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18 May 2016 The perils of misleading your prospective employees

By Richard Ottley, Partner

INTRODUCTION

There are few court decisions which deal with damages claims by employees lured into new employment by prospective employers' assurances, and who suffer loss when things do not go according to plan. However a decision of the Federal Court of Australia handed down in April 2016 in Rakic v Johns Lyng Insurance Building Solutions (Victoria) Pty Ltd (Trustee) [2016] FCA 430 is one such case.

The decision involved a claim by a Ms Rakic a former General Manager at the insurance building firm Johns Lyng, who was awarded nearly $350,000 in damages following the Court's finding that she was induced to leave her existing and higher paid job in reliance upon misrepresentations as to her likely future earnings with Johns Lyng. The decision, apart from highlighting the need for employers to be circumspect about predictions (especially financial ones), also provides a useful insight into how courts interpret the relevant provisions of the Australian Consumer Law which underpinned Ms Rakic's claims.


FACTS

Ms Rakic was employed by Pattersons Insurer build between October 2012 and April 2013. Between April 2013 and February 2014 Ms Rakic was employed by Johns Lyng as a General Manager. In the month or so prior to her joining Johns Lyng, Ms Rakic and her potential employer had a series of discussions concerning possible employment with Johns Lyng. Ms Rakic alleged in the proceedings, that Johns Lyng made various representations to her concerning the profitability of Johns Lyng which were misleading and deceptive and which induced her to leave her stable employment with Pattersons.

Ms Rakic's evidence was that she was offered a base salary inclusive of superannuation which was approximately $100,000 less remunerative than her Pattersons salary. Whilst Johns Lyng's original base salary offer was increased by some $15,000, the difference in salary was an impediment to her joining. Ms Rakic asserted that her concerns around remuneration were ultimately addressed by representations made by Johns Lyng including by email, concerning the potential for Ms Rakic to earn an additional $100,000 plus, based on a share of the profit of Johns Lyng for the forthcoming financial year.

As things turned out, Johns Lyng did not make the profit it had indicated it would and Ms Rakic did not earn the remuneration she thought she was going to. Worse than that, Ms Rakic ended up being made redundant. She subsequently brought a claim against Johns Lyng. Ms Rakic asserted that had she not relied upon the representations made to her by Johns Lyng, she would have continued on in her employment at Pattersons at her leisure, or she could have become employed elsewhere on terms that were as remunerative as her employment terms at Pattersons or more so. 


DECISION OF THE FEDERAL COURT

Ms Rakic alleged that Johns Lyng had breached clauses 18 and 31 of the Australian Consumer Law (ACL). 

Clause 18 of the ACL essentially 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. 

Clause 31 of the ACL states:

"A person must not, in relation to employment that is to be, or may be, offered by the person or by another person, engage in conduct that is liable to mislead persons seeking the employment as to: 
              (a)    the availability, nature, terms or conditions of the employment; or 
              (b)    any other matter relating to employment"

The Court found that Ms Rakic relied upon representations by Johns Lyng that its profits and sales in financial year 2013 were likely to meet or exceed its profits and sales in the financial years 2011 and 2012 and that it was probable after March 2013 for at least the next 12 months, that Johns Lyng would remain as profitable as it had been in the previous two years.

A question which arose was whether the representations (which concerned a forecast) were misleading or deceptive. The Court noted with approval a statement by the Federal Court in ACCC v Dukemaster Pty Ltd [2009] FCA 682 at [10], that where a representation concerns a statement of opinion it will not be misleading or deceptive or likely to mislead or deceive "merely because it turns out to be incorrect, misinforms or is likely to do so." What is critical is whether there was an adequate foundation for holding the view. In that decision the Court went on to say:

"However, an opinion may convey that there is a basis for it, that it is honestly held and when it is expressed as the opinion of an expert, that it is honestly held upon rational grounds involving an application of the relevant expertise. If the evidence shows that the opinion was not held or that it lacked any or any adequate foundation, particularly if the opinion was expressed as an expert, a statement of opinion may contravene s 52 of the TPA".

Justice Bromberg carried out a detailed analysis of the financial data and information of Johns Lyng which was advanced by Johns Lyng as the basis for making the representations in issue. With respect to this material the Court noted that the key question was whether on an objectively reasonable basis the representations could be supported or in Justice Bromberg's words:  

"The question is whether there was an objectively reasonable basis for the subject matter of the representations: whether there were facts within Johns Lyng's knowledge that were objectively reasonable and supported the prediction that profits in FY 13 would meet or exceed those in FY 11 and FY 12 and the prediction that Johns Lyng would remain for the next 12 months as profitable as it had been for the previous two years"

The Court ultimately determined that there was not such a basis for the making of these representations. Such finding was in large part because Johns Lyng's number of successful tenders had diminished and was significantly below target in the months immediately preceding the representations. Therefore revenue was likely to decline.

As noted above, Ms Rakic brought her claim under both clauses 18 and clause 31 of the ACL. Clause 18 essentially mirrored the previous section 52 of the Trade Practices Act. Justice Bromberg considered that there was no doubt that any representations found to have been made would satisfy the test in clause 31 as they were directed towards future employment. 

An interesting question which arose was whether such representations were deceptive or misleading conduct within the parameters of clause 18 of the ACL. Clause 18 is directed to conduct which is deceptive or misleading "in trade or commerce".

Justice Bromberg noted with approval Justice Kenny's conclusion in Walker v Salomon Smith Barney Securities Pty Ltd [2003] FCA 1099 that misleading or deceptive conduct in the course of negotiations for employment may support a cause of action under section 52 of the then Trade Practices Act. That is to say that such conduct might fall within that provision as it would be considered to have occurred in trade or commerce. Justice Bromberg considered there was no reason why such a conclusion should not equally apply to clause 18 of the ACL. It should be observed that this is a matter about which judicial minds have differed.

To conclude, Ms Rakic was successful as the Court found that: there were not reasonable grounds for making the representations in issue, that the representations were misleading and that Ms Rakic relied upon them in deciding whether or not to accept employment with Johns Lyng, to her detriment. She was awarded $333,422 of compensable loss or damage and a further sum of $16,529 under a separate head of claim involving a contractual entitlement. 


LESSONS FOR EMPLOYERS

When considering hiring a new employee, employers need to treat the making of predictions or forecasts with extreme caution. Avoid them if you can. If you cannot, ensure that you have (and retain) all relevant information at your fingertips before making a prediction or forecast. The prediction or forecast needs to be based on a solid foundation which will withstand scrutiny. Wherever possible, qualify your prediction if there are known contingencies that may impact on the accuracy of your forecast or prediction. Finally keep a detailed file note of the prediction or forecast and the basis for it, in case things go south.

Richard Ottley, Partner  |  Phone: +61 2 9233 5544  |  Email: rbo@swaab.com.au

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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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