The high price of an unsigned contract

An ASX 100-listed company is paying the price for not ensuring an employee signed her employment agreement, after the Supreme Court of NSW ordered it to pay more than $1.1 million in damages plus legal costs to its former finance director following her termination from employment.

The lesson for employers from this case is to ensure you have proper documentation recording the current terms and conditions of employment for employees, and that such documentation has been signed by employees.

The background

In 2006, the employee in question was hired by Washington H Soul Pattinson (WHSP), initially as its CFO. At this time, she signed a short-form employment agreement, which included an express term requiring WHSP to give three months' notice of termination.

In 2014, WHSP offered the employee a new position of finance director, which included her former duties as CFO as well as executive director duties and general governance responsibilities for the entire business, including in relation to work health and safety matters.

In early 2015, the employee was provided with a new draft executive employment agreement, which was much more extensive than her original 2006 employment agreement. It included a termination clause allowing WHSP to give six months' notice of termination. The employee didn't sign this agreement. Instead, she made handwritten comments on the document, and approached WHSP's Remuneration Committee Head on at least two occasions to arrange a meeting regarding her suggested amendments and comments, but no meeting ever eventuated. The employee accordingly never signed the new employment agreement.

The employee's employment with WHSP continued, now in the position of finance director, despite having not signed the new employment agreement. WHSP's 2015 annual report announced that she had been appointed to the position of finance director from 1 November 2014.

From 2016 to 2018, her employment continued without incident, and she received performance assessments during this time which ranged from "Minimum level of performance" to "Outstanding level of performance" regarding different parts of her role. At no time was she graded as having underperformed, and she was never informed that WHSP had any concerns with her performance. If anything, her performance assessment grades were improving over time.

The dismissal and court case

On 12 April 2018, the employee's employment was terminated by WHSP without notice or pay in lieu of notice. Her termination letter did not make any reference to poor performance. The only reason given for the termination in the letter was that "she was not the right fit". WHSP would, during the proceedings, assert that her employment was terminated due to her underperforming in her role, but the Court found that there was little evidence for this being the case.

On 3 July 2018, the employee commenced proceedings in the Supreme Court of NSW seeking compensation for lost salary and incentive benefits. Ten days later, WHSP paid her three months' pay, which it characterised as being paid in lieu of notice in accordance with her original 2006 employment agreement.

Which employment agreement applied, if any?

One of the main questions arising during proceedings was whether the 2006 or 2015 employment agreement applied to the employee's employment, or whether none did at all.

WHSP contended that the 2006 employment agreement applied, as it was never expressly rejected by the parties.

The employee asserted that, upon her becoming finance director, her role and duties had changed to such an extent that the 2006 employment agreement should be taken as being discharged, meaning that no written employment agreement applied to her employment.

Neither WHSP or the employee claimed that the 2015 employment agreement applied, as she had not signed it, and had clearly indicated that she had some suggested changes to it, which WHSP had not responded to.

The Court considered the evidence and made the following findings.

1. WHSP's conduct suggested that it viewed the 2006 employment agreement being insufficient upon the employee becoming finance director, as evidenced by its provision of the more thorough 2015 employment agreement;
2. as WHSP did not give the employee three months' pay in lieu of notice at the time of her termination, this indicated that WHSP did not consider that the 2006 employment agreement applied at this time; and
3. the employee's duties, role and reporting line changed immediately on her appointment as finance director, and her salary and responsibilities increased. WHSP submitted that these changes were not significant. However, the Court found otherwise. The Court also observed that the 2006 employment agreement did not include a term specifying that it would remain in force even after a change in the employee's duties.

When considering these findings together, the Court determined that "all of these matters point to a change in the contractual landscape", and that on the employee's appointment as finance director, the parties intended that the terms and conditions of her employment would no longer be as set out in the 2006 employment agreement, but instead be governed by a new employment agreement.

As the 2006 employment agreement had been discharged, and the employee had not agreed to the 2015 employment agreement, the Court accordingly found that no written employment agreement applied to her employment at the time of her termination of employment.

As there was no written termination clause governing the employee's employment, she was entitled to "reasonable notice of termination". Reasonable notice of termination is a period of time that Courts will determine on a case by case basis.

For the employee, the Court considered factors including:

• her age
• her 14 years' service
• her senior position as finance director
• her being an executive director of a very large public company
• her being the second most senior employee in that very large company (and being so senior that she reported to the Board)
• her being a Board member
• the low number of females being in senior executive roles such as the employee's role
• there being no evidence she had engaged in misconduct or improper behaviour justifying her dismissal
• her being left by WHSP in the position of being unable to explain her abrupt termination to any future employers.

The above factors led the Court to the conclusion that the employee would have great difficulty in obtaining comparable employment to her former role at WHSP. Indeed, she had not obtained further employment from the time of her termination to the time of the hearing, almost two years later.

In the circumstances, the Court found that 12 months was a reasonable period of notice. Accordingly, for the purposes of damages, WHSP was required to pay her an additional nine months' notice (having paid her three months' pay in lieu of notice previously).

Having found that WHSP had breached the employee's unwritten employment agreement by giving her insufficient notice of termination, the Court also found that her claims for unpaid incentive payments were also valid, and ultimately awarded her a total of more than $1.1 million, as well as her legal costs.

Lessons for employers

1. A robust administrative procedure should be implemented within an employer's organisation to ensure that all employees have signed employment agreements on file which reflect their current employment and position.
2. If an employee refuses to sign an employment agreement provided to them (and a negotiated middle ground does not appear possible), the employer should carefully consider its position and next steps, including, whether the terms of, for example, the offer of employment, a new position or promotion, or pay increase will be fulfilled.
3. It should not be assumed that an employee will return a signed agreement eventually, or that simply because a signed agreement can't be found on file that one must exist somewhere else. It also should not be assumed that simply because the employee continues to report for duty after being presented with a new employment agreement that the terms of such agreement have been agreed by the employee. WHSP learned to its disadvantage, that when an employee changes position or duties, the former employment agreement may not continue to apply.

Following up people for signed employment agreements (especially from current employees) can feel like an administrative hassle, but this case emphasises the potential consequences when an employment agreement is not signed.

This article is part of a regular employment law column series for HRM Online. It was first published in HRM Online on 22 September 2020.