As more employers look to replace guaranteed salary payments with profit share schemes and other forms of “at risk” remuneration, the impact of the Australian Consumer Law (ACL, previously the Trade Practices Act) can be easily overlooked with respect to employment relationships. A recent decision of the Federal Court of Australia illustrates why employers should be mindful that the provisions against misleading representations apply to the negotiation of contracts with prospective employees.
Section 18 of the ACL prohibits conduct that is misleading or deceptive in trade or commerce. Since the Trade Practices Act (TPA) first enacted this provision in 1974, it has not proven a commonly successful basis for employees to claim compensation from employers. Overcoming the ‘in trade or commerce’ requirement tends to be troublesome for claims resulting from circumstances outside the actual act of employing a person. In Rakic v Johns Lyng Insurance Building Solutions (Victoria) Pty Ltd, however, Justice Bromberg of the Federal Court found that misleading representations made in the course of negotiating employment contracts can fall under s 18.
Section 31 makes the process of bringing such a claim under the ACL more straightforward as it expressly prohibits misleading conduct in relation to offers of employment. Further, it does not require that the conduct be in trade or commerce.
The application of the ACL in employment cases is a caution to employers against the use of overzealous inducements regarding incentive remuneration (eg. profit share or bonuses), security or longevity of employment, working conditions, business strength, and the like when negotiating with a prospective employee.
Such representations can prove problematic when, even if made in good faith, the representation turns out to be false or exaggerated, and the employee, having relied on that representation is ultimately worse off.
Ms Rakic was in discussion with Johns Lyng about leaving her employment with one of its competitors to join it. In the course of negotiations for an employment contract, Johns Lyng offered a base salary plus a 2.5% profit share. The profit share was important for Ms Rakic because Johns Lyng offered her a base salary which was less than that which received in the employment of the competitor. She was shown that the 2.5% was forecast to approximately amount to the gap between her current salary and the offered base salary, and was assured by Johns Lyng that the business was ‘very successful’ and would continue to be profitable.
Ms Rakic accepted the offer of employment and began working for Johns Lyng in April 2013. She left its employment in February 2014.
It transpired that the representatives of Johns Lyng who had made the original representations to Ms Rakic had been relying on what turned out to be ‘badly wrong’ forecasting information. Johns Lyng did not make a profit that year, and the business had not been travelling well. Johns Lyng refused to pay Ms Rakic any profit share. Ms Rakic sued, relying on the ACL to claim that the representations made about its profitability were false and misleading.
The Court accepted that the representations had been made by Johns Lyng in trade or commerce. A second hurdle facing Ms Rakic, which commonly confronts employment claims using the ACL, was that the representations made by Johns Lyng were made as to a future state of affairs. The ACL specifically excludes liability in respect of future representations if can be shown that there were reasonable grounds for making the representations, even if, as events transpire the representations turn out to be incorrect. Johns Lyng relied on the future state of affairs defence.
Actual belief in the representation is insufficient for the future state of affairs defence to succeed, as the belief must also be reasonable. It was important in this case that it was not enough that those Johns Lyng representatives who had coaxed Ms Rakic to join had a reasonable belief in the representations made. It is the company, not the individuals, which must be able to demonstrate it was acting reasonably. The Court, based on the submissions on behalf of Ms Rakic, entered into a detailed analysis of the forecasts on which the representations of future profitability were made.
There was no dispute that the forecasts were badly wrong. The Court decided that an objective analysis of the business’ profit/sale margins showed that there were enough warning signs in the actual figures about the prospect of reduced profitability. The company could not have reasonably relied on the forecasts, even if the forecasts had appeared to be legitimate to those making the representations to Ms Rakic.
Ms Rakic was awarded almost $350,000 for losses she incurred having left her previous employment upon reliance on the representations.
Employers must exercise care in the information used, or promises made, to lure employees to join them. Aside from unqualified promises, such as the offer of a new company vehicle, the Rakic case demonstrates that complex information such as financial forecasts should be treated with extra caution. Even if senior officers of the company have every reason to believe that the figures are accurate, a more in depth examination may be warranted to ensure that there is not some systemic error, which may lead to a finding that the company had no reasonable basis for representing that they were accurate. The price of promising Shangri-la without a good understanding of how to get there can be high.
I am grateful to Greta Marks for her assistance in preparing this article.