Trust, confidence and your staff

A recent Supreme Court decision has found contracts of employment require employers to treat employees honestly and fairly. Sounds simple, but as ANDREW DOUGLAS explains, not doing so could cost you millions.

By Andrew Douglas

A recent Supreme Court decision has found contracts of employment require employers to treat employees honestly and fairly. Sounds simple, but not doing so could cost you millions.

I was speaking to a management consultant recently. She raised a problem where a senior executive claimed he had been constructively dismissed because the board called into question his honesty.

His claim included notice and lost earning capacity. The lost earning capacity arose from the onset of a depressive illness caused by the board’s behaviour. Such a condition left the employee immediately unemployable and probably unemployable in the future.

When I pressed the consultant as to how the senior executive became depressed, and why it was the board’s problem, she explained:

• The board had questioned his honesty, and at least one board member had spoken to other people in the industry about the issue. It was now industry gossip.
• He was honest. The allegation proved to be false.
• The board’s investigation was clumsy and involved discussions with the executive’s reports. It was now widely believed in the business that he was dishonest.
• The executive started to lose confidence and then the board commenced a performance management program designed to drive him out of the business.
• The executive was initially angry but this subsided into serious depression, which included suicidal thoughts.

The consultant was disturbed to learn that a recent NSW Supreme Court appeal decision recognised that such behaviour fell foul of a term courts imply into contracts of employment called “the trust and confidence” term.

The term requires employers to be honest, and treat employees fairly and respectfully. The botched investigation, false allegations of dishonesty and the spread of gossip internally and within the industry was a clear breach of the term.

The breach did constructively terminate the executive’s contract, and the executive was entitled to damages representing several years of wages (in this case over $1 million).

The case reminds me of a quote of Sir Winston Churchill, where he said: “Odd things animals. All dogs look up to you. All cats look down on you. Only a pig looks at you as an equal.”

Employers deal with all sorts of employees, as employees do with employers. The new implied term lifts us out of the animal kingdom and sets a benchmark of expected behaviour.

The new implied term requiring honesty, respect and fairness requires no more than acting in a manner you would hope to be treated yourself. This rule, sometimes called the Golden Rule, has existed since the beginning of the first millennia.

It’s odd that sometimes we shed the cloak of civility and learning and return to dogs, cats and pigs. Employers should feel assured that a return to the barnyard will include an expensive trip to the bank.

Andrew Douglas is the founder, principal lawyer and managing director of Douglas Workplace & Litigation Lawyers. Andrew is an experienced commercial litigation and workplace lawyer, who acts both as a solicitor and advocate.