Employment Update - Incorporation of Policies into Contracts of Employment

On 7 August 2007, by a majority, the Full Court of the Federal Court in Goldman Sachs JBWere Services Pty Limited v Nikolich upheld the decision of the trial judge that the employer had breached the employee's contract of employment by not adhering to a section of the employer's policy document that was incorporated into an employee's contract of employment. As a result of the employer's breach of contract, the employee received significant damages.

The initial decision of the Court

In June 2006, the Federal Court held in the case of Nikolich v Goldman Sachs JBWere Services Pty Ltd that sections of the employer’s document called ‘Working With Us’ (WWU) were incorporated into Mr Nikolich’s contract of employment. The WWU document was sent to Mr Nikolich at the same time as the employer’s offer of employment. The key clause in the letter of offer read:

'From time to time the company has issued and will issue office memoranda with which it will expect you to comply as applicable...'

The trial judge also held that the employer’s conduct in relation to Mr Nikolich breached the sections of this document that related to the maintenance of a safe and healthy work environment, harassment and grievance procedures. Damages in the sum of $435,896 were awarded to compensate Mr Nikolich for the serious psychological injury suffered by him that resulted in loss of income (past and future) together with a further $80,000 by way of general damages for pain and suffering.

The decision on appeal

The Full Court, by a 2-1 majority, dismissed the employer’s appeal and confirmed that sections of the WWU document that impose obligations or confer entitlements were incorporated into Mr Nikolich’s contract of employment. Whilst it did not initially concede the point during the hearing of the appeal, the employer accepted that some sections of the WWU document did form part of the employee’s  contract of employment, but that those sections in issue in this matter did not.

The Full Court examined the three sections of the WWU document that were found by the trial judge to be breached by the employer. The Full Court decided that only one of these sections formed part of Mr Nikolich’s contract of employment, that is the section that related to occupational health and safety.

This section obliged the employer to take ‘every practicable step to provide and maintain a safe and healthy work environment’.

The Full Court held that this obligation, in the circumstances, required the employer to urgently investigate and resolve Mr Nikolich’s complaint, reverse any inappropriate decision taken by Mr Nikolich’s manager, attempt to reconcile Mr Nikolich and his manager and, if appropriate, end the manager’s supervision of Mr Nikolich.

The delay in addressing Mr Nikolich’s complaints was unacceptable and breached the obligation to ‘take every practicable step to provide and maintain a safe and healthy work environment’. This was the ‘heart’ of the breach.

The Full Court held that the other two sections of the WWU document that the trial judge held were breached by the employer were not contractual in nature, but merely ‘aspirational’. These sections merely described what the employer wanted to achieve (eg staff being friendly towards each other) or what it wanted to aspire to, rather than creating contractual obligations that the employer could be compelled to comply with.

What does this decision mean for employers?

This decision serves as a timely reminder that an employer should be aware of its obligations to its employees, not only in an employee’s contract of employment, but also in other documents, such as policies or human resources manuals, parts of which may be found to be incorporated into each employee’s contract of employment.

As experienced in this case, significant damages could be awarded against an employer if found to be in breach.

Based on this and earlier decisions, there is now little controversy about the incorporation of policies or human resources manuals into contracts of employment, given the right circumstances. Not all terms in a policy document or human resources manual will impose obligations or confer entitlements (such as redundancy pay) that can be enforced by court proceedings and, if found to be in breach, result in damages being awarded. What is important is that an employer be aware of what it is doing by the terms of its letters of offer. If it does not wish policy documents to be incorporated it should ensure its contracts are drafted in a manner to protect against such an outcome. Employers should review their contracts, policies and related documents to ensure there are no unintended consequences, which are generally revealed only when the parties are in dispute.

There is no indication yet whether the employer will appeal to the High Court.

For further information please contact the authors:

Nick Ruskin, Partner
Tel +61 3 9274 5284
nick.ruskin@dlaphillipsfox.com

Brendan Charles, Senior Associate
Tel +61 3 9274 5806
brendan.charles@dlaphillipsfox.com