Employer forced to pay half a million dollars to honour verbal agreement
December 13, 2016
An ex-employee has been awarded nearly $500,000 after he successfully argued that his former employer had made a verbal agreement with him regarding the termination of his employment and then had failed to fulfil its promises.
The employee had occupied a senior position at the company, with a clause in his contract which provided that he would be granted a retention bonus if he remained employed with the company by a certain date – a date which was still several months into the future when the company began engaging in discussions with the employee about ending his employment by reason of redundancy.
Before the termination could take effect, the company mistakenly made a payment of $477,400 to the employee as ‘a consequence of a processing error’, which had been calculated to include the retention bonus, despite the company’s belief that he would not be entitled to the bonus as he would not still be employed by the specified date. After realising its mistake, the company attempted to offset the amount already paid (the retention bonus) with the amount it still owed to the employee (payment in lieu of notice of termination), claiming it did not owe the employee another cent.
In contrast, the employee believed he was still entitled to be paid another several hundred thousand dollars, as part of the redundancy discussions had involved the company making a verbal agreement & promise to ensure he would still be paid the retention bonus.
The Victorian Supreme Court of Appeal found that such promises had indeed been made, and despite them only existing orally, upheld the agreement and required the company to pay an additional half a million dollars to the employee.
This case highlights the dangers of making a verbal agreement with employees, especially when such promises can’t be kept at a later date. While not every employer is in the habit of promising such large payments to its employees as in the case above, any careless comment may turn into a binding obligation.
We recommend that businesses use employment contracts with ‘entire agreement’ clauses which clearly state that the contract forms the entirety of the employment arrangement agreement, preventing employees from relying on pre or post-contract discussions to their advantage.
In addition, we advise that employers should think carefully about how they communicate with employees or candidates to ensure that they are not locking themselves into promises they can’t afford to honour. Keep file notes of any verbal conversations you have, and save emails, letters and contracts into an employee’s personnel file for easy access at a later date.
For more information on this issue and what this means for you, clients should contact the HR Assured team. If you’d like more information about the benefits of becoming an HR Assured client contact us today for an informal chat.