Misleading Comments in Pre-Employment Negotiations Leads to Damages

As an employer, you want the best people working for your business. It's common to want to 'talk up' the business to a prospective employee and present the opportunity only in the most positive light. But just how far can you go to convince someone to work for you?

The Federal Court of Australia will shortly be entering orders awarding an employee a damages payment of almost AUD350,000, after the Court found that her employer had engaged in misleading conduct under clause 18 of the Australian Consumer Law (ACL).

Clause 18 of the ACL provides that a person must not, in trade or commerce, engage in conduct that is misleading or deceptive, or is likely to mislead or deceive. Further, clause 31 of the ACL allows for pecuniary penalties to be imposed on employers who engage in misleading conduct in offering employment to a prospective employee.

It's fair to say that these are not provisions that are often at the forefront of an employer's mind when looking to attract individuals to join their company. This is particularly so for companies looking to poach senior or executive-level employees who are well recognised in their field of expertise. In some cases, employers will be prepared to do "whatever it takes" in order to secure the services of an individual they have identified as being critical to the ongoing success of the business. This case serves as a useful reminder for employers of the limits on doing "whatever it takes".

Johns Lyng Insurance Building Solutions (Victoria) Pty Ltd (Johns Lyng), a building insurance firm, sought to poach Ms Rakic from her then employer in the insurance industry. Johns Lyng wished to engage Ms Rakic as the General Manager of their business.

In seeking to procure Ms Rakic to leave her current employment and take up the General Manager position at Johns Lyng, the company arranged for her to have an informal meeting with a director of the company, in addition to other negotiation discussions.

Johns Lyng proposed a remuneration package for Ms Rakic involving a reduction in base salary of around AUD100,000 in comparison to her current pay, but included a contractual entitlement to 2.5% of the net profit of the business for the 2012/2013 financial year, and 5% equity in the business after her first six months in employment.

As you might expect, Ms Rakic asked Johns Lyng why she should accept an offer of employment with them, if it would involve taking a six-figure pay cut. Johns Lyng assured Ms Rakic that this was nothing to fear. They made representations to Ms Rakic regarding the future profitability of the company, and informed Ms Rakic that the 2.5% net profit would easily account for the shortfall in salary.

You can guess what happened next. Ms Rakic accepted employment with Johns Lyng. Sales and profit of the company never reached the lofty heights that were conveyed to Ms Rakic during the pre-employment negotiations, and the overall remuneration package fell far short of what she was earning with her previous employer. Unsurprisingly, Ms Rakic pointed to what she claimed were misleading representations made by Johns Lyng during the negotiation process about the profitability of the business and her remuneration package. She contended that this behaviour contravened the ACL.

The Court agreed. The Court found that Ms Rakic accepted an offer of employment based on her reliance on the representations made by Johns Lyng. In doing so, the Court noted that the representations did not need to be the sole reason for Ms Rakic accepting employment.

It is also important to note that, if a person makes representations with respect to future matters, and the person does not have reasonable grounds for making the representation, the representation is misleading. In this case, the profit/loss statements and profit forecasts failed to take into account the real likelihood of diminished profits in 2012/13, by comparison to previous years. As a result, the employer could not use these documents to shield themselves from a finding that their representations to Ms Rakic were not reasonably based and misleading.

The Court confirmed that representations made during pre-employment negotiations may be representations made "in trade or commerce", and therefore, subject to clause 18 of the ACL. In any event, clause 31 of the ACL would operate to prohibit employers engaging in conduct that is liable to mislead persons seeking the employment. However, by successfully invoking clause 18 of the ACL, Ms Rakic opened up the possibility of claiming damages. It is also anticipated that she will be awarded interest and most of her legal costs.

Key Points for Employers

• In poaching employees, an employer needs to exercise care to ensure that they do not 'overcook' promises or representations that are misleading in nature.
• The ACL provisions regarding misleading and deceptive conduct in trade or commerce can apply to pre-employment negotiations.
• Pecuniary penalties can be imposed on employers who make misleading statements in relation to employment terms and conditions.
• When making representations to prospective employees about future events, it is important that there is a reasonable basis for making the representation, grounded in supported facts.
• Employees may be entitled to damages if they rely on misleading representations when accepting an offer of employment and they suffer a loss as a result. This is particularly likely to arise in offering executive remuneration packages, particularly where representations are made about profit, bonuses or the performance of shares, all of which may tie into the remuneration package and/or incentive scheme.