What does the employment contract say about notice? – Oh really? It doesn’t say anything?

Stephen Booth

A recent case is a forceful reminder of the problems that arise when there is no employment contract at all, or there is an old contract which has not been kept up to date, or there is a contract but it is silent about the period of notice to be provided or paid on termination of employment.

In Ma –v- Expeditors International Pty Ltd in the NSW Supreme Court, Ms Ma had worked for Expeditors for nearly 25 years, in a position of significant seniority, although not in the highest management group.  She had started as Accounts Supervisor in 1989 and by 2011 was the Regional Financial Controller, South Pacific region, reporting directly to the MD, and having a team of 14 people reporting to her. She had a base salary of $70,000 but substantial bonus entitlements gave her an income averaging $700,000pa over the 6 years preceding termination.  That was itself indicative of the high degree of responsibility she had.

In August 2010, the MD with whom she had worked for many years (and who referred to her as “his watchdog”) retired, and the new MD attempted to renegotiate Ms Ma’s salary package, by reducing the bonus by 50%. When Ms Ma refused to accept the reduction, the new MD terminated her employment, with 5 weeks pay in lieu of notice, plus accrued leave entitlements.  Long service leave was calculated as $28,530 on the basis that “ordinary pay” included base salary plus superannuation, and as that exceeded $144,000 (the cut-off point for including bonus in the calculation of accrued long service leave), bonuses could be ignored.

Five weeks notice complied with Fair Work Act requirements, so that should be OK, shouldn’t it?

Well, it would have been if there was an operative contract providing for that or some lesser notice period.  But in fact, there was no contractual notice provision.  Ms Ma had been given a letter of appointment in 1987, and an updating letter in 2002, but neither dealt with the subject of notice.  That meant that the standard term implied by law – an entitlement to “reasonable notice” – applied instead, regardless of the statutory minimum notice period.  So Ms Ma sued Expeditors, claiming “reasonable notice”, and she argued that 12 months would be reasonable in all the circumstances.

Having assessed her level of seniority, length of service and so forth, the Court didn’t quite agree with 12 months, but assessed 10 months as being reasonable, the main criterion being the time it would take to find a comparable position (for an employee with such a high income and effectively only one-company experience).

In addition, the long service leave calculation came unstuck:  as superannuation was not “ordinary pay” (not being received by the employee and being for a different purpose), “ordinary pay” was less than $144,000, so bonus had to be included in the long service leave calculation, which increased the long service leave entitlement to more than $265,000.

This case is a salutary lesson to ensure that employees have employment contracts covering critical terms such as notice. This is particularly an issue where a long serving employee will have gone through a number of roles in a company, and any old employment contract will readily be disregarded as being obsolete, if it has not been kept up to date with changes in position and responsibility and remuneration. It is also reasonably common for very long term employees never to have had an employment contract (because things were not so formal 25 years ago), resulting in the same exposure.

It is good practice, with each significant change of position, either to issue a new employment contract, or at least to accompany the change of position with a letter indicating the changes to position and remuneration, and anything else relevant, but otherwise confirming that the existing employment contract terms continue to apply.

This case also illustrates that some care is needed when remunerating an employee substantially by bonus rather than base salary, as there may be significant unforeseen on-cost consequences.

For more advice on employment contracts, please contact our experienced employment lawyer:

Stephen Booth, Principal
Phone: + 61 2 9895 9222