We are often asked  whether or not workplace policies should be incorporated or referred to in employment contracts. Historically employment contracts have included clauses that dealt with an employer’s expectations around conduct and company procedures, however there has been a movement away from this practice as employers prefer to have more control over the content of the policies without binding themselves contractually.

The case law in this area is mixed and establishes that, while policies may be incorporated into employment contracts, or simply referenced within the contract, there is a risk that this creates binding obligations on both the employer and its employees.Employers must use precise, unambiguous and clear language to ensure their true intentions are carried across. Otherwise, employers could find themselves in legal strife if they fail to abide by their own policies. A review of the case law in this area indicates that whether or not a reference to policies within an employment contract  creates contractual obligations will be judged on the particular facts of each case.

In Romero v Farstad Shipping[1], it was found that the company’s Harassment and Discrimination Policy formed part of the employment contract. The employee was employed under a letter of engagement which stated “all Farstad Shipping policies are to be observed at all times”. The Full Federal Court had to determine whether this clause created mutually binding contractual obligations.  It was found that the language of the clause made “it clear that there is an expectation by the company that there will be mutual obligations”.

The policy set out standards of acceptable behaviour, the processes for employee to lodge complaints and how investigations are to be conducted. Following a falling out with her captain, the employee sent an email to Farstard alleging that she was subjected to relentless bullying. She argued that Farstard failed to comply with its own policy when it undertook the investigation.

Despite a finding that certain aspects of the policy were ‘aspirational’, it was held that the mutual obligations “were clearly ascertainable and quite capable of precise identification.”

A different direction was taken in McKeith v Royal Bank of Scotland Group PLC[2]. In this case, it was held that the employer’s ‘closed’ redundancy policy was not incorporated into the employment contract. The secret redundancy policy stipulated that should a redundant employee sign a deed of release, they would be entitled to accrued contractual and statutory entitlements, a severance payment and discretionary ex gratia payment. The employee claimed he had a right to these payments as they were incorporated into his employment contract. However, the court did not support this finding and it was held that because “the policy was not readily available to the employee when the contract of employment was signed…” a reasonable person could not conclude that the employer intended to be contractually bound by the policy.  

There is also an argument that the requirement to observe an employer’s policies and procedures amounts to a lawful direction by an employer to an employee. In that case, a breach of company policy would entitle the employer to take disciplinary action (e.g. provide a written warning). This issue was considered in Wittenberg[3], where it was argued that such policies were too aspirational to have contractual status.

Recommendations for Employers

In most cases it is preferable for employers to include a clause in employment contracts stating that workplace policies do not form part of the contract. At the same time, it should be outlined that an employer expects these policies will be observed by its employees. This way, policies will take the form of directions rather then giving them contractual force. Where an employee fails to observe a policy term, employers will be well within their rights to take disciplinary action, provided it can demonstrate that it has taken reasonable steps to inform the employee about the contents of the policy and the employee’s resulting obligations.

In our view, it is a safer and potentially less expensive option for the employer to treat a breach of policy as a disciplinary matter, rather than as a breach of contract. For this reason we suggest that employment contracts should be drafted to exclude company policies from their contractual terms.

Summary:

 

[1] Romero v Farstad Shipping (Indian Pacific) Pty Ltd [2014] FCAFC 177.