Do as I say and not as I do? The status of HR policies

Romero v Farstad Shipping (Indian Pacific) Pty Ltd [2014] FCAFC 177

WHAT YOU NEED TO KNOW

• Human resources policies are a common tool used by Australian employers to manage workplace behaviour, including bullying, harassment and discrimination. Policies can be a useful way of reminding employees of their employer's expectations, and of setting behavioural and performance standards.
• A recent Full Federal Court case has confirmed that the expectation of compliance with policies can work both ways. In some circumstances, employers may also be bound by a policy and may even be exposed to damages orders if they breach their policies.
• An employer is at risk of damages orders if its policies are found to form part of the contract of employment, and so are contractually binding on the employer. If so, an employer must be careful to comply with its own policies, especially when it comes to investigating alleged discrimination, bullying or harassment.
• As in this recent case, irrespective of whether or not there has actually been unlawful discrimination, an employer may still face potentially significant damages orders for breaching its own binding policies, such as by:
• failing to separate a misconduct process from a performance process;
• failing to clearly manage an issue either formally or informally. "Half-measures" do not meet the requirements of any policy; or
• failing to follow the basic principles of procedural fairness when managing issues formally by way of an investigation.

WHAT YOU NEED TO DO

• Review your contracts and policies (especially policies underpinned by legislative obligations, such as discrimination, harassment, bullying, work health and safety) and consider whether your policies could have contractual force. If your organization does not want a policy to have contractual force, redraft the policy, noting the considerations in this Employment Alert, and our previous Employment Alert on this topic dated 2 August 2013. You may also need to consider whether to issue updated contracts at an appropriate time.
• If an employee makes a formal complaint, treat it as such and refer to your policy requirements. Ensure that you arrange for every allegation to be properly and impartially investigated.
• If an employee raises a grievance informally, decide whether to manage the matter formally (by treating it as a complaint and conducting an investigation) or informally (such as by referring the matter to mediation). Avoid "half-measures" such as escalating a complaint beyond informality but not properly investigating it.
• Separate the investigation of misconduct allegations from the management of performance issues. Treat a formal allegation seriously, and do not prejudge it by evaluating its likely success before it is investigated or by balancing it against performance issues raised against the complainant.

Has your organisation inadvertently incorporated HR policies into its contracts of employment? Could it be exposed to damage orders for not strictly complying with its policies?

In December 2014, the Full Federal Court handed down an important decision on the vexed question of whether an employer's human resources policies are contractually binding on the employer.

The decision in Romero v Farstad Shipping (Indian Pacific) Pty Ltd [2014] FCAFC 177 highlights the risks that employers can face arising from their own policies. Even though the alleged bullying and sex discrimination which gave rise to the dispute was found to be unsubstantiated, the employer faced damages orders for failing to properly conduct its investigation into the employee's grievance.

No discrimination but was the management of the complaint appropriate?

The applicant employee was a sailor. During one 12 week posting, tension developed between the employee and the Captain of the ship. This culminated in a series of heated exchanges on the bridge of the ship.

The employee asked to be returned to land. She then wrote to her managers about various things, including her concerns about how the Captain had treated her. The email did not ask for a formal investigation, and expressly left it open to the employer to decide what to do about the employee's concerns.

The employer treated the email as a formal complaint and started an investigation.

Unknown to the employee, at the same time as she raised concerns about the Captain, the Captain raised concerns about her performance, temperament and capacity. When the employer began investigating the employee's concerns, it also started to investigate her performance. The two investigations became mixed.

The employee made a complaint to the Australian Human Rights Commission, claiming that she had been bullied and discriminated against, contrary to the Sex Discrimination Act 1984 (Cth). She claimed that she had, by reason of her sex, been treated less favourably than a male would have been treated in similar circumstances. Neither the Commission, nor the primary judge, accepted the claim. The primary judge found that even if the conduct had occurred, what had happened was a "personality clash", and was not discrimination because of the employee's sex. The employee did not appeal this part of the decision.

Notwithstanding that the discrimination allegations were not made out, the employee appealed the primary judge's decision on another point, arguing that the employer had breached her contract of employment in the way it had – or rather, had not properly – investigated her claim. She claimed that the employer had failed to comply with its Workplace Harassment and Discrimination Policy.

Management of complaint breached the contract of employment

The Full Court found that even though there had been no discrimination, the employer was liable to the employee in contract because its investigation had been done in breach of policy, and – in the circumstances - in breach of the contract of employment.

Why was the policy contractually binding on the employer?

