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“Ordinary pay” and an extraordinary payout

“Ordinary pay” and an extraordinary payout

Published on September 29, 2014 by Janine Smith and Peter PunchJanine Smith and Peter Punch

In a recent decision of Acting Justice Nicholas of the Supreme Court of New South Wales, a long-serving employee was awarded damages of more than $1.1 million dollars following the termination of her employment.

Such an award serves as a timely reminder to employers of the potential financial risks associated with dismissing senior management employees in circumstances of dispute or contention.

In addition, the decision provides important guidance for employers (and industrial lawyers) regarding the calculation of an employee’s long service leave entitlements and has clarified the meaning of the concept of “ordinary pay” in that context.

The employee had been employed by the Australian subsidiary of an international shipping and logistics company for more thanr 24 years. For much of her employment, she occupied the role of financial controller for the parent company’s Asia-Pacific branch.

Although the employee occupied a senior managerial role, her base annual salary had remained at $70,000 for more than 10 years. However, due to a generous monthly bonus scheme, which applied to her as well as other senior managers, the employee earned an average annual income of $750,000 (inclusive of bonuses and other allowances) during the last five years of her employment.

The terms and conditions of the employee’s employment were governed by a series of letters of appointment notifying her of increases to her overall remuneration package. The last of these letters was provided to her on 5 August 2002. This letter required the employee to provide the employer with one months notice of resignation, but was otherwise silent as to the amount of notice to be provided by the employer in the event that it wished to terminate her employment.

New contract with reduced terms
In 2011, the employer attempted to re-negotiate the employee’s terms and conditions and subsequently provided the employee with a new employment contract which:

  • converted the fixed monthly bonus scheme into a discretionary entitlement
  • halved the maximum value of the bonus scheme
  • permitted the employer to provide the long serving employee with one months notice of termination.

The employee informed the employer that she would not accept the financially disadvantageous terms of the new employment contract. In response, the employer terminated the employee’s employment, instead of attempting to engage in any further negotiation.

The employee received salary in lieu of five weeks notice of termination, along with her accrued annual leave and long service leave entitlements. Both the notice payment and the employee’s accrued leave benefits were paid out without including the bonus component of the employee’s salary in the calculations.

Employee alleges LSL should have been paid at rate including bonuses
In her claim against the employer, the employee alleged that the employer breached her employment contract by failing to provide her with reasonable notice of termination (due to the absence of any express term setting out the period of notice required to be given by the employer).

The employee also alleged that the employer failed to calculate and pay her accrued long service leave by reference to her “ordinary pay” which she asserted ought to have been calculated on the basis of her total income inclusive of bonus.

Employer cross-claims, alleging misconduct, breach of contract
The employer had cross claimed against the employee, alleging misconduct due to a conflict of interest relating to her brother’s cleaning business, which had contracted to the employer for many years. It contended the employee was not entitled to notice due to her alleged serious and wilful misconduct. In the alternative, the employer asserted that reasonable notice in the circumstances would be no greater than 4–5 months.

The employer’s allegation of misconduct was strenuously denied by the employee.

Claim of reasonable notice
In alleging that the employer breached the employment contract when terminating her employment, the employee relied upon the well-known authorities of Quinn v Jack Chia (Australia) Limited (1992) 1 VR 567 and Rankin v Marine Power International Pty Ltd (2001) 107 IR 117, which establish that a term of reasonable notice is to be implied into a contract of employment in the absence of an express term of notice.

Citing the principles set out in these decisions, the employee asserted that factors such as her age, seniority, considerable length of service, the uniqueness of her position and limited future employment prospects meant that a notice period of 12 months was reasonable in the circumstances.

The employee further asserted that although a term of reasonable notice may be implied into a contract of employment, the law does not imply a term permitting an employer to pay an employee in lieu of providing reasonable notice of termination.

On this basis, the employee claimed damages for the amounts she would have received in the event that she had been permitted to work out a 12-month period of notice (which included her monthly bonuses, allowances and superannuation contributions over that period).

No finding of misconduct; notice of 10 months was reasonable
In his judgment, Nicholas AJ made the finding that the employer’s misconduct allegations were without foundation because the cleaning contract had been known to, and accepted by, the employer and its management for several years. On this basis, the judge found that the employee was entitled to reasonable notice of termination of employment.

In determining the amount of reasonable notice, the judge acknowledged that he was required to consider all the factors relevant to the employee and the employment relationship both at the time, and as a result of, the termination of employment.

