Australia: New South Wales Supreme Court finds senior employee entitled to 10 months reasonable notice of termination

In Susanna Ma v Expeditors International Pty Ltd [2014] NSWSC 859 (30 June 2014), the New South Wales Supreme Court found that the reasonable notice period to terminate the employment of a long serving senior employee was 10 months.

The Supreme Court also found that payment of the employee's accrued long service leave should have been based on salary that included incentive payments which formed part of the employee's remuneration package.

In this In Brief, we examine the decision which again highlights the importance for employers of including an express provision for termination of employment in all contracts of employment.

BACKGROUND

Ms Ma commenced employment with Samev Pty Ltd (Samev) on 5 January 1987. After Samev entered into a joint venture with Expeditors Inc, Ms Ma's employment was transferred to Expeditors International Pty Ltd (Expeditors) with effect from 1 July 1988. She was told she would have the same salary and arrangements she had with Samev.

In late 1988, Ms Ma was appointed by Expeditors to the position of Regional Financial Controller, South Pacific Region. Ms Ma remained in this position until her employment was terminated by Expeditors on 6 June 2011. Expeditors terminated Ms Ma's employment following a dispute over management's proposal to vary her employment conditions including a 50% reduction in her monthly bonus.

The terms of the relevant contract of employment were contained in a letter dated 26 August 2002. This included salary of $70,000 per annum and an entitlement to a bonus. This was amended to include allowances in 2003. In terms of the amount of remuneration paid to Ms Ma, the bonus represented the vast majority of the total remuneration. There was no express termination provision in the contract.

Expeditors terminated Ms Ma's employment by paying 5 weeks' base salary in lieu of notice. Ms Ma claimed that Expeditors was in breach of an implied term of the employment contract by failing to provide reasonable notice of termination of her employment.

Ms Ma claimed that the reasonable notice period was 12 months and therefore she should have been paid an amount of $757,700. This represented her base salary of $70,000 per annum plus bonuses.

WHAT WAS A REASONABLE PERIOD OF NOTICE?

Nicholas AJ of the NSW Supreme Court confirmed that absent evidence to the contrary, a term of reasonable notice is to be implied into a contract of employment. His Honour relied upon well established principles for determining reasonable notice. The length of notice that is reasonable is a question of fact. Therefore it will differ from case to case. It is to be determined after the consideration of all relevant circumstances, mindful that the primary purpose of notice is to enable the employee to obtain new employment of a similar nature.

Applying the principles regarding relevant matters of fact to take into account when determining what is reasonable, Nicholas AJ found that the appropriate period of notice for Ms Ma was 10 months, taking into account the following factors:

• At the time of termination, Ms Ma was 49 years of age and had been a loyal employee of Expeditors for over 24 years.
• An accounting team of about 14 people had reported to Ms Ma.
• Ms Ma held a position of significant seniority and trust for many years as regional controller for the South Pacific region, reporting directly to Expeditors' managing director. This managing director regarded her as trustworthy and honest, and observed that she worked with high attention to detail.
• Ms Ma received a substantial remuneration package which was indicative of the high degree of responsibility she had and the dedication in discharging it.

MS MA'S FUTURE JOB PROSPECTS: FAILURE TO MITIGATE OR INCREASING THE NOTICE?

Ms Ma argued that the future prospects for her employment at a similar level were poor and that this was a factor to be taken into account when determining the period of reasonable notice. Ms Ma gave evidence of numerous attempts to find similar work to that which she performed for Expeditors. Expeditors disputed that Ms Ma had actively looked for other work. Expeditors argued she had therefore failed to mitigate her loss and that this should reduce the amount payable to her.

Nicholas AJ found that the evidence unequivocally demonstrated the real difficulty for Ms Ma in finding suitable employment with similar responsibility or remuneration. This was a matter to be given significant weight when determining the reasonable notice period. Hence Nicholas AJ rejected Expeditors' argument that Ms Ma failed to mitigate her loss, stating the evidence did not support that argument.

CALCULATION OF LONG SERVICE LEAVE IN NSW

Ms Ma and Expeditors were also in dispute as to the calculation of her long service leave entitlement. Ms Ma argued that the calculation should be based on her base salary plus bonus whereas Expeditors argued it should be calculated on her base salary alone. Given the bonus represented the majority of Ms Ma's remuneration, the discrepancy (and therefore Ms Ma's claim) between the amounts Ms Ma was actually paid and which she argued she should have been paid was $265,373.44.