Much of the argument in this case focused around whether the policy was incorporated into the contract of employment. This is not a new field of argument. Previous cases have established that a policy is capable of being incorporated into the contract of employment, and employers have in the past found themselves owing damages to employees when they breached a policy.

The courts will make an objective assessment of the parties' intentions at the time the contract was made. However each case depends on the circumstances, and there has been a divergence of outcomes in the decided cases.

In this case, the employer was successful at first instance in arguing that the policy in question was not capable of being contractually binding.

The Full Federal Court, however, accepted that the Workplace Harassment and Discrimination Policy formed part of the employee's contract of employment. The Court's reasons included:

• the wording and scope of the policy. Although some parts of the policy were merely "aspirational" or "directive", the specific obligations relied upon by the employee were "clearly ascertainable" and "quite capable of precise identification";
• the fact that the policy was accompanied by an education campaign at the time of the offer of employment, and there was regular reinforcement of the policy;
• that the employer provided the policy at the same time as the contract of employment; and
• the practical conditions of employment on a ship, where a calm environment is important from a safety perspective.

The policy contained the employer's position and procedures on topics which are also covered in Commonwealth and state legislation (such as discrimination, harassment, bullying, work health and safety). Against that background, the employer argued that because the policy related to matters which are already regulated by legislation, the policy should not be treated as binding.

The Full Court, however, took the opposite position. It used the existence of legislation as an aid to interpreting the contract. The Full Court considered that the policy could be expected to be contractually binding, and should be treated as an agreed method as to the manner in which the parties' serious statutory obligations are to be observed. The Court suggested that this reasoning would also apply to policies dealing with other "fundamental conditions of employment" such as payment and the method of compliance with (other) external statutory obligations.

The Full Court also made the point that even if a policy is not contractually binding, it may constitute an "actionable representation" in some circumstances. This may occur where an employer makes a statement, and an employee relies on it to his or her detriment.

What went wrong with the investigation?

Having found that the employer's policy was part of the employee's contract of employment, the Court went on to find that the employer had breached the policy.

The first issue was that the employer had inferred a formal complaint from the employee's email, even though she made no reference to the policy and did not give the details that would be required for a formal complaint.

More problematically, having decided to treat the email as a formal complaint, the employer then failed to follow its own procedures and conducted an investigation which the Full Court found "had the capacity to indicate a partiality towards [the Captain] and something of a prejudgment of the issues".

Some of the specific problems with the investigation included that:

• the Captain was interviewed first, before the employee. This meant that the employee was denied the chance to tell her story or formulate detailed allegations, and her allegations could not be put to the Captain;
• the employee was not given proper notice of the purpose of an interview with her, which was really to investigate her performance, not her complaint;
• the employee had not had her options explained to her, had not been asked for her consent to the investigation, and had not had a Contact Officer allocated to assist her;
• the employer had not kept proper records of all interviews, allegations and responses; and
• the lines of inquiry between the complaint and the performance inquiry became tangled, and the performance inquiry came to take priority. This meant that the complaint was not fully investigated.

The case shows that an employer can expose itself to damages orders by failing to follow its own procedure and policy for investigating formal complaints when the employer makes a decision to treat a complaint formally.

This is even more so when an employer is considering performance concerns about a complainant. Employers should manage performance and misconduct processes separately and independently.

The case outcome

The Full Court declared that the employer breached the contract of employment and ordered the employer to pay the employee's costs.

The Full Court commented (but did not determine) that the employer may have repudiated the contract of employment by performing it in a manner fundamentally different from that agreed between the parties. The issue of repudiation was not dealt with by the primary judge (as he found no breach).

The Full Court remitted the questions of damages and repudiation to a judge of the Court for trial.

MAKING THE CASE: Insights from Geoff Giudice

The question of whether a particular employer policy is contractually binding arises often. The case of Romero, however, has an unusual twist. The case commenced as a complaint of discrimination under the Sex Discrimination Act 1984 (Cth). The Full Court found that a policy setting out a procedure for dealing with complaints of bullying and sex discrimination was contractually binding. It also found that the employer had breached the procedure and remitted the case to the trial judge for consideration of damages.

The unusual aspect of the case arose from the fact that the trial judge had found that the complaint of discrimination had not been made out and that finding was not challenged on appeal. The Full Court therefore decided the matter on the basis that the complaint of discrimination, on which the proceeding was based, had failed.

In doing so it appears that the Full Court gave questions of procedure independent importance and a status which was unrelated to the substance of the complaint. Until damages have been assessed, however, we will not know the financial consequences of the employer's failure to follow the correct procedure.

It is fair to say that the outcome of the proceedings has the potential to be very significant indeed.