3 May 2016
The Dangers of Overcooking When Poaching
Practice Group:
By Alice DeBoos, Martin Watts and Emily Baxter
Labour, Employment
and Workplace Safety
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
The Dangers of Overcooking When Poaching
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.
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The Dangers of Overcooking When Poaching
Authors:
Alice DeBoos
alice.deboos@klgates.com
+61.2.9513.2464
Martin Watts
martin.watts@klgates.com
+61.2.9513.2553
Emily Baxter
emily.baxter@klgates.com
+61.2.9513.2492
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