Australia: Employees' duty to report misconduct of themselves or others must be in employment contract or policy

Last Updated: 28 April 2012
Article by Dan Trindade

Key Points:

Employers should review their employment contracts and policies to ensure that any obligation requiring employees to disclose misconduct engaged in by themselves or others is expressly identified.

If an employer wants employees to have a positive obligation to report their own or others' misconduct, they need to ensure this is expressly included in the contract of employment or a binding policy, as such an obligation may not be implied at law.

This issue was considered in the recent decision of Hodgson v Amcor [2012] VSC 94.

Fiduciary duty to disclose misconduct?

While the relationship of employer and employee is generally said to be "fiduciary" in nature, traditional strict fiduciary duties (for example, to put another's interests ahead of one's own and to avoid situations where there is a conflict) are generally not imposed on a relationship governed by an ordinary contract of employment.

Parties to a contract of employment are commonly viewed as free to pursue their own self-interest within the bounds of the obligations they have accepted under their contract (which will include the implied duties of fidelity for employees). This may differ, however, depending on the level of seniority and responsibility afforded to a particular employee.

Senior employees with managerial responsibilities (such as directors), are more likely to owe fiduciary obligations to an employer because of the higher level of commitment that is generally required of such employees. This may be contrasted with the position of other employees who may owe fewer duties to their employers.

Previously it has been unclear whether employees owing fiduciary obligations have a general duty to disclose misconduct. However Hodgson v Amcor has reinforced the view that employees are not subject to a positive duty to disclose their own misconduct.

Employees' own misconduct – distinction between past and prospective wrongdoing

In Hodgson v Amcor, Justice Vickery drew the following distinction between the failure to disclose past wrongdoing and the failure to disclose prospective wrongdoing:

"Failure to disclose past wrongdoing, may be distinguished from the position with regard to prospective wrongdoing, and the requirement to disclose a conflict of interest if the employee falls in to that position, in order to protect the employer from future harm."

The practical application of this comment would be that:

  • where an employee has engaged in wrongdoing in the past, they remain under no obligation to disclose such misconduct; but
  • where an employee is engaged in "prospective wrongdoing", such as a conflict of interest that has arisen, they may be required to disclose that wrongdoing in order to protect the employer from future harm.

It is not entirely clear what is meant by "prospective wrongdoing", however it would seem to at least include a duty to avoid conflicts of interest, and also could include any misconduct which may cause an employer harm in the future, whether that be financial, reputational or otherwise.

Employers are likely to experience practical difficulties in identifying when this obligation is owed or has been breached, as employers must first become aware of the fact that misconduct has been engaged in.

Reporting misconduct of fellow employees

In relation to an employee's obligation to report misconduct of other employees, Justice Vickery observed that:

"there is no general duty imposed on employees to report misconduct of fellow employees, except in certain circumstances when this is required under a contract of employment, either expressly or impliedly. The exception may arise by implication from the position occupied by the employee in the employer's organisation. A person in a managerial position, for example, cannot in the usual case stand by and allow a fellow employee to help themselves to the company's assets and do nothing about it, without breaching the duty owed to the mutual employer." [emphasis added]

A practical (perhaps unintended) consequence of this would be that where an employee becomes aware of another employee's misconduct (ie. breaching their contract of employment, stealing from the employer etc), neither the employee who commits the misconduct, nor the employee who becomes aware of the misconduct, would be obliged to inform their employer unless the employer's contracts of employment or binding policies required this.

This appears to be inconsistent with the implied duty of fidelity and loyalty, which requires employees to serve their employer faithfully. Justice Vickery did not reconcile these issues.

How to ensure employees report misconduct

If Justice Vickery's judgment on this issue is applied in the future, there are measures that employers can take to ensure that they are protected against adverse consequences that may arise from their employees not disclosing misconduct.

The inclusion of an express obligation in an employment contract for employees to disclose personal misconduct and the misconduct of others would overcome this issue. Similarly, a binding policy requirement would have a similar effect.

What action should employers take?

Employers should review their employment contracts and policies in light of this decision to ensure that any obligation requiring employees to disclose misconduct engaged in by themselves or others is expressly identified.

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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 bulletin. Persons listed may not be admitted in all states and territories.

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