EMPLOYERS MUST BEHAVE REASONABLY - THE IMPLIED DUTY OF MUTUAL TRUST AND CONFIDENCE
The Supreme Court of South Australia decision in McDonald v State of South Australia, after a comprehensive review of English and Australian Law, concluded that mutual trust and confidence is part of Australian Law in employment contracts and should be implied in the case before the court.
The plaintiff, Mr McDonald, was formally a school teacher employed by the defendant, the Department of Education and Children's Services (DECS). The plaintiff taught at Brighton Secondary School, a school operated by the defendant.
In that case the plaintiff claimed that the defendant breached:
• a fundamental term in his employment contract to provide a safe system of work; and
• an implied term in his employment contract by engaging in conduct that destroyed or damaged the relationship of mutual trust and confidence between the parties.
The plaintiff claimed that he had no choice other than to terminate his employment because the above breaches amounted to a repudiation of his employment contract. The plaintiff finally claimed that he had been constructively dismissed, that is, his termination was brought about because of the defendant's breaches of contract.
Justice Anderson concluded that the plaintiff was entitled to treat his employment contract as having been repudiated and could therefore constructively dismiss himself. This repudiation occurred as a result of the defendant's breaches of contract, including breach of the implied term of mutual trust and confidence.
His Honour provided a detailed review of the case law in relation to the implied term of mutual trust and confidence. This review included a summary of the English cases and the key Australian cases of: Perkins v Grace Worldwide, in which it was deemed that trust and confidence was "a necessary ingredient in any employment relationship" and applies to both employers and employees; and Thomson v Orica Australia Pty Ltd, in which it was deemed that "there is ample authority for the implication of a term that the employer will not, without reasonable cause, conduct itself in a manner likely to damage or destroy the relationship of confidence and trust between the parties as employer and employee".
Justice Anderson concluded that, as a result of the above, mutual trust and confidence is part of Australian law in relation to employment contracts and should be implied in this case.
The court determined that the defendant breached the implied term of mutual trust and confidence in this case. This breach occurred for reasons such as:
• the school failed to provide the plaintiff with adequate support, training, risk procedures and management of the plaintiff's performance;
• the school failed to investigate the plaintiff's complaints that he was being harassed by a number of other employees who took his phone away from him, copied his keys and altered his computer access; and
• the principal of the school harassed and humiliated the plaintiff when he complained that he was being victimised and discriminated
Justice Anderson considered the above factors and concluded that their combined effect was such that the plaintiff could not have been "expected to put up with it". The defendant was, therefore, in breach of the implied term of mutual trust and confidence.
This decision illustrates the care that employers must take to act reasonably and sends a powerful message that employers must conduct themselves fairly and reasonably in their dealings with employees. If an employer fails to conduct its activities consistently with the duty, an employee who suffers financially or physically as a result of the breach could bring a claim for potentially significant damages. Australian employers with policies governing workplace behaviour need to monitor their compliance with these policies carefully.
Finally, this duty of mutual trust and confidence can cover a multitude of situations such as failing to follow an established policy and procedures, failure to examine genuine employee grievances or expose employees to dishonest or unsafe or unethical conduct by co-workers.
DO FIXED-TERM CONTRACTS PRECLUDE AN EMPLOYEE FROM WORKING FOR A COMPETITOR FOR THEIR FULL TERM?
Employers have commonly used fixed-term contracts as a means to ensure they have the benefit of an employee's services for a specified period. The contract then provides certainty to employees who know that they will continue to be employed for the full term of the contract or in the event that their employer terminates the contract early they will be paid out the remainder of the contract. The New South Wales Supreme Court decision in Tullett Prebon (Australia) Pty Ltd v Simon Purcell has called into question the certainty provided by fixed-term employment contracts by limiting the ability of an employer to enforce the full term of the contract in the event that the employee decides to terminate the contract prematurely.
In this case, the employer conducted a wholesale brokerage business. Mr Purcell had been employed by Tullett Prebon for a number of years but in July 2007 the parties negotiated a new fixed-term contract with a duration of two years, commencing in July 2007 and expiring on 31 July 2009. The contract also contained an express three-month post-employment covenant prohibiting Mr Purcell from working for a competitor of Tullett Prebon, or encouraging Tullett Prebon's employees to terminate their employment. The contract also included provisions enabling Tullett Prebon to place Mr Purcell on gardening leave or unpaid leave.
In April 2008, Mr Purcell was offered employment with a competitor and accepted the offer. Mr Purcell informed Tullett Prebon that he was resigning even though there was a further 15 months remaining in the fixed-term of the contract. Tullett Prebon advised him that it did not accept the resignation but directed him not to attend work; instead placing him on gardening leave. He was advised that he was required to comply with his contractual obligations and that he would continue to receive remuneration under the terms of the contract.
