Implied ‘good faith’ in employment contracts

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A recent decision of the Supreme Court of Western Australia (Rogan-Gardiner v Woolworths) confirms that employers usually owe a duty of good faith to their employees.
Ms Rogan-Gardiner had been the state accountant for Woolworths in Western Australia for eight years when in 2002, Woolworths undertook a nationwide restructure. Ms Rogan-Gardiner’s position was abolished whilst she was on maternity leave.

Before Ms Rogan-Gardiner returned to work, Woolworths offered her a number of alternative positions with comparable scope to her previous role, however she declined each of them. When Ms Rogan-Gardiner re-turned to work, Woolworths made further offers, which she also declined. Her employment with Woolworths was eventually terminated summarily.

Ms Rogan-Gardiner alleged Woolworths had breached terms implied in her employment contract requiring Woolworths to:

• act in good faith towards her; and
• give reasonable notice of her termination.

Ms Rogan-Gardiner also claimed damages for stress, depression and anxiety caused by the manner of her dismissal.

Good faith
The Court accepted that there was an implied term of good faith in Ms Rogan-Gardiner’s employment con-tract, but found that Woolworths had not breached it. The Court held that:
• the purpose of a good faith term was fundamentally inconsistent with the termination of the employment relationship;
• the term could not operate in a manner that would restrict the right of an employer to terminate employment; and
• where an employee claims for loss on the basis of an alleged breach of the good faith term it will be necessary to prove that such loss was caused by conduct of the employer which preceded, and was independent of, any subsequent dismissal.
In finding that Woolworths had not breached the implied term, the Court noted that Woolworths offered Ms Rogan-Gardiner three alternative positions commensurate with her skills and experience. The Court also found that the offers were genuinely made with a view to retaining her services on reasonable terms.

Reasonable notice
Ms Rogan-Gardiner’s contract was for an indefinite duration. In the absence of any contrary term, a contract of service will contain an implied term that either party can bring the contract to an end by giving reasonable notice. The period required depends on various circumstances, including:
• the position held by the employee;
• the importance of the job, size of the salary and the professional standing of the employee;
• the nature of the employment;
• the length of service, the employee’s age, qualifications and experience;
• the degree of job mobility and prospects of future employment for the employee; and
• the time it would take for the dismissed employee to obtain further employment.
The Court considered that the appropriate notice period in Ms Rogan-Gardiner’s case was four months, and she was awarded damages on the basis of her salary and benefits for this period.

What employers should know
Generally, employment contracts will contain an implied term of good faith. i.e. an unwritten term; that “an employer will not, without reasonable and proper cause, act in a manner calculated or likely to cause serious damage to a relationship of trust and confidence between it and its employee”.
However, this term will apply only to conduct during employment and not to dismissal or the manner of dismissal.
Where an employment contract does not contain a contrary term, a period of ‘reasonable notice’ of termi-nation will be implied. For senior employees, such notice periods can be between four and 12 months.
Employers should ensure employment contracts deal expressly with notice, particularly those for senior employees.