General

What Happens When an Employment Policy Becomes More Than Just a Policy?

In March 2015, two former directors of ABN AMRO Australia Holdings Limited (“AAAH”) successfully argued that severance and other beneficial bonus entitlements owed to them under AAAH policies, which had not been paid to them on termination, ought to have been paid by their former employer.

At first instance, the Supreme Court of NSW upheld that a redundancy policy maintained by AAAH was incorporated and formed part of the contract of employment, thereby giving rise to actionable contractual rights.

In March 2016 however, after the case went on appeal, the NSW Supreme Court of Appeal reversed the decision of the primary Judge and found that AAAH’s former CEO, Mr Angus James was only entitled to a severance payment, and because he declined to accept ongoing employment when in October 2008 AAAH was sold to a consortium, including Royal Bank of Scotland Plc (“RBS”), was not entitled to any ex-gratia payments.

The Facts

Mr Angus James was the former CEO of AAAH. His colleague at the time, Mr Colin McKeith was the Head of Global Markets, both were employed by AAAH, which was subject to a takeover bid in 2007 by a “Consortium”, including RBS.

Prior to the takeover, representations were made by the Consortium, through AAAH, that employees who continued in their employment for a period of two years following the merger, would be treated in accordance with AAAH’s existing termination and redundancy policies. In 2008, both Mr James and Mr McKeith were retrenched from AAAH and commenced legal action to recover their severance payments.  In addition they claimed ex-gratia payments under a “closed” redundancy policy only known to senior members of AAAH. This policy was not published or available on AAAH’s company intranet (“Policy”).

Among other things, 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 stated that “in all cases where redundancy arises, staff will be treated fairly, equitably and consistent with the organisations values.”

Initial Findings

At first instance, the Court found that the Policy was incorporated into Mr James employment contract and so he was owed severance and ex-gratia bonuses by AAAH for a period of two years’ amounting to $2.5 million, not including interest, equal to a further $1.9 million. In particular, the Court observed that Mr James’ employment contract noted that he agreed to be bound by AAAH’s policies.

As a result, the Court held that the policies, including the Policy, had contractual force as between Mr James and his employer. Significant weight was placed on the fact that Mr James’ contract of employment required him to obey company policies. At trial, the evidence also revealed that AAAH had a practice of affording ex-gratia payments to redundant employees, and by virtue of Mr James’ knowledge of the Policy and its substance, there was a presumption it applied to senior staff as well.

With respect to Mr McKeith, because his employment contract did not have the same clause dealing with the obligation to comply with Company policies, the Court found that he was neither entitled to receive severance pay or any ex-gratia amounts.

The Appeal

On Appeal, Tobias AJA who wrote the unanimous judgment found that in fact the Policy was not incorporated into Mr James’ contract of employment by virtue of the policy clause in his contract, on the basis that it was not reasonable for Mr James to regard AAAH bound by a Policy which was deliberately made unavailable and kept secret. There were a number of other legal arguments raised on behalf of Mr James and Mr McKieth including that the Policy was incorporated into their contracts of employment as a contractual term by a “course of dealing” constituted by representations made to Mr James and Mr McKieth that the existing redundancy policy and practices relating to redundancies would remain in place for a period of two years after the acquisition. The Court found that this argument must fail because for it to be successful the representations relied upon to make up the “course of dealings” must have been made by the employer AAAH. However, the Court found that the representations were made by the Consortium and not AAAH.

This however was not the end of the matter, as Tobias AJA accepted Mr James’ and Mr McKeith’s alternative argument that in fact Mr James and Mr Mc Keith had entered into a new contract with RBS whereby in consideration for each of them continuing in employment with AAAH for a period of at least 2 years, the Policy would be applied to them in the event either was made redundant.

Tobias AJA held that the representations made were more than just “mere statements of intention”, and were promissory in nature and intended to be taken seriously. In particular, the Appeal Court paid special regard to the fact that the representations were made in the context of RBS seeking to retain and encourage staff to remain in employment after the merger process was complete to facilitate a smooth transition and allay any concerns about future career stability. It was noted that the method of acceptance of the offer was achieved through an act of continuing to be employed.

For all these reasons, Tobias AJA held that the representations were intended to have contractual effect and that Mr James and McKeith acted in reliance on them, including that in the event they became redundant the Policy would be applied. As the Court affirmed that the Policy did apply, the next issue was how it should be applied according to its terms.

Importantly, the Policy stated that employees who were made redundant would be entitled to a severance payment calculated in accordance with the employee’s length of service. The Policy also stated: “depending on the circumstances ex-gratia payments may be included”, and that a Deed of Release (“Deed”) should be prepared and executed by the employee before any such payments could be made.

It was held that the Deed which was presented to both Mr James and Mr McKeith by RBS went beyond what was permitted by the Policy as a necessary condition on them receiving the severance payment. In this regard, both employees were awarded damages in the amount equivalent to the severance payments to which they were owed under the Policy.

The Appeal Court however, with respect to Mr James’ ex-gratia bonus payment claim, ordered by the Court below, set aside the award on the basis that it was not unreasonable for RBS to require Mr James to execute a broadly defined Deed as a condition of him receiving the ex-gratia amount of $2.5 million and that because he refused to do so at the relevant time, he was not entitled to the receive this payment. For similar reasons, it was held that RBS did not breach the Policy when it exercised its discretion not to make any ex-gratia payments to Mr McKeith given the company’s poor financial position following the merger after the global financial crisis.

Outcome

As a consequence of the appeal, it was held that the judgment in favour of Mr James for the amount of $2,932,692.31 plus interest of $1,490,149.15 be set aside. Instead, Mr James was awarded $432,692.31 with interest in respect of the severance payment only as was the case for Mr McKeith in the amount of $375,961.54 together with interest.

 The Conundrum with Company Policies

This decision demonstrates the fine balance employers face in attempting to strike an appropriate balance between compliance with policies to the extent that doing so avoids the creation of legally binding obligations. In some cases, through written policy documents employers inadvertently impose obligations on themselves, which can have the potential to give rise to a situation where policies are deemed to be incorporated into an employee’s contract of employment and must met in every respect.

The lesson from this case, and others like it, it to regularly take the opportunity to review and update standard clauses in offer letters and especially contracts of employment to ensure the intention in relation to compliance with policies is clear and unambiguous. Secondly, it is imperative that employers consider whether all aspects of a company policy, if enforced, could be complied with and the cost to the business in the event this was to occur.

Our experience suggests that employers tend to draft extremely prescriptive policy documents in which they adopt language that is highly promissory in nature. This approach has the risk of imposing legal obligations on employers who may not mean to do so. We recommend that before policies are distributed to staff, they are carefully vetted to ensure that any unintended consequences are avoided.

If it has been a while since you last reviewed your HR and employment documents, or wish to further discuss the steps that can be taken to mitigate the risks in this area, please do not hesitate to contact us for specialist advice or assistance.

This alert is not intended to constitute, and should not be treated as, legal advice.

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