If employers were to any extent lulled into post Work Choices complacency when it comes to terminating the employment of senior employees and executives, the decision in Goldman Sachs JB Were Services Pty Limited v Nikolich (2007) FCAFC 120 is a timely reminder that common law breach of contract claims are on the increase and may provide a lucrative avenue of redress for disgruntled executives with nowhere else to go.
The Work Choices amendments to the Workplace Relations Act 1996 (Cth.) (“WRA”) largely removed access to the New South Wales unfair contracts jurisdiction and further restricted access to the unfair dismissal provisions in the WRA. The decision in Goldman Sachs JB Were Services Pty Limited v Nikolich (2007) FCAFC 120 demonstrates a predicted response to those amendments – the increased use by senior employees of common law breach of contract claims and a corresponding development in this area of the law.
The decision of the Full Court on 7 August 2007 upheld the earlier ruling of Justice Wilcox in Nikolich v Goldman Sachs JBWere Service Pty Limited (2006) FCA 784 in which Mr Nikolich was awarded damages of $515,869 for psychiatric injury resulting from a breach of his employment contract. The breach arose because the employer failed to comply with its own HR Policy and the Court found in favour of Mr Nikolich’s claim that the HR Policy formed part of his contract of employment.
The facts
Mr Nikolich commenced employment with Goldman Sachs as an Investment Advisor in May 2000. Together with the Letter of Offer for the position, he was provided with a number of Goldman Sach’s documents including its HR Policy entitled “Working With Us” (“WWU”) which he was expected to read. He signed and returned the Letter of Offer but was not required to sign the WWU however, the Letter of Offer provided that Goldman Sachs would, from time to time, issue “office memoranda and instructions” with which it would expect Mr Nikolich to comply.
The WWU contained a “code of conduct” chapter concerning harassment and setting out behavioural prescriptions with regard to treating people with respect and courtesy and without aggression and discrimination. It claimed that Goldman Sachs was committed to providing a safe and healthy work environment. Of particular note for the claim made by Mr Nikolich was the Grievance Procedure which instructed employees to contact the Group Manager, Human Resources or Branch Manager with any grievance or complaint and advised that Goldman Sachs was committed to ensuring that anyone with a “genuine” complaint would be able to discuss it confidentially, and be supported and not penalised in any way by the firm.
In 2003, Mr Nikolich lodged a formal complaint against his Branch Manager, Mr Sutherland, when a dispute arose over Mr Sutherland’s reallocation of clients of another Investment Advisor following his departure from Goldman Sachs. The reallocation was not in accordance with a prior agreement (“the DKN Partnership Agreement”) approved by Mr Sutherland and favoured Mr Sutherland at Mr Nikolich’s expense. When Mr Nikolich challenged the decision, Mr Sutherland allegedly told Mr Nikolich that if he told management, he would “get nothing”. Mr Sutherland allegedly became hostile, aggressive and intimidating.
Subsequently, Mr Nikolich began to suffer from stress and took the matter to Mr Sutherland’s superior Mr Heath and in July 2003, lodged a formal complaint with Goldman Sach’s HR section. The Sydney HR Manager failed to fully investigate the claim and did not respond until 1 December 2003 when she advised Mr Nikolich that the complaints were not substantiated.
Mr Nikolich was absent from work with severe stress and depression from December 2003 to early December 2004. He had informed senior management that he was suffering from stress and could not return to work in March 2004 but various attempts by managers to resolve his complaint in 2004 were unsuccessful. Medical evidence supported his claim that he suffered from psychiatric illness as a direct consequence of his treatment at work. Goldman Sachs wrote to Mr Nikolich terminating his employment, effective 6 December 2004.
The proceedings at first instance
Mr Nikolich commenced proceedings in the Federal Court alleging:
Unlawful termination under the WRA
Mr Nikolich alleged that Goldman Sachs had unlawfully terminated his employment because of a temporary absence from work due to illness. Justice Wilcox dismissed the claim accepting Goldman Sachs’ argument that the absence was greater than 3 months at the date of termination and therefore not temporary.
Mr Nikolich also claimed that Goldman Sachs had unlawfully terminated his employment because of his psychiatric condition, which falls within the definition of “mental disability” – a prohibited ground of termination under the WRA. Goldman Sachs successfully relied upon the defence that it is not unlawful to terminate a person’s employment on the basis of that person’s mental disability if that mental disability prevented the person from performing the inherent requirements of the position. As Mr Nikolich’s condition prevented his from attending work and performing his duties, Goldman Sachs had not breached the relevant WRA provision.
False and misleading conduct under the Trade Practices Act
Mr Nikolich alleged that Goldman Sachs had engaged in misleading and deceptive conduct by failing to abide by the approved DKN Partnership Agreement. However, Justice Wilcox dismissed the claim on the basis that Mr Nikolich could not establish on the evidence that he had suffered any compensible loss flowing from that alleged conduct.
