28 May 2013

Who's the boss: the impact of multiple employment and successive contracts

In an area that is rarely tested, the Full Federal Court has come down in favour of recognising continuity of service with one employer, despite there being successive employment contracts, employment with group companies, overseas employment and ultimately a secondment taking place (Cohen v iSOFT Group Pty Limited [2013] FCAFC 49).

When doing so, the Court looked behind the contracts at the intention of the parties to determine the true employing entity, and awarded long service leave because of continuity of employment to the overseas employee.

If you are not prepared for the consequences of continuity of employment, this may adversely impact on your business, as a simple redundancy may trigger more entitlements that you had anticipated.

In the modern world of group companies, where it is not uncommon for employees to perform services for more than one affiliated entity at the same time, or to transfer between entities overseas or within Australia, the message is to look carefully at your contracts and the relationships that are created.

While this decision ultimately found that Cohen was employed overseas and was not an Australian employee for the purposes of the Fair Work Act 2009 (Cth), it should be noted that the Act can also trigger other entitlements for continuity, treatment of accrued leave and transfer between related entities, even if the employee transfers overseas, which should be carefully managed and documented.

Who was Dr Cohen's employer?

Dr Cohen was originally employed by a Singapore-based company in 1988. This was acquired by the first respondent which then employed Dr Cohen in 2000 via an agreement made between the two parties for a three-year period, but his salary was paid by IBA Holdings, the new name for the first respondent. At the end of that period, he continued in his position.

In 2006, another agreement was made, this time between Dr Cohen and "IBA", which said "This letter is an addendum to your original employment contract… dated 15 February 2000. The terms of your employment with IBA are amended as follows." It ended with the sentence: "All other terms of your Executive Service Agreement, as amended, will continue in full force and effect."

In 2008 he was seconded to India. A letter from the Group HR Director set out the terms of the secondment, including that his current Expatriate Assignment was being extended, his terms and conditions remained the same, and he would return to his current position in Singapore after the secondment.

He was made redundant in 2011, and claimed his accrued annual leave, long service leave, the amount of his notice and a redundancy entitlement from the first respondent, which amounted to over half a million dollars. The first respondent replied those entitlements arose under the 2000 agreement, which was no longer in force – and it wasn't his employer now.

The first respondent argued that each agreement was separate and self-contained, and that the identity of the employer had changed.

This argument was aided by the fact that while the original 2000 agreement had been professionally drafted, the later ones had not been. The first respondent had also changed its name four times since it listed on the ASX 13 years ago, and was part of a conglomerate. The later documents used different names for the employer.

While the Federal Court accepted this argument, the Full Federal Court disagreed. Dr Cohen had been employed by the first respondent all along, under the 2000 agreement which had been amended and supplemented.

The 2006 agreement was signed by the chief executive officer of the first respondent, and both parties who executed it knew when they signed it that the 2000 agreement:

  • had been made by them; and
  • it subsequently formed the basis of their relationship, with such changes as they had agreed.

It then said:

"The confirmation of the continuity of the 2000 agreement reflected the objective facts. The 2006 agreement thus amended and supplemented the 2000 agreement. This amended and supplemented agreement formed the mutually known background for negotiation and entry into the 2008 agreement… the 2008 agreement was, in the context of the mutually known facts, a supplement to the existing employment contract between Dr Cohen and the first respondent."

At the end of the day, Dr Cohen was provided with six months' notice and accrued leave in accordance with NSW legislation (not because he was based in NSW but because his contract picked up the legislation through the governing law provision). Dr Cohen was not, however, entitled to a redundancy payment because there was no contractual (implied or express) entitlement. Had he been considered a Fair Work Act employee, however, there would have been a statutory entitlement to redundancy payments.

Key lessons for employers

While the contractual provisions referenced other employer names, this didn't sit with what the parties understood the intention of ongoing employment to be. It is important to keep in mind, as the Court pointed out, that employment relationships are fluid – they are not wholly constrained by the contractual documentation but will be affected by relevant statutory overlay and the fiduciary relationship. In this case, there had been no negotiations concerning a change in employer (despite the contractual terms) and the absence of such discussions was considered "striking" by the Court.

Not paying careful attention to the drafting and failing to document any intention to change the employing entity in this case allowed some ambiguity to creep into the documents and consequently into how an objective third party would interpret them.

What the case doesn't consider is if Dr Cohen had been employed by different employers within the group, with contracts that referred to "continue to employ…" would his continuity of service been recognised in any event? We think the answer has to be yes. This is even more obvious in relation to Australian-based employees when you consider the operation of section 22 of the Fair Work Act which deals with "continuity of service" and "transfer of employment".

If it is an employer's intention to move employees between group companies, it is important that you:

  • understand in what circumstances continuity of employment will attach;
  • be clear what the purpose of the move is and who the correct employer is; and
  • ensure the employee is informed of any change in employing entity and the consequential impact of that change, so make sure your communication strategy is well documented.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.