Following his purported resignation, Mr Purcell claimed that Tullett Prebon had summarily dismissed him by requiring that he not attend work and he had accepted Tullett Prebon's repudiation of the contract on that ground, and that the purported summary dismissal negated the post-employment restraints.
Tullett Prebon then instituted proceedings seeking injunctions to restrain Mr Purcell from working for a competitor until the expiration of the fixed-term contract on 31 July 2009.
The court found that the contract had not been terminated and remained on foot even though the "employment relationship" (as opposed to the "contract of employment") had been terminated by Mr Purcell's repudiatory conduct. It decided that the contractual prohibitions were reasonable and valid restraints of trade for so long as the employment relationship (as distinct from the contract) subsisted and for six months thereafter, for it determined that a six-month post-employment restraint was reasonable given the size of the industry and as Mr Purcell had negotiated a contract with a competitor that included a six-month restraint period.
The court then turned to the issue of whether the nature of fixed-term contracts could mean that the remaining term of the contract could be longer than the period of the post-employment restraint. On the facts of this case the court needed to consider whether Tullett Prebon's attempt to restrain Mr Purcell for the remaining 15 months of the contract's term was reasonable.
The court decided that there was nothing in the evidence to suggest that, following the departure of a broker, more than six months was required for a replacement broker to be found, recruited, installed, demonstrate their competence and develop a rapport with clients. In those circumstances the court decided that an injunction extending for more than six months after Mr Purcell had ceased working in the office of Tullett Prebon would not protect any legitimate business interests of that company, but would merely sterilise Mr Purcell and prevent competition.
Accordingly, the court granted an injunction restraining Mr Purcell from engaging in conduct in breach of the restraints for six months from when the "employment relationship" ended, rather than the 15 months of the contract term sought by the claimant.
This has brought into question the benefits of entering into fixed-term contracts, as the employer may not be able to preclude an employee from engaging in conduct that would harm the employer's business for the full term of the contract.
WHEN DOES AN EMPLOYER OWN AN EMPLOYEE'S INVENTIONS?
The Federal Court of Australia dealt with the ownership of inventions created during the employment relationship in University of Western Australia v Gray (No. 20). The Federal Court has raised doubts as to the ownership of inventions where the employee has no duty to invent as an condition of employment.
The University of Western Australia appointed Dr Gray as professor of surgery in 1985. Dr Gray's appointment required him to conduct and stimulate research and incorporated the university's regulations, including its intellectual property regulations. Dr Gray terminated his employment in November 1997. Following his resignation, the university asserted rights to the intellectual property of Dr Gray's inventions during his employment based on an implied term.
The university instituted proceedings in the Federal Court of Australia seeking recognition of its intellectual property rights in Dr Gray's inventions based on an implied term and proceeded to trial. The trial was heard by Justice French (as he then was).
Typically, in the absence of express contractual provisions, an employer will only obtain intellectual property in an employee's inventions where the inventions are created in the course of employment or where the seniority of the employee creates a fiduciary duty to the extent that inventions relate to the business of the employer.
The university relied on English authority that supported the implication of a fiduciary duty owing to the seniority of an employee: Fine Industrial Commodities Ltd v Prowling and cited Australian case law that recognised this category of senior employees as having particular obligations regarding intellectual property rights.
Justice French, in considering the existence of the implied term asserted by the university, distinguished between a university employee engaged to produce an invention and an employee, such as Dr Gray, who was engaged to research. In determining that an employee engaged to research could not be expected by the university to invent during the course of his or her employment, Justice French noted that while the public purpose of the university and the general nature of universities were critical in determining the existence of an implied term as argued by the university. Dr Gray was more than an employee of the university, he was a member of a community of scholars and teachers and employed for public purposes. Justice French did not consider that Dr Gray was required under his employment contract to "advance a UWA commercial purpose" when selecting the research he would undertake.
The court considered that there were a number of circumstances that weighed against the existence of an implied term in Dr Gray's contract. Firstly, as he was engaged to research, he was not subject to a duty to invent. He had freedom to publish the results of research and such publication may destroy the ability to patent any invention and additionally he was expected to solicit external funds to fund his research.
These factors may also have weighed against the existence of a fiduciary duty on the basis of Dr Gray's seniority. However, it was unnecessary for the court to consider this issue as it had found that the university had no proprietary rights in the inventions.
The case also raised issues regarding the incorporation of policies into employment contracts. The university asserted that Dr Gray was required to notify it of inventions under its relevant regulations. This claim failed owing to the university's failure to maintain the patent committee, which was the body to whom academics were to make such notifications.
While the decision to a large extent relied on the fact that Dr Gray was an academic employed to research and not to further the commercial interests of the university, it raises additional considerations for employers regarding intellectual property created during the operation of the employment contract. Employers need to consider carefully the need for express contractual terms protecting their intellectual property rights.