Under the Long Service Leave Act 1995 (NSW) (LSL Act), the ordinary pay of a worker for the purposes of calculating long service leave entitlements is not to include amounts paid under any bonus or incentive scheme, if the worker's ordinary pay (excluding bonuses, etc) exceeds the amount of $144,000. The threshold issue to be determined was therefore whether Ms Ma's "ordinary pay" was less than $144,000.

Ms Ma argued that her ordinary pay was her base pay and allowances. As that amount fell below the amount of $144,000, her substantial bonuses should have been included in the calculation of her long service leave payment. Expeditors claimed that Ms Ma's calculation failed to take into account any amounts referable to superannuation. The inclusion of superannuation tipped Ms Ma's annual ordinary pay over the $144,000 threshold.

Nicholas AJ found that Ms Ma's employment contract did not provide for an "ordinary time rate of pay" but included a number of components and therefore, Ms Ma's ordinary pay was to be calculated by reference to her "average weekly wage" in accordance with the provisions of the LSL Act. Ms Ma's average weekly wage included amounts "received" by Ms Ma under the provisions of the LSL Act. His Honour found that because the superannuation contributions could not be accessed by Ms Ma, they were not "received" and therefore did not form part of the calculation of her ordinary pay.

As a result, the amount of Ms Ma's ordinary pay was below the amount of $144,000. This meant that Ms Ma's significant bonus was not excluded from the calculation of the long service leave entitlement, increasing the long service leave payment by the amount she claimed, $265,373.44.

CROSS-CLAIM BY EXPEDITORS

Expeditors cross-claimed against Ms Ma arguing that she was guilty of misconduct in failing to disclose an actual or potential conflict of interest.

This placed Ms Ma in breach of her contractual, fiduciary and statutory duties, and would have justified summary termination of her employment, in which case she would not be entitled to the termination payments. Expeditors' Code of Business Conduct required declarations of conflicts of interest; and from January 2010, employees were required to complete Quarterly Certifications in relation to conflicts of interest and related party transactions.

His Honour did not need to determine whether the alleged duties existed because he found there was no conflict. His Honour considered the principles relevant to determining whether a conflict exists:

• A conflict between interest and duty can arise where the personal interest of the fiduciary is pecuniary or non-pecuniary, or direct or indirect.
• A non-pecuniary interest includes an interest by way of association, whether by way of kinship or business connection.
• Not all interests are within the conflict rule, and the interest must give rise to a conflict or a real or substantial possibility of a conflict.
• The existence of a conflict between interest and duty is not dependent on the fiduciary acting with the intention (purpose or motive) of advancing its personal interests.

Nicholas AJ found that no actual or perceived conflict of interest was established. His Honour found that there was uncertainty regarding the extent to which Ms Ma's brother had an interest in the cleaning business. His Honour also found that Ms Ma was not involved in the engagement of the cleaning company to perform services for Expeditors and nor did she supervise contracts with the cleaning company. In dismissing Expeditor's claim, Nicholas AJ held "it is reasonable to conclude that, but for the very fact of kinship, there was nothing to suggest (Ms Ma) had a personal interest, direct or indirect, in authorising the invoices." Expeditors' cross-claim was therefore dismissed.

KEY POINTS FOR EMPLOYERS:

• Check your employment contracts and ensure they contain express notice of termination provisions. There is potential for senior employees with high-level responsibilities to be awarded substantial payments reflecting a failure to provide them with reasonable notice of termination. This is especially the case where the employee has been employed for a substantial period of time and can demonstrate they have performed well and diligently. Although in this case the obligation to pay reasonable notice arose because there was no express right of termination, the obligation will also arise when the contract of employment no longer represents the employee's employment. For example, if the employee has been promoted but the contract has not been updated to reflect the promotion.
• In another recent decision – District Council of Barunga West v Hand [2014] SASCFC 90 (6 August 2014) – an executive employee succeeded in establishing a claim for 12 months' reasonable notice. The Full Court of the South Australian Supreme Court rejected the employer's argument that the employee was only entitled to five weeks' notice as per the relevant state award.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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