The risks in ending an employment contract by repudiation

A Supreme Court order which saw a financial services firm pay $423,445 to a former accountant provides a reminder of how repudiation of employment contracts can be used by employees to obtain significant damages awards and prevent employers from enforcing otherwise valid post-employment restraints.

What does repudiation mean?

When the conduct of one party – either the employer or employee – demonstrates an intention to no longer be bound by the terms of the contract or to fulfil it in a manner substantially inconsistent with their obligations, the contract has been repudiated. This gives the ‘innocent’ party the right to conclude the contract by accepting the repudiation. If the ‘innocent’ party does not accept the repudiation, the contract will continue to apply.

Repudiatory conduct may be cured by the party in breach, but only prior to acceptance. A breach of an essential term of the contract, or a sufficiently serious breach of a non-essential term, can constitute repudiatory conduct. It is an objective test, a question of fact and will not be inferred lightly. Repudiation may be evidenced by a single act or by an accumulation of conduct.¹

Examples of repudiatory conduct

Examples of employer conduct that may constitute a repudiation include:

• failing to pay the employee the agreed remuneration
• reducing an employee’s remuneration or withdrawing a contractual benefit (eg motor vehicle) without consent, including while the employee is on garden leave
• unilateral changes to an employee’s role which result in a significant reduction in status and/or responsibilities

Examples of what may constitute repudiatory conduct by an employee include:

• not turning up for work (without reasonable excuse)
• resigning part way through a fixed term contract
• refusing to perform a key part of his/her role
• engaging in serious and wilful misconduct (eg theft)

Accepting a repudiation vs terminating for breach

In the case of repudiatory conduct by an employee, employers should carefully consider the implications of accepting the employee’s repudiation – which brings the contract and obligations imposed on both parties under that contract to an immediate end – versus terminating the employment (either on notice or summarily) for breach of contract.

Repudiation and post-employment restraints

Employers with post-employment restraints included in their contacts should be aware that these are unlikely to be enforceable following repudiation, as seen in Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSC 163.

Background

Mr Loone was employed as Managing Principal of the Launceston office of national financial services firm Crowe Horwath (CHA) and played a significant role in CHA’s acquisition of another accounting firm. A dispute arose after CHA indicated that it did not intend to take this into account when assessing the ‘bonus pool’ upon which it would calculate Mr Loone’s discretionary bonus, and that it intended to modify its incentive scheme and Mr Loone’s role. In response, Mr Loone left CHA and subsequently started his own boutique advisory firm 5kms away.

CHA issued proceedings in the Supreme Court of Victoria to enforce the post-employment restraints in Mr Loone’s employment contract. Mr Loone claimed the restraint clause was unenforceable because CHA had repudiated his contract. CHA maintained that the post-employment restraints ‘survive the termination of the employment in all circumstances, for any reason’ including any repudiation (which it denied). Pending trial, CHA obtained an interlocutory injunction to prevent Mr Loone from setting up his own firm in competition with CHA and from soliciting work from certain former CHA clients.

Trial Judgment

At trial, the Court held that CHA had repudiated Mr Loone’s employment contract by:

1. Breaching his employment contract by excluding the acquisition from the bonus pool (as the quantum was discretionary but the criteria were not).
2. Breaching his employment contract by proposing to introduce a new incentive model under which payment of 20% of Mr Loone’s annual bonus would be deferred for 3 years.
3. Proposing changes which would involve a significant reduction of Mr Loone’s staff management responsibilities and profit and loss responsibilities.

The Court found that Mr Loone was entitled to accept CHA’s repudiatory conduct and that the (otherwise enforceable) post-employment restraints did not survive termination of the contract brought about by that acceptance.

Appeal and damages order

On appeal, the Court of Appeal upheld Justice McDonald’s decision. It noted that there is no Australian authority in which a court has enforced a restraint of trade provision where an employee ended the contract after an employer’s repudiation.

Mr Loone was subsequently² awarded damages of $423,445 by the trial judge, comprising 12 months’ remuneration – on the basis that, but for CHA’s repudiatory conduct, his employment would have continued for another 12 months – and the bonus entitlement of $142,778. The Court rejected CHA’s submission that damages should be limited to the 6 month notice period in the contract. The Court also ordered that CHA pay Mr Loone interest of approximately $50,000 plus most of his legal costs, including for the interlocutory hearing where CHA successfully obtained an injunction.

In another case, the employer was also unable to enforce post-employment restraints as it was found to have repudiated the employee’s contract when it withdrew access to the company vehicle, iPhone and iPad when it placed him on garden leave.

Repudiation and company restructures

Employers should also be aware that changing an employee’s role significantly can be seen as repudiatory conduct and can result in significant damages orders, as seen in Whittaker v Unisys Australia Pty Limited [2010] VSC 9 and Earney v Australian Property Investment Strategic Pty Ltd [2010] VSC 621.

Whittaker v Unisys Australia Pty Limited [2010] VSC 9

In 2010, the Supreme Court of Victoria awarded Mr Whittaker damages equivalent to 6 months’ pay in lieu of notice after finding that his employer had repudiated his employment contract by unilaterally removing him from his position of VP and GM of Unisys Global Commercial Industries Asia Pacific, appointing another employee to that position and appointing Mr Whittaker to a new role focussing on negotiating and closing ‘mega deals’. Mr Whittaker successfully argued that although there would be no reduction in remuneration, the new role represented a substantial reduction in status and responsibility and, by its conduct – which included sending a company-wide email without Mr Whittaker’s consent communicating the changes as effective immediately – Unisys repudiated his contract. Mr Whittaker’s claim for redundancy pay however failed after he unsuccessfully argued that Unisys had a redundancy policy that was incorporated into his contract.

Earney v Australian Property Investment Strategic Pty Ltd [2010] VSC 621

Shortly after Whittaker’s case, the Supreme Court of Victoria awarded CFO Mr Earney 12 months’ pay ($250,000) in damages (based on a change of control clause in his contract) after finding Australian Property Investment Strategic Pty Ltd (AIMS) repudiated his contract by progressively downgrading his status and responsibilities over a four month period, before removing him as CFO and failing to offer him a definite alternative position which was equivalent in status and responsibility. The Court found Mr Earney was entitled to accept the repudiation and rejected AIMS’ submission that it was entitled to dismiss him when he ceased attending work.

Recommendations for employers

• Ensure employment contracts are drafted as flexibly as possible concerning changes to position, duties, incentives/ bonuses etc., whilst understanding there will still be limits to changes you can make unilaterally.
• Ensure incentive/bonus scheme policies are thoughtfully developed and carefully drafted, particularly where they are intended to be ‘discretionary’
• When contemplating a restructure, be wary of changes that may diminish an employee’s status and/or responsibilities and consider how to minimise the risk of repudiation and/or breach of contract claims.
• If placing an employee on garden leave, do not remove benefits (e.g. use of company vehicle or phone) unless expressly permitted by the contract.
• If considering changes to your policies – especially those affecting employee remuneration – consider the potential for repudiation/ breach of contract claims.
• Before accepting an employee’s repudiation, consider potential implications for post-employment restraints.

If you would like advice or assistance with any issues concerning repudiation of employment contracts, please contact a member of our Workplace Relations team.

^1. These legal principles were summarised in Earney v Australian Property Investment Strategic Pty Ltd [2010] VSC 621, citing Whittaker v Unisys Australia Pty Ltd (2010) 192 IR 311.
^2. [2017] VSC 548