In 2014, the High Court will, for the first time, directly consider whether there is an implied term of mutual trust and confidence in contracts of employment in Australia – and if so, exactly what this means for employers. 

This is an important issue for employers because:

  • of the wide-ranging conduct such an implied term can cover in the context of the employment relationship, and
  • a breach of the implied term may result in damages being payable to an employee for any loss suffered as a result of the breach.

How might the duty apply?

In CBA v Barker [2013] FCAFC 83, a Full Court of the Federal Court held that employers are obliged not, without reasonable and proper cause, to act in a way likely to destroy or seriously damage the relationship of trust and confidence between employer and employee.

In the case, Mr Barker’s job had been declared redundant, and the Bank allegedly failed to consult with him about redeployment opportunities or offer any to him. In the first decision, the Court held that this was a ‘serious breach’ of the Bank’s redundancy policy and therefore a breach of the implied term in the employment contract – even though the relevant policy was expressly excluded from being incorporated into the contract of employment.

On appeal, however, the Full Court took a different approach. It concluded that there was an implied term of mutual trust and confidence which, because the employee was a long-term employee of a large corporate employer, obliged the Bank to:

  • take positive steps to consult with Mr Barker about redeployment, and
  • to provide him with the opportunity to apply for alternative positions within the Bank.

The Full Court found that the Bank had breached the implied term because it had not done these things (regardless of the provisions in the redundancy policy). The Full Court confirmed the award of damages to the employee.

The obligation expressed in this way has a potentially broad ranging impact particularly in a redundancy situation but also for other situations – for example:

  • claims against an employer’s administration of a ‘discretionary’ bonus scheme if employees receive no, or little, bonus
  • claims by the complainant or the alleged perpetrator in a sexual harassment or bullying complaint if they are dissatisfied with the investigation process undertaken by the employer
  • claims that certain directions or instructions to an employee to perform particular work is in breach of contract as it puts them at risk of injury.

Where to from here?

Until the decision of the Full Court, there had been no authoritative acceptance of the implied term by an Australian appellate court. The High Court’s forthcoming decision may be important in clarifying:

  • does the common law in Australia require that employment contracts contain an implied term that the employer will not, without reasonable cause, conduct itself in a manner likely to destroy or seriously damage the relationship of trust and confidence between the employer and employee?
  • if so, exactly what obligations does an employer have, and what conduct might be a breach of the term particularly in the context of redundancy of an employee’s position (does it depend on whether the employee is ‘long standing’ and whether the employer is a ‘large corporate’ and if so what do these phrases mean)?
  • whether the term can be breached in connection with the termination of an employee’s employment (which necessarily “damages” the relationship)
  • whether employers can take any steps to exclude the implied term from their contracts (some commentators have suggested the contract would no longer be an employment contract if it was excluded)

Top tips

Until the situation is clarified, it will be important for employers to:

  • proceed on the basis that the employment relationship is one of “trust and confidence” and act carefully when taking steps that could be said to undermine that relationship
  • check provisions in contracts and policies and their interaction (even though they might not be contractually binding) before taking any action and consider ways in which damage to an employee can be minimised.