Breach of contract
Mr Nikolich alleged that both the DKN Partnership Agreement and the WWU formed part of his employment contract so that Goldman Sachs’ failure to comply with their respective terms amounted to breaches of his employment contract.
Justice Wilcox rejected the former claim in the absence of evidence supporting the view that Goldman Sachs’ had agreed to vary Mr Nikolich’s contract to include the DKN Partnership Agreement. However, His Honour accepted the argument that the WWU formed part of Mr Nikolich’s contract finding that Mr Nikolich considered the WWU to be binding on him as one of the “office memoranda and instructions”. Many other employees called as witnesses in the case also considered themselves bound by the WWU.
Goldman Sachs argued that the WWU was “a manifestation of [an employer’s] right to issue lawful and reasonable directions to its employees, and the corresponding obligation of employees to comply with such directions.” In other words, while the WWU bound employees it did not bind the employer.
Justice Wilcox found that the WWU went further than Goldman Sachs alleged in that it made promises and granted specific employee entitlements which one would expect to find in an employment contract and in respect of which employees should have enforceable rights. The WWU was therefore binding on employees and on Goldman Sachs.
On review of the evidence, Justice Wilcox found that the company’s handling of Mr Nikolich’s complaint was “extremely inept” with Mr Nikolich being treated as the problem without any genuine attempt being made to resolve the grievance. HR and Senior Management had exacerbated Mr Nikolich’s situation by confining their investigation into the matter to discussions with Mr Sutherland, the alleged cause of the harassment complaint. Specifically, Goldman Sachs had breached the provisions of the WWU that contained express prescriptions on behavioural standards namely, provisions regarding harassment, the Grievance Procedure and the health and safety provisions by leaving Mr Nikolich “festering in an environment of harassment and intimidation for an extremely lengthy period of time”. His Honour found that Mr Nikolich’s disability was the result of Goldman Sachs’ failure to abide by its own HR policy.
Mr Nikolich was awarded damages of $305,869 for lost income, $130,000 for loss of future income and $80,000 in general damages.
The appeal
On appeal, Goldman Sachs argued that Justice Wilcox had erred in finding that the WWU document formed part of Mr Nikolich’s employment contract, or, in the alternative, if the WWU formed part of the contract, there had been no breach of its terms by Goldman Sachs, or, that if Goldman Sachs had breached any terms, no loss flowed from those breaches.
The Court held that the test to determine whether any terms of the WWU formed part of Mr Nikolich’s employment contract was an objective one, namely: What would the language in the WWU have led a reasonable person in the position of Mr Nikolich to believe? Applying that question, the Court held:
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The health and safety commitments in the WWU went to the core of what Goldman Sachs was expressing about its culture through the whole WWU document. They were more than aspirational and should be seen as contractually binding on Goldman Sachs;
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The harassment clause and the grievance procedures in the WWU were plainly not promissory and therefore not contractual in nature but merely descriptive and aspirational and advisory respectively. Justice Wilcox had erred in finding that these two sections of the WWU were incorporated in Mr Nikolich’s contract of employment;
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Goldman Sachs’s delay in taking appropriate steps to alleviate Mr Nikolich’s unhealthy work environment constituted a breach of the health and safety provision in the WWU;
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Mr Nikolich’s psychiatric injury was caused by the breach of contract. Referring to established English and Australian authority, the Court confirmed that:
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Damages may be awarded for psychiatric injury caused by breach of an employment contract where, as in this case, it is a contractual obligation of the employer to provide “peace of mind”;
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Damages may be awarded against an employer where psychiatric injury results from its failure to respond appropriately to bullying and harassment.
Lessons from the case
When an employee sues at common law for a breach of contract, the damages are traditionally limited to damages for economic loss during a period of reasonable notice or the notice of termination period specified in the contract. This is because the breach usually occurs just prior to or coincides with termination of employment. In this case, the breach did not occur on termination of employment. It occurred during employment and led to a psychiatric illness that prevented Mr Nikolich from working. Mr Nikolich was awarded damages for past loss of income of almost 2 years pay as well as $130,000 for projected loss of future income.
Damages for a breach of contract claim cannot usually include any amount for humiliation or personal distress. However, damages for personal distress may be awarded in breach of employment contract cases where the contract contains a commitment by the employer to provide peace of mind or prevent distress, that obligation is breached and the employee suffers personal distress caused by the breach, which results in some significant disturbance to the employees’ health.
As a consequence, executive and senior level employees can receive damages awards considerably higher than they would receive for a payment of reasonable notice or under the statutory unfair dismissal laws.
Employers should revisit the wording in their employment contracts to assess whether policies are incorporated as terms that may be binding on both the employer and employees. They should also review existing policies, particularly those containing behavioural prescriptions and commitments to prevent harassment and discrimination or to ensure healthy and safe working environments. The line between what is aspirational and what is promissory is not always easy to draw so that incorporating policies poses a real risk for employers. The solution is for contracts to provide that while employees are required to comply with the employer’s policies as amended from time to time, they do not form part of the contract of employment.
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