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Understanding employment contracts: Key considerations for policy clauses (Part 2)

01 November 2023

5 min read

#Workplace Relations & Safety

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Understanding employment contracts: Key considerations for policy clauses (Part 2)

The employment contract is the cornerstone of the employer-employee relationship. A well-drafted employment contract will set out the terms and conditions of employment in a concise manner and include necessary and clearly defined protections for the employer.

However, the standard clauses within an employment contract are regularly scrutinised before courts and tribunals and a seemingly innocuous clause can have a serious adverse effect for the employer in a dispute.    

In this series, we set out examples of issues that arise with standard clauses within employment contracts, provide guidance to employers on how to address these risks and suggest improvements to these clauses within the contract. The first instalment covered bonus clauses of an employment contract.

This next instalment will examine policy clauses within the employment contract, which is a clause that addresses an employer’s policies and sets out how they apply to the employee.

Standard policy clause and key legal principle

Policy clauses in employment contracts take various forms, however a typical clause may contain wording to the following effect:

“Company Policies
You are required to comply with any written policy of the Company. However, the Company’s policies do not form part of your contract of employment.”

The qualifier in the second sentence is a crucial protection for employers and has been a hallmark in employment agreements since the Nikolich decision (see Goldman Sachs JBWere Services Pty Ltd v Nikolich [2007] FCAFC 120), where Nikolich’s employer was found liable for a six-figure sum after they found they had failed to comply with their own policy when terminating Nikolich. This resulted in a breach of contract as the policies were incorporated into the employment contract. 

Following the Nikolich decision, courts and commissions have accepted that policies will not form part of the employment contract where the express qualifier set out above is included in the contract. This reduces the risk of a breach of contract claim in circumstances where an employer has not complied with their policies (such as complaint handling policies, disciplinary policies, performance management policies and investigation policies, etc).

While many employment contracts now contain the above protection, it is not contained in all, particularly older employment contracts drafted pre-Nikolich. The recent case of Elisha v Vision Australia Ltd [2022] VSC 754 is one example.

Elisha v Vision Australia

This case involved an employee in the position of adaptive technology consultant at Vision Australia. The employee was involved in setting up and assisting in the administration of software and hardware systems for those with vision impairment.

The employee was dismissed following a workplace incident, which the Supreme Court ultimately found to be “nothing short of a sham and a disgrace”, due to the lack of procedural fairness afforded to the employee and the failure to comply with the company’s policies and procedures in effecting the termination.

The employer had in place a ‘disciplinary procedure’ that mandated various steps in the disciplinary process should an employee be terminated for misconduct. The procedure also stated that: “Vision Australia is committed to a fair, equitable and consistent approach to disciplinary action, and to act in accordance with this procedure, as well as all relevant industrial instruments and contract provisions, for all employees who have completed the minimum employment period as defined in the Fair Work Act 2009.”

However, when the employee received a stand down letter, Vision Australia did not detail all allegations made against him. Further, during a meeting about his conduct, the employee was not afforded the opportunity to respond to those allegations. These were several examples of the termination process falling short in the employer’s dismissal.  

Based on an assessment of the wording in the employment contract (which did not contain the express qualifier set out above) as well as other factors, the Supreme Court ruled that the company’s policies and procedures did form part of the employment contract and the breaches to these policies and procedures meant that there had been a breach of contract in the termination of the employment. 

The Court accepted evidence from the employee that the termination and termination process had caused him to suffer an ongoing psychiatric injury which significantly affected his life. This evidence was substantiated by medical evidence, which also demonstrated that the impact of these events meant that the employee was unable to work, with no clear timeline for returning to work. Further, the Court found that this impact was foreseeable in all the circumstances. 

As a result, the Court awarded damages in favour of the employee of $400,000 in respect of general damages, $537,236 in respect of past economic loss and $795,882 for future economic loss.

Lessons for employers

Does your business have in place employment contracts that expressly state that workplace policies are not incorporated into the employment contract? Is this clause included in all contracts or only more recent contracts? We recommend you review any workplace policies which could be the centre of a dispute like Nikolich and Elisha.

Other comments

Beyond the express carve out within policy clauses of employment contracts dealing with the operation of policies referred to above, there are other measures your business can take to limit liability in respect of your workplace policies. These include the following:

  • state in your template employment contracts that your business can vary, replace or withdraw workplace policies
  • set out within workplace policies/employment handbooks themselves that they are not contractual in nature
  • ensure that the language within your workplace policies/employment handbooks is appropriate and does not commit to standards which are not practical in all circumstances.

If you have any questions or wish to discuss any policies in your employment contracts, please get in touch with a member of our team below.

The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

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