It is often said that the essence of the employment relationship is the work/wages bargain – where an employer directs an employee to complete certain work in exchange for wages.  However, the reality of the employment relationship is much more complex.

To manage these complexities, most employers attempt to cement the terms of the employment relationship in a single, written document – the employment contract.

Of course, the employment contract reflects the fundamental work/wages bargain but it also deals with a range of other central features of the employment relationship, such as location of work, duties of the parties and, critically, termination of employment.

Many of the clauses we see today in standard employment contracts are the direct result of a long history of case law about contractual interpretation. In fact, there are little-known subtleties in the drafting of some clauses that are often overlooked and sometimes deleted entirely by those caught up in the excitement of a new employment relationship. This however can lead to significant problems for employers when the honeymoon period ends, as those small features, that have been deleted for the sake of speed and a shorter document, can be essential to the function and eventual termination of the employment relationship.

In this blog, we explore the subtleties of one of the most standard clauses in the employment contract- the notice of termination clause.

Notice of termination clause

Notice of termination clauses set out the amount of notice a party is required to give the other before they end the employment relationship. The length of that notice period usually depends on the nature of the employee’s position. For example, senior executive positions usually have a longer notice period than junior positions.

A well-drafted termination clause will set out the notice that both the employer and the employee must provide so that each knows exactly what to expect from the other.

However, some employers get distracted with the promise of the potential of a new employee and either forget to cement their employment arrangements in writing altogether, or forget about their own right to terminate the employment with notice, thus only making provision for the notice expected from their employee. An example of a one-sided termination clause of this kind might be:

“The Employee may terminate the employment by providing the Company with one month’s notice in writing.”

So, why is it so critical to set out mutual terms regarding termination with notice? The answer is the common law principle of “reasonable notice.”

Reasonable notice

Where a contract (either written or verbal) does not include an express term setting out the notice period that an employer is required to provide an employee, the common law implies a term of “reasonable notice of termination”.

The issue of reasonable notice usually arises in circumstance where an employer has decided they wish to terminate the employment relationship but they have no notice of termination clause in a contract to refer to or rely on, so the employer provides the notice (or payment in lieu) it thinks is appropriate. Sometimes, employees disagree with the amount of notice the employer has decided to provide, particularly in situations where the position they held was quite senior and they will face difficulty finding new employment on similar terms.

Determining the period of “reasonable notice” in circumstances where there is no express contractual term depends on a range of factors and will be different in each situation, but the case law in this area can provide some interesting guidance and lessons for employers.

For example, in Callahan v Graphic Impressions [2014] FWC 437, the Fair Work Commission (FWC) held that an employee was entitled to four months’ notice (or payment in lieu thereof) in circumstances where the arrangements governing his employment were partly in writing and partly oral. The employee was a founder, shareholder and the managing director of a small printing company. He was a party to a shareholder’s deed which dealt with some employment matters but did not contain an express term regarding notice of termination. The employee was summarily dismissed for allegedly diverting business away from the employer, but was successful in claiming that his summary dismissal was harsh. In finding that the summary dismissal was harsh, the FWC concluded that dismissal with notice would have been appropriate and went on to consider what exactly the applicable notice period should have been. The employer argued that the statutory minimum notice period in the Fair Work Act 2009 (Cth) (FW Act) should apply, but the FWC disagreed, commenting that those were minimum notice periods and that, in the circumstances, a longer notice period was appropriate and reasonable.

The interaction between the statutory minimum notice periods in the FW Act and the common law principle of reasonable notice was also discussed in the decision of Guthrie v News Limited [2010] VSC 196. In this case, the fixed-term employment of an editor-in-chief was brought to an end before the expiry of the fixed term. The employee’s contract of employment stated that, if the employment was not renewed, the employee would be entitled to payment of notice and redundancy. However, the period of notice was not specified. The court implied a term of reasonable notice into the contract and found that, having regard to a range of factors, including the seniority of the employee, he was entitled to payment in lieu of eight months’ notice. The court noted that the primary purpose of reasonable notice is to allow the employee enough time to find work of a similar kind and the statutory minimum notice periods in the FW Act, were just that – minimum notice periods – and were not appropriate in this case.

The case law demonstrates that reasonable notice will be implied into a contract of employment where it is necessary to enable the contract to operate. One of the primary case law examples of this can be found in the decision of Quinn v Jack Chia (Australia) Ltd (1992) 1 VR 567. In this case, an employee who commenced employment at a junior level and rose to a senior level before the termination of his employment was found to be entitled to 12 months’ notice of the termination of his employment, despite his initial contract of employment stating that termination could occur on 30 days’ notice. The court held that the determination of reasonable notice should be made by taking into account the circumstances at the time of the termination of employment and not those at the commencement of the employment relationship. In this sense, the employee’s initial contract of employment did not reflect the circumstances at the time of his dismissal and accordingly, the 30-day notice period was not appropriate.

Lesson for employers

When a court or tribunal implies the common law term of reasonable notice into an employment contract, it rarely results in an outcome that is favourable to an employer. The result is generally months of notice being owed to an employee.

For this reason, it is very important for employers to ensure that their employment contracts contain a notice of termination clause which sets out in clear terms how much notice the employer will provide the employee upon termination of their employment.

The case law in this area also demonstrates that a “set and forget” mentality may result in reasonable notice being implied into an employment contract. Employers should therefore ensure that they regularly review their employment contracts, including notice of termination clauses, at the very least on promotion.

 

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