Repudiation of an employment contract: Overview and basic principles

The path to ending an employment relationship is often fraught with risk, twists, turns and lengthy processes. When determining how to proceed with the termination of an employee who has breached their employment contract (Contract) or who simply has no intention of fulfilling the terms of the Contract, consider the principles of repudiation of Contract. 

In this article, we provide an overview of the basic principles for terminating an employment relationship on the basis of employee repudiation.

What does repudiation of a Contract mean?

Repudiation of a Contract occurs when one party abandons their obligations under the Contract. It can be that the relevant party is either unwilling or unable to perform those obligations.

Unlike other forms of disputed contracts, it is not necessary in the case of a repudiation for the contract to have yet been breached. Rather, repudiation of a Contract often occurs before a breach occurs. This is known as an anticipatory breach.

How does repudiation apply to an employment relationship?

Much of the case law and guidance that deals with repudiation of a Contract is from the perspective of an employee being the aggrieved party. Most commonly, an employee becomes aggrieved when an employer seeks to unilaterally alter the terms of the Contract, such as amending an employee’s position description, duties, compensation (base salary, fringe benefits etc.), reporting line or delegations.

In these instances, if an employee feels that their employer has repudiated the Contract, they have a choice to:

1. continue with the Contract (under the new terms set by the employer); or 
2. accept the repudiation and elect to terminate the Contract.

It is crucial to note here that repudiation itself does not automatically terminate a contract.

Repudiation allows the aggrieved party to terminate the Contract if they wish and that desire must be communicated to the offending party for the repudiation to be effective. In fact, inaction or assuming the Contract has automatically terminated will have the opposite effect – the Contract will continue and the aggrieved party will be bound by the new accepted terms.

When would an employee repudiate the Contract?

Given that in most employment relationships, an employee is unable to vary the terms of employment of their own accord, repudiation by an employee gives the employer the right to summarily dismiss the employee if it can be shown that the conduct is sufficiently serious that, to the reasonable observer, the employer should no longer be bound by the Contract.

This principle was articulated in a full bench decision of the Fair Work Commission in Gelagotis v Esso Australia Pty Ltd (2018)^[1] (Gelagotis):

“The test for repudiation is whether the conduct of the employee is such as to convey to a reasonable person, in the position of the employer, renunciation either of the contract as a whole or of a fundamental obligation under it. The issue turns upon objective acts and omissions and not on uncommunicated intention.”

In Gelagotis, His Honour, Fair Work Comission President Justice Iain Ross drew on the principle established by the High Court in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007)^[2] where Gleeson CJ, Gummow, Heydon and Crennan JJ said:

“… The test is whether the conduct of one party is such as to convey to a reasonable person, in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it. … Secondly, it may refer to any breach of contract which justifies termination by the other party. … There may be cases where a failure to perform, even if not a breach of an essential term (as to which more will be said), manifests unwillingness or inability to perform in such circumstances that the other party is entitled to conclude that the contract will not be performed substantially according to its requirements. This overlapping between renunciation and failure of performance may appear conceptually untidy, but unwillingness or inability to perform a contract often is manifested most clearly by the conduct of a party when the time for performance arrives. In contractual renunciation, actions may speak louder than words.”

Examples of employee repudiation include, but are not limited to:

• misconduct – where the misconduct is such that it goes to the root of the Contract and indicates a dismissal of the terms
• refusing a lawful and reasonable direction
• disclosure or misuse of confidential information
• receipt of secret profits (colloquially, the notorious ‘cashie’)
• failure to disclose relevant adverse information – relevant adverse information could be, for example, related to the employee’s pre-employment criminal history. But in instances where the employee is in a supervisory role, it could also be relevant to information the employee becomes aware of in respect of a subordinate or other employee that they would have an obligation to disclose to the employer
• unauthorised absence from work – for unauthorised absence from work to be considered repudiation of Contract it would need to be to the threshold of being habitual, of significant length, contrary to a lawful and reasonable direction, occurring at a significant time causing substantial loss to the employer or abandonment of employment.

How does repudiation affect an employee’s statutory claims and entitlements?

In instances where an employee has genuinely repudiated the Contract and an employer has taken the necessary steps to accept the repudiation and terminate the Contract, the effect on an employee’s statutory claims will be different than if the employer had simply dismissed the employee, for example, on the basis of misconduct or via a restructure or redundancy. This is because the argument can be made that it is the employee’s conduct that has terminated the Contract, rather than a unilateral decision by the employer.

While no termination of a Contract is completely without risk, an employer’s exposure to a claim of unfair dismissal or breach of general protections will be significantly reduced if they can provide clear evidence that the employee’s actions have repudiated the Contract.

Generally, the entitlements that are payable to the employee at the time of termination comprise of payment of any outstanding time worked, outstanding annual leave balances and, if applicable, any long service leave entitlements. When an employee’s employment is terminated on the grounds of repudiation of the Contract, the employer is not obligated to provide any notice of termination or payments in lieu of notice.

In addition, where the Contract provides an employee with an allowance, payment or loan (such as educational or training loans, annual leave balances in arrears, parental or maternity leave payments etc.) that are conditional on the employee remaining employed with the employer for a specified period of time, these amounts may not be withheld from the employee’s final entitlements (see section 324 of the Fair Work Act 2009), but can potentially be recovered by way of the usual debt recovery processes.

Key takeaways

To mitigate against the potential risk of an employee bringing a successful unfair dismissal or general protections claim, the key things to remember when considering whether an employer can terminate the Contract on the basis of employee repudiation are:

• for the termination to be genuine and lawful, the repudiation must first be formally accepted by the employer and communicated to the employee before termination
• indecisiveness or inaction to accept the repudiation in a timely manner may inadvertently set new contractual terms, by which both parties will be bound going forward
• each case of repudiation will turn on it’s own facts – objective acts and omissions, not on uncommunicated intention
• the conduct giving rise to the repudiation must be of an objectively seriousness nature, as outlined in the examples above
• actions speak louder than words – when the time comes for performance of the Contract, repudiation is an unwillingness or inability to fulfil contractual duties

Authors: Andrew Klein & James Beutler

^[1] Gelagotis v Esso Australia Pty Ltd [2018] FWCFB 6092 at [119]
^[2] Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115; [2007] HCA 61 at [44]

Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Andrew Klein

James Beutler

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