Australia: The power of implied terms in contracts of employment

In brief

Many employers are surprised to learn that the express terms contained in written contracts of employment are not the only terms that regulate the employment relationship. Common law has long held that terms can be "implied" into an employment contract as a matter of law, fact or industry custom/practice. In other words, these are invisible common law duties and obligations binding on employers and employees.

Recently, two cases demonstrated the benefit of implied terms for employers in two previously contentious areas, suspension and gardening leave.

Ability to suspend employee implied into contract

In the first case, Avenia v Railway & Transport Health Fund Ltd [2017] FCA 859, an employer was lawfully able to suspend an employee while undertaking a workplace investigation, despite there being no express suspension clause in the written contract.

Justice Lee of the Federal Court of Australia held that at common law, an employer has a right to temporarily suspend an employee on full pay for as long as is necessary to undertake and conclude an investigation. This includes situations where the employer is reasonably seeking to determine issues, or find facts relevant to allegations or suspicions of employee misconduct.

A direction to suspend an employee on full pay will be reasonable in circumstances where it is taken to enquire into or investigate allegations of inappropriate behaviour when such behaviour could constitute a risk to the safety, health and welfare of its staff or the duty to provide a safe workplace.

Ability to place employee on gardening leave implied into contract

In the second case, Grace Worldwide (Australia) Pty Limited v Steve Alves [2017] NSWSC 1296, it was lawful to place a senior employee on three months' gardening leave when he announced his resignation to join a competitor, even though the employee alleged "repudiation", because no such clause was contained in the written employment contract.

The Court ruled in favour of the employer, finding the employer had an implied right to direct the employee to take a period of gardening leave because implying the term was "reasonable and equitable and necessary to give business efficacy to an employment contract so as to avoid contact between an employee and a competitor".

Take away tips about implied terms in contracts

Employers should seek advice about the circumstances where implied terms can be called to the rescue to support disciplinary or dismissal outcomes. In some cases, these invisible obligations can be more important than what is (or more likely, is not) contained in the written contract.

However, having said that, contemplating and including express provisions in written contracts will avoid disputes arising in the first place. Employment contracts should be reviewed to keep pace with common law developments to ensure rights and obligations are expressly recorded.

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.