Why contracts are important when you second employees

Assume an employer and an employee are bound by an employment agreement with a fixed term and the employment continues beyond the fixed term for another 2 years. The employer and employee subsequently enter into a contract seconding the employee to another company within the group for a substantial term. The second contract imposes additional obligations, but preserves the employee's accrued entitlements to long service leave, superannuation and so on.

Does the second contract operate as a variation or a termination of the original contract? And who then becomes the employer?

One may intuitively answer that the original contract has been terminated and replaced and the new company becomes the employer. However, the Full Court of the Federal Court of Australia held in Cohen v iSOFT Group Pty Limited¹ that such a contract was merely varied and that therefore the employee continued to be employed by his original employer.

THE EMPLOYMENT ARRANGEMENTS

IBA Healthcare

Dr Cohen commenced work in November 1988 as the technical director and later the managing director of SW International Systems Pty Ltd ("SW"). In 1999 SW merged with another company forming the entity IBA Health Limited ("IBAH").

Dr Cohen was employed as IBAH's chief technology officer with the employment agreement being formalised in 2000 ("the 2000 Agreement"). The 2000 Agreement provided for long service and annual leave entitlements and was terminable only upon six months' notice.

Bangalore secondment

In 2005 Dr Cohen was seconded to work in Bangalore. He entered into an agreement ("the Bangalore Secondment Agreement") with IBA Health (Asia) Pty Limited ("IBAH Asia"), a company registered in Singapore and part of the same international group of companies as IBAH.

The Bangalore Secondment Agreement listed IBAH Asia as Dr Cohan's employer but also stated that the terms of Dr Cohen's employment would remain the same as those under the 2000 Agreement, other than new provision for remuneration and benefits.

Chennai secondment

In June 2008 Dr Cohen was seconded to Chennai. IBAH Asia gave Dr Cohen a letter headed "Expatriate Assignment" confirming the new appointment for a 24 month period ("the Chennai Secondment Agreement"). The Chennai Secondment Agreement stated that Dr Cohen's existing expatriate assignment would be extended for a period of 24 months and set out the details of the new assignment, including new terms relating to annual, personal and sick leave. Moreover, the Chennai Secondment Agreement stated that his employment was deemed to have commenced on "the first day" he joined the company and went on to clarify that his continuous service was therefore "effective from November 1988".

In September 2011, Dr Cohen's position was made redundant. By that time, IBAH had changed its name to iSoft Group Pty Ltd ("iSoft Group") and IBAH Asia to iSoft Health (Asia) Pty Ltd ("iSoft Asia").

PROCEEDINGS AGAINST ISOFT GROUP

Dr Cohen commenced proceedings against iSoft Group for breach of contract and contraventions of the Fair Work Act 2009 (Cth) ("FWA") and the Long Service Leave Act 1955 (NSW).

iSoft Group denied that it was Dr Cohen's employer, arguing that consequently Dr Cohen would have to commence proceedings against iSoft Asia overseas in order to pursue his claims.

Dr Cohen maintained that the chain had not been broken between the 2000 Agreement and his responsibilities and entitlements immediately prior to the termination of his employment in September 2011.

At first instance the Court rejected all of Dr Cohen's claims on the basis that iSoft Group had not been his employer at that time. However, the Full Court of the Federal Court of Australia allowed an Appeal awarding Dr Cohen $585,208.57, consisting of:

1. Payment in lieu of six months' notice on the redundancy of Dr Cohen's position ($228,062.50);
2. Long service leave ($167,248.75);
3. Annual leave ($114,469.83); and
4. Outstanding balance of salary for the month of September 2011 ($7,049.27); plus
5. Interest ($68,378.22).

REASONS FOR THE DECISION

In making its decision the Court drew upon basic principles of contract law, stating that the construction of such a document or contract must be determined by what a reasonable person in the position of the parties would have understood its terms to mean. That process involves consideration not only of the text of documents, but also of the surrounding circumstances known to all the parties, as well as the purpose and object of the transaction.

The relevant circumstances the Court took into consideration were that:

1. while the term of the 2000 Agreement expired on 15 February 2003, it could not be said that, as a consequence, Dr Cohen's employment by iSoft Group came to an end;
2. the Bangalore Secondment Agreement concluded with a confirmation that all the other terms of the 2000 Agreement, that were left unamended or not supplemented by its proceeding terms, "will continue in full force and effect";
3. this amended and supplemented agreement formed the mutually known background for negotiation and entry into the Chennai Secondment Agreement which also used concepts of continuation.
4. the signatory to the Chennai Secondment Agreement was the iSoft Group HR Director; and
5. the subject matter of the agreement was Dr Cohen's secondment which by its ordinary meaning within the context of the Chennai Secondment Agreement described Dr Cohen as being asked to work in Chennai for two years, partly under Indian law, while remaining in his continuing employment.

LESSONS FOR EMPLOYERS

Whether the effect of a second contract is to bring an end to the first contract and replace it with the second, or whether the effect is to leave the first contract standing, subject to the alteration will be determined by a number of varying factors. Employers seeking to enter into a further contract with an employee should take the following lessons away from Cohen v iSOFT Group:

1. the determining factor deciding whether an earlier contract might be rescinded altogether is the intention of the parties, as disclosed by the later agreement;
2. partial rescission is a variation, not the destruction, of the contractual relationship;
3. the earlier contract may be varied (but not rescinded) by way of:
4. 1. partial rescission with or without the substitution of new terms for those rescinded; and
   2. the addition of new terms with or without any partial rescission at all.

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.