What happens when you want to terminate the employment of an employee, or as an employee you wish to resign but your contract of employment is silent on how much notice is required. This may seem like a silly question, and many employers still believe that the notice required on termination relates directly to the frequency of payment. In other words, if an employee gets paid fortnightly they are entitled to give 2 weeks’ notice. This is not the case, notice is usually a matter agreed between the parties on commencement of employment and contained in the written contract of employment, but what happens when there has been no prior agreement and nothing in the contract of employment dealing with this issue. How much notice must be given and what are the consequences for failing to provide sufficient notice?
Although, the Fair Work Act 2009 (Cth) (“the Act”) sets out minimum notice required in these circumstances, it will not displace the contractual requirement of notice. At common law, where an employment contract does not provide for a period of notice of termination, the law will imply a term that the contract may be brought to an end by “reasonable notice” by either party. This term is implied as a matter of law, to ensure the contractual relationship is not incapable of being brought to an end. Terms that are implied by law do not rely on imputed intentions of the parties, or on business efficacy, but are legal constructs designed to ensure the proper operation of the contract between the parties.
Reasonable notice will be implied where, the employment contract is silent as to the period of notice required for termination. However, this may also occur, where an employee was originally employed to perform a particular role under a particular employment contract, and their position, duties and title evolved significantly over time such that the position they hold at termination is significantly different from the one to which they were originally employed, and for which the original written contract of employment was created. In this circumstance, there is no written contract for the employment which is being terminated and thus no term of notice. For example, this situation would apply where an employer hires a paperboy, who after 30 years’ worth of service has accumulated so much industry knowledge and know-how that at the end of his tenure held the office of Editor in Chief. In those circumstances, assuming the employer failed to issue the employee with a new employment contract, and the old contract did not specify that it would continue to apply regardless of changes to the employee’s role, the employee would be able to argue that the change is so profound that the old contract of employment no longer applies, but rather that there is a new contract that is terminable on the provision of “reasonable notice”.
The assessment of how much notice is reasonable is, however, dependent on the facts and circumstances of each case. There are a number of imperative factors that a Court will consider in making the assessment (“Common Law Test”). Without being exhaustive, these factors include:
- the employee’s length of service;
- the employee’s age;
- the employee’s qualification and experience;
- current market and job mobility factors;
- the period the employee might reasonably have continued in the employment but for the termination;
- industry custom and practice;
- the employee’s seniority and importance;
- the character and nature of the employment relationship;
- the availability of comparable employment for the employee; and
- whether the employee was induced by the employer to give up secure employment in order to take up the position.
In applying the Common Law Test, Courts have awarded notice from anywhere between 4 weeks and 18 months. One of the primary difficulties with the concept of reasonable notice is the uncertainty involved, as to actually determine what is reasonable requires the commencement of litigation without any assurance of the quantum of notice that may ultimately be awarded.
The primary rationale behind requiring a party to give notice of termination has been expressed as necessarily allowing the party receiving the notice to make other arrangements (that is, to seek alternative employment, or for an employer to seek another employee) and to enable the parties to bring to an end the contractual relationship in an orderly manner so that they have a reasonable opportunity to wind up matters which arise out of the existing employment relationship (see Birrell v Australian National Airlines Commission  9 IR 101).
Importantly, the introduction of the Fair Work Act 2009 (Cth) (“Act”) prescribed statutory minimum periods of notice of termination to be given to an employee under the National Employment Standards. The cases which have considered whether this minimum period is sufficient to dislodge a claim of reasonable notice confirm that an employee is not prevented from receiving a longer period of reasonable notice in circumstances where the minimum period in the Act would be wholly inadequate upon consideration of the Common Law Test (see Guthrie v News Limited  VSC 196 (“Guthrie”)).
This particular issue was resolved by the oft-cited decision of Guthrie, a case in which News Limited (“News”) engaged Mr Guthrie as Editor in Chief of the Herald Sun in February 2007 for a fixed term of 3 years. From about March 2007, the employment relationship between Mr Guthrie and the then Managing Director of News broke down, and Guthrie was terminated under his employment contract with a payout of $844,523.
Relevantly, the employment contracted purported that the payout sum was inclusive of notice and any redundancy or severance pay due to Mr Guthrie. In this matter however, Guthrie claimed that his employment contract entitled him to reasonable notice (or a payment in lieu) and sought 12 months’ salary and 4 weeks’ severance from News.
As Guthrie was employed pursuant to a fixed term contract, that also provided for a payment of an amount of notice of termination, Justice Kaye observed that the issues to be determined in this particular case was:
- whether an employee under a fixed term contract is entitled to damages for a wrongful breach including as a result of not completing the full term provided by the fixed term contract, and the loss of opportunity to renew the contract for a further period; and
- whether an employee under a fixed term contract is entitled to claim damages for failure to pay reasonable notice.
Justice Kaye ultimately held that Guthrie was not engaged under a true fixed term contract, as the drafting on the early termination clause operated to make the contract terminable on reasonable notice. In considering the Common Law Test, the Court initially assessed Mr Guthrie’s entitlement to reasonable notice to be 12 months’ remuneration in gross terms. This amount, however, was reduced because Guthrie was not employment indefinitely and knew in advance when he entered into the fixed term contract that his secured period of employment had an end date. Accordingly, Justice Kaye reduced the period of reasonable notice to 8 months.
This area of law demonstrates the costly implications that may flow from simply failing to include a termination provision in an employment contract and the importance of employers ensuring that their agreements with staff contain express notice provisions dealing with termination. As a precaution, employers ought to consider the inclusion of addition clauses in the employment contract which contemplate the employment relationship changing over time without affecting the application of the contract. In this regard, as a matter of practice:
- employers should regularly review, update and refresh their existing employment contracts; and
- in the absence of appropriate provisions regarding changes to the employment relationship and how the contract will continue to apply, employers should ensure that any variations of the contract are documented in writing by way of a letter or memorandum signed by the parties.
If you wish to further discuss the steps that can be taken to mitigate the risks in this area or have an employment matter for which you require assistance, please do not hesitate to contact us for specialist advice.
This alert is not intended to constitute, and should not be treated as, legal advice.