The judge noted that the employee’s age, the seniority of her position, and length of service suggested a significant period of notice was reasonable.

Further, the judge also made note of the abrupt and hostile nature of the employee’s termination, which he believed prejudiced the employee’s future employment prospects.

The judge found that a notice period of 10 months was reasonable in the circumstances, and ordered the employer to pay the employee damages equivalent to 10 months notice based on the employee’s average annual income of $750,000. The employer was also ordered to make superannuation contributions on this period of notice.

Long service leave on “ordinary pay”
The employee also alleged that on termination she was entitled to long service leave calculated on her “ordinary pay” including in that concept her base salary, allowances and monthly bonuses.

The employer resisted this claim by relying on s3(2C) of the Long Service Leave Act 1955 (NSW). This section provides that an employee’s “ordinary pay” upon which long service leave entitlements are calculated is inclusive of any bonus payments, unless the employee’s ordinary pay exclusive of that bonus exceeds the prescribed amount of $144,000.

The employer contended that the compulsory superannuation contributions made to the employee’s superannuation fund in accordance with the requirements of the Superannuation Guarantee system formed part of the employee’s ordinary pay, and that when superannuation contributions were added to the employee’s base salary and allowances, the total of these amounts exceeded the statutory limit of $144,000.

The employer therefore submitted that the employee’s bonuses could not form part of the “ordinary pay” upon which the employee’s long service leave entitlements were to be calculated.

In support of this argument, the employer relied on a number of authorities including Jongwaard v Dall (1992) SAIRC 11 and May v Lilyvale Hotel Pty Limited (1995) 68 IR 112, which collectively defined the terms “remuneration” and “ordinary pay” as being inclusive of superannuation.

In response, the employee relied on the decision of Reynolds v Southcorp Wines Pty Limited (2002) 122 FCR 301 in which it was held that superannuation contributions do not constitute “ordinary pay” on the basis that such contributions are paid to a fund rather than the employee, and cannot be accessed and enjoyed by the employee except in the circumstances permitted by the fund.

The employee also submitted that if long service leave included superannuation (which was not admitted), any employee who utilised long service leave would necessarily receive superannuation contributions on leave already inclusive of superannuation contributions, which would be a nonsensical interpretation and application of superannuation legislation.

Ordinary pay did not include superannuation
In finding in favour of the employee, the judge interpreted the Long Service Leave Act 1955 (NSW) in accordance with ordinary principles of statutory interpretation. His Honour observed that the Act defined in detail the various components of ordinary pay, and that these components did not include references to superannuation.

The judge also noted that the authorities relied upon by the employer were helpful, but not determinative, because each authority related to a specific piece of legislation that did not include the NSW Act presently under consideration.

As a consequence, of the judge’s findings, the employer was directed to pay the employee a total amount of $1,164 million, plus interest and costs.

Lessons to be learnt
The judgment sets out clearly the various factors that a court will take into account when determining an appropriate period of reasonable notice in the absence of an express term.

In this particular case, the employee’s seniority, length of service, and limited employment prospects were all factors that influenced the award of damages for reasonable notice.

These factors can also be highly powerful in favour of senior executives in circumstances of termination of employment. The decision confirms the continued relevance of the principles contained in Quinn v Jack Chia (Australia) Ltd and Rankin v Marine Power International Pty Ltd in modern employment, while providing an extensive summary of both.

Total remuneration packages with superannuation specified separately
But perhaps more significantly, the decision confirms that superannuation contributions paid by an employer does not form part of an employee’s “ordinary pay” for the purposes of the Long Service Leave Act 1955.

This decision will be of particular relevance to employees subject to a total remuneration package that includes an express superannuation component. In such a case, these employees will only be entitled to be paid out their accrued long service leave entitlements on the value of their remuneration package exclusive of the superannuation component of that package.

Good faith contract negotiations are important
Finally, the decision illustrates the potential costs to an employer of attempts to vary its employees’ employment contracts in a clearly unreasonable way.

Employers should always endeavour to negotiate in good faith when seeking to amend their employees’ contract terms, particularly when senior employees are being asked to relinquish favourable employment terms and benefits.

In circumstances where senior employees are not subject to express notice terms, the employer should consider the employee’s age, seniority, length of service, and likely prospects of future employment (including from the manner of termination), when considering its obligations to give notice or termination or provide payment in lieu of such notice.

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