In a ruling that serves as a warning to employers, the Federal Magistrates Court rejected an employer’s contention that pre-employment negotiations were not binding.

In the case of McRae v Watson Wyatt Australia Pty Ltd, Federal Magistrate Raphael found that a redundancy provision that was discussed in pre-employment negotiations formed part of the employee’s contract.

FACTS

The case involved a superannuation consultant, Kathryn McRae, who accepted a role at Watson Wyatt Australia Pty Ltd in 2000. During pre-employment negotiations, she expressed a concern about the absence of a redundancy clause in her letter of offer, and contacted Watson Wyatt’s then managing director by telephone. The managing director assured her during the call that although the company did not include redundancy clauses in its employment contracts, its staff were “well looked after” and, in the “unlikely event” that the worker’s position was made redundant, she could expect to receive three weeks’ salary for every year of service. Watson Wyatt made the worker redundant in August 2007, however it denied that such arrangements had been made, and offered her only one month’s severance pay.

CLAIM

The employee brought an action in the Federal Magistrates Court for breach of contract. In her statement of claim, Ms McRae relied on the notes she made of the telephone conversation she had with the managing director prior to her joining the company.

The employer argued that a subsequent contract made with the employee in 2004, following a promotion excluded any pre-employment negotiations as the subsequent contract made provision that “this letter sets out the entire agreement with you regarding the terms and conditions of your employment with the employer”.

The employer also argued that even if the telephone conversation had taken place, the former managing director ‘s promises were “mere puffery”, and could not be considered binding.

FINDINGS

Federal Magistrate Raphael found that the managing director was the “guiding mind” of the organisation and consequently, the employee had every right to have faith in the assurances he made after she expressed her concerns.

Federal Magistrate Raphael ordered the employer to pay $106,615 for breach of contract plus interest.

WHAT THIS MEANS FOR EMPLOYERS

This case shows that verbal representations can be contractually binding. Employers should consider the following when looking at hiring new staff:

• Employers need to be careful when discussing terms of employment with employees not promise terms that will not be in the written contract.
• All clauses and benefits offered to prospective employees should be encapsulated in the written contract
• We recommend that employers keep detailed file notes from pre-employment meetings or discussions where benefits and conditions are discussed.
• Employers should also ensure that executives, HR managers or recruiters involved in negotiations with potential employees are briefed on what benefits and conditions they are authorised to offer.

To obtain further information about this decision or discuss the implications for your business, please contact Andrew Bland at [email protected]