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Verbal statements did not create a legally binding contract of employment

The Australian Industrial Relations Commission has recently held that oral exchanges between an employee and employer that a fixed term contract would be extended to a permanent position did not constitute a binding contract.

Implications for employers

Employers should exercise caution regarding statements and representations made in the recruitment process and during the course of an employee’s employment. In some circumstances, verbal statements will have binding legal force. The effect of such statements and representations made by employers is likely to be challenged more frequently in this period of economic uncertainty.

Practical steps an employer can implement to avoid this consequence include:

  • instituting a policy and practice that all terms of an employee’s employment must be committed to writing, and
  • inserting an express provision in an employee’s contract of employment that the terms of the contract constitute the entire agreement between the parties and the employee has not relied upon any other representations or discussions.

Background

Ms McDermid was employed with Samsung Electronics Australia Pty Ltd (Samsung) on a three month time-fixed contract. Before her employment commenced, Ms McDermid told Samsung she was only interested in the position if the role was to be made permanent. Ms McDermid alleged she was advised by the Human Resources Manager at Samsung that while she was to be initially employed on a three month basis, once her “foot was in the door” she would be made a permanent employee as there was a business need for someone in her position.

Ms McDermid alleged that throughout the course of her employment, she was given further verbal assurances that her position was to become permanent and that she would be informed of this as soon as the final details relating to her role had been confirmed by management.

Toward the expiry of Ms McDermid’s contract, she received a written offer to take up a further three month contract. This contract was drafted in identical terms to her first contract and did not contain any of the verbal assurances that had been given to her in relation to the permanency of her position. Ms McDermid agreed to and signed the second contract without amendment.

Two weeks before Ms McDermid’s second contract was to expire, Ms McDermid was told that Samsung had decided it would not make her position permanent and that her employment would cease on the expiry of her contract.

Ms McDermid commenced proceedings in the Commission alleging, among other things, that the termination of her employment was harsh, unjust and unreasonable.

Decision

The Commission accepted Ms McDermid’s evidence that she only agreed to take up the position on the assurances of Samsung that she would have a permanent position after her fixed term contract came to an end. However, he found the verbal assurances given to Ms McDermid were not sufficient to constitute a legally enforceable contract between Samsung and Ms McDermid.

The Commission reiterated the well-established principle that under the common law it is not necessary for a legally binding contract to be in writing. That is, a contract may be made orally. However, the central question to consider in determining whether an oral statement can form a contract, or be incorporated into a contract, is one of intention. In order for a verbal statement to become a term of a contract there must be evidence that the statement was warranted or guaranteed by the person who made it and could not be described as a mere representation. This is a matter which is to be judged objectively.

In the factual matrix of the case, the Commission was not convinced such an intention existed or had been conveyed to exist on behalf of Samsung. In forming this view, the Commission placed significant emphasis on the policy and practice within Samsung to only make decisions in relation to the length of an employee’s employment in writing. This had not occurred in relation to the alleged promise of permanency of the position.

In addition, both of Ms McDermid’s two time-limited contracts stated that the written agreement constituted the entire agreement between the parties, providing that the contract contained:

“all of the terms of your employment contract with the Company. If there are any other matters that you have relied on in our discussions to date or any other matters you wish to discuss please let the Company know before you sign the attached copy of this letter so that we can consider them and, if necessary, include them in the terms set out in this letter to ensure that it is complete when you sign it”.

The Commission held the clause showed the mutual intention of the parties to commit all terms of employment to writing.

Alternatively, the Commission found that even if Samsung’s assurances were legally enforceable, Ms McDermid’s permanent employment by Samsung was conditional on it being confirmed in writing. Again, this had not occurred and in fact Ms McDermid had been told on a number of occasions that approval for and the details of an ongoing contract of employment were “being worked on”. As approval from Samsung to make Ms McDermid’s employment permanent was never given, an unconditional contract was not formed.

The Commission was also of the view the Human Resource Manager’s statements were too vague to imply that Ms McDermid’s employment was not subject to the usual formalities and standard exchange of an offer and acceptance in written form as had been the case in respect of Ms McDermid’s two previous contracts.

McDermid v Samsung Electronics Australia Pty Ltd [2009] AIRC 171

Who does this affect?
All Australian employers

What do you need to do?
Ensure you are updated on recent developments

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