. You acknowledge and accept that it is the prerogative of ABN AMRO to vary, change or terminate existing policies as well as to devise and introduce new policies.”

What did the Court rule?

The Court ruled that the redundancy policy, as it stood when the employee was retrenched, was incorporated into his employment contract and was therefore legally binding on the employee. It also determined that if the parties to the employment contract intended the employee to be bound by his employer’s policies from time to time, then they must have intended the employer to also be bound.

This ruling was despite the policy:

• not having been made available to employees (employees knew it existed and that it applied to them, but were not informed of the mechanics or the components of it); and
• containing some content that was aspirational in nature, thus suggesting the parties did not intend it to be contractual, i.e. the policy stated that it provided “principles and guidelines to follow in the event that an individual or group of staff is made redundant” and referred to “guiding principles”, such as “all redundant staff will be treated fairly, equitably and consistent with the organisations values”.

However, the Court noted that the bulk of the policy set out terms suggesting that neither the employer nor employee was free to ignore them. It was also not prepared to rule that severance payments were not found in employment contracts generally, let alone those applying to senior employees in large commercial enterprises.

The redundancy policy provided benefits to the employer by, in effect, classifying the various types of benefits to be paid to retrenched employees. The Court could not, therefore, accept the proposition that the employee might be bound to accept whatever the redundancy policy provided for him in the circumstances, while the employer was not bound to offer that provision.

The employee sued for severance pay of $432,692.31 plus an ex gratia payment of $2,500,000.00. The Court awarded him these sums, plus interest and costs.

In relation to the ex gratia payment, the Court ruled that, while the employer did have the power to decide on an appropriate ex gratia payment, it did so outside of the general guidelines of the workplace policy because it made the payment contingent upon the employee signing a deed of release that was broader than the deed of release contemplated under the policy.

What can you learn from this case?

The case is a reminder that if you don’t want policies to become contractually binding, you need an express provision in the employment contract to that effect.

For example, you might state in the contract: “You are expected to observe the company’s policies and procedures as applicable to you and as varied from time to time. However, these policies do not form part of the terms of your employment and they cannot be enforced by you as a contractual promise.”

Regards,
Charles Power
Editor-in-Chief
Employment Law Practical Handbook