Recruitment

“You’re Going to Get Rich Working Here!” What Not to Say When Hiring Staff: A Lesson for Employers

In last week’s client alert we discussed the importance of forming strong employment relations from the outset and the need to have carefully drafted employment contracts in place that appropriately reflect the parties understanding of the bargain. What protections, however, does the law provide when a prospective employer is less than frank about the affairs of the business in which the employee is going to be employed, and makes misrepresentations about the level of earnings, profitability and potential career trajectory of a prospective employee.

If an employee relies on those misrepresentations in making a decision to leave secure employment on the expectation that they will be better-off under the employment of the prospective employer, and the opposite in fact occurs, can they sue their employer? When this does occur, an employee may be entitled to bring a claim under Schedule 2 of the Australian Consumer Law of the Competition and Consumer Act 2010 (Cth) (“ACL”). This provision allows an employee to argue that they relied on false or reckless representations made by their employer in the pre-employment stages of the employment relationship, which as a result caused the employee to suffer a detriment sounding in financial damages.

In an important decision by the Federal Court in April of this year, Justice Bromberg found that a senior insurance executive lost more than $300,000 in earnings when she was encouraged to take up a general manager’s position with Johns Lyng Insurance Building Solutions Pty Ltd (“JLI”) at a lower base salary, and leave her secure employment, based on deceptive inducements by JLI.  JLI represented to the employee that she would boost her future earnings through a profit-share scheme if she accepted the role, based on the projected revenue and profits of JLI for which the employee’s share was 2.5%. However, JLI failed to disclose to the employee its true financial position, which was such that it could not support the representation made.

In the decision, Justice Bromberg observed that the employee, who had 30 years’ experience in the insurance industry, joined JLI following a successful 6-month courting period while she was employed by Pattersons Insurerbuild Pty Ltd (“Pattersons”). The employee argued that had the true financial position of JLI been disclosed to her during her contractual negotiations, she would have remained at Pattersons (or been employed elsewhere on comparable terms) and not accepted the offer of employment from JLI at a base salary of $100,000 less than she received at Pattersons. While the employee’s base salary was significantly less that she received at Pattersons, she claimed that JLI indicated that the difference in remuneration would be made up by way of a percentage of net profit, and that her profit share would increase from 2.5% to 5% after six months of employment.

In the proceedings, evidence was led that JLI’s directors made statements that the profit share system was a “successful model” and had been operating for some time. The employee was able to demonstrate that the representations as to the success of the profit share model were supported by emails as to how the model worked and the profit share results paid in the 2011 and 2012 financial years. The email evidenced predications by a director of JLI that profit for the 2013 financial year was expected to hit $4.270 million. Based on this figure, the employee’s profit share would have amounted to approximately $106,000. However, JLI’s revenue during the 2013 financial year plummeted and the predictions conveyed to the employee during contract negotiations were considerably less than estimated.

As a result, the employee claimed that she was never told that JLI was unlikely to meet its sales and profitability targets. In fact, the Court found that the opposite was held out to her in that the employee was led to believe the business had been profitable and projections showed JLI would achieve a greater bottom-line figure than the two years preceding the employee’s employment. In finding that JLI misled the employee and contravened the ACL, his Honour accepted that while unforeseeable events may unexpectedly intervene in the normal course of business to disrupt the flow of revenue, it was reasonable for the Court to accept that the representations made by JLI in combination with the email evidence conveyed that a positive profit share outcome was “likely”.

The Court ordered JLI to pay the employee $333,422 in compensation for lost earnings and damages, and invited the parties to make submissions on costs.

This case is significant for employers, and is an important reminder that comments made by employers to entice employees can give rise to significant legal consequences.

So much is clear from this decision that an employer who overreaches by making representations in relation to, for example, the nature of an employee’s role, longevity of their employment, the value of contingent remuneration benefits, any future career opportunities, the company’s financial prospects or other material aspect of  any business activity may be exposed to a deceptive and misleading conduct claim where reliance on such representations results in some kind of detriment being sustained by an employee.

For employers, this decision highlights the importance of the contract of employment in setting out the agreed legal obligations of both employer and employee. Even if during the course of contractual negotiations an employer makes anticipatory statements about future prospects or the likely advancement of an employee, it is important to bear in mind that the Court would ultimately need to examine those representations with regard to the employment contract agreed at the time. Having a well drafted contract of employment may assist to defeat claims by an employee that they were misled when accepting a role with the employer, and emphasizes the importance of including clauses in the body of the employment contract in which the employee agrees that all prior communications, understandings, agreements and representations are superseded by the employment contract which reflects the obligations owed by the parties in totality.

Another important lesson for employer’s illustrated by this decision is the importance of using appropriate language during the recruitment process, and avoiding the adoption of promissory statements when discussing terms of employment with a prospective employee. To avoid claims in this area, employers should consider language that outlines possibilities rather than promises, assurances and guarantees that may not become reality. Employers need to also take care not to oversell the success of their businesses or their future or current financial position to prospective employees. Lastly, just as important as what is said during the pre-employment phase, is what is not said. The courts have recognised and accepted that misrepresentations can be made by not saying anything. In other words, for example if an employer fails to disclose the true financial position of its business and leads the prospective employee to believe they are joining a thriving business and this is not the case, there will be a misrepresentation by omission.

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.

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