Notice of termination: Key considerations for employers when choosing, and using, periods of contractual notice

Published 15 June 2018

The Fair Work Act (2009) (Cth) stipulates the minimum period of notice parties to employment need to give each other when ending the relationship. However, a notice period greater than this minimum can be stipulated in the employment contract. Flexibility also exists for the employer in terms of determining what work, if any, the employee will do during this notice period, and whether or not to make a payment in lieu of notice.

When an employee resigns, the notice period can be a critical opportunity to train replacement employees, or to ensure continuity of product delivery. On the other hand, often there is risk that confidential information, such as client lists, price lists, trade secrets, employee records, and financial information, being compromised during the notice period if the employee intends to takes up a role with a competitor. There is also the obvious risk of the employee actively soliciting customers for the new enterprise during the notice period.

Determining how to use notice, both when drafting a contract, and when in receipt of an employee’s resignation, is critical, and varies depending on the specific needs of each business.

Mandatory minimum notice periods
What is the mandatory notice period? The minimum notice period (for employees other than casuals) is set out in the National Employment Standards (NES) and depends upon the employee’s length of service. It varies from one week for those with less than one year’s service, to four weeks for those with more than five years’ service. Employees over forty five years of age are also entitled to an additional week from employers.

Alternatively, the employment contract, enterprise agreement or Modern Award may provide for a longer notice period.

Senior employee contracts have historically stipulated a notice period that is far higher than the NES minimum, ranging from three to twelve months. However, it is becoming common practice for employers to reduce these contractual notice provisions, often merely relying upon the NES minimum provisions, even for more senior roles.

How to use notice following a resignation
When an employee hands in their notice of resignation, the employer may choose to:

1. Have the employee continue to work during their notice period;
2. Pay the employee in lieu of their notice period, effectively ending the employment relationship immediately; or
3. Continue to employ the employee, but direct them away from the workplace, onto “gardening leave”.

The approach an employer adopts will often depend on the length of the notice period, the nature of the employee’s work, their level of access to confidential information, client connections, and seniority. There are advantages and disadvantages of each approach. It is important that the contract of employment contains express terms providing the employer with these options upon an employee resigning.

Payment in lieu of notice
Payment in lieu of notice involves an employer paying out the employee’s notice period and ceasing their employment immediately. The employee must be paid an amount equal to what they would have been paid had they worked out the notice period.

When should I use payment in lieu of notice?
Payment in lieu of notice should be used when the employer wants to move the employee on as soon as possible. This might be because they do not want the employee to have access to confidential or sensitive information or because they wish to avoid the departing employee from being a disruptive influence on the remaining workforce. It may also be the best way for the business to make a fresh start and begin the process of transitioning to life without the departing employee.

There are some negatives to payment in lieu of notice. Most predominately, the employer is getting no return to their business on their payment to the employee. In fact, the employer may have to pay someone else to complete the departing employee’s job. Often, however, when an employee is failing in the performance of their role, the potential wider costs of keeping them in their role is more expensive than making the payment in lieu.

Working out the notice period
When should I get the departing employee to work out their notice period?
A carefully monitored notice period potentially provides the greatest net benefit for the employer. From a productivity perspective, this is the way to get the fullest return on the wages paid. The employer may wish for the employee to finalise certain projects that they have been working on, or even to assist the employer in finding and training a replacement. Further, this period may provide a way for the employee to stay out of the hands of a competitor for as long as possible. There is also an increased chance of retaining clients if the departing employee is directed to transition such clients to other employees within the business.

However, great care needs to be taken when getting a departing employee to work out their notice period. If there are concerns regarding confidential information, or if there is a risk of the employee working for a competitor in the future, employers should closely monitor employee’s email and computer activity during this time.

Alternatively, departing employees may be placed on special duties for the duration of their notice period as a way of quarantining what information they can access, and what contact they may have with customers. This also allows for the employer to more easily monitor the departing employee and minimise any damage they might cause.

What if the employee is unwilling to work out their notice?
Despite popular belief, notice is a ‘two way street’. What is owed by the employer, is also owed by the employee. If an employee resigns,and is unwilling to work out their notice period, a deduction can be made in lieu of notice from wages earned or accrued leave balances. While this step may appear extreme, it can form a very important part of an exit negotiation, in the event that a relationship breaks down completely.

Gardening Leave
What is gardening leave?
Gardening leave involves an employer directing an employee to stay away from work during their notice period, whilst still continuing to pay their remuneration. An employee remains employed by the employer for the duration of gardening leave. Employers use gardening leave as a way to protect their business, and in some cases, this may even work to extend any period of post-termination restraints that may also be in place in the employee’s contract. There are broadly two aims of gardening leave: 1. Preventing an employee from working for a competitor for the length of the gardening leave as they remain employed by the business and obligated to act in the business’ best interests; and 2.Blocking access to the employer’s clients, colleagues, confidential information and intellectual property so that an employee cannot benefit from this access after they have resigned or had their employment terminated, and subsequently, damage the employer.

When should I use gardening leave?
Generally, gardening leave is reserved for senior executives or employees with strong customer connections or access to highly sensitive information. As there is no financial return, or productivity from this period, it is important to assess whether the value of interests being protected actually outweigh the costs of the leave period.

A clear benefit of gardening leave is that the employee remains employed by the employer. This means that various contractual terms, both express and implied, still apply to the employment relationship. Most contracts contain a term preventing employees from working for someone else. The implied term imposing the employee’s obligation of loyalty and fidelity towards the employer also remains in effect. Therefore, any behaviour which might be considered a breach of this duty, such as working for or communicating information to an competitor, will entitle the employer to damages for breach of contract.

Gardening leave can be useful if you still need someone to answer various queries, or perhaps complete discrete pieces of work during their notice period, as long as it’s possible to restrict their access to confidential information. Another benefit of gardening leave is that although the employee remains employed, they are not present in the workplace. This ensures that it is difficult for the departing employee to collect confidential information, solicit clients or poach colleagues. Gardening leave avoids a bitter, disgruntled employee being a disruptive influence in the workplace or from having a negative impact on staff morale.

Gardening leave instead of a post-termination restraint clause
For employees who are paid in lieu of notice, their employment is terminated immediately. When they walk out, they are a free agent and can start working for a competitor straight away. If an employer wishes to restrict the departing employee’s activities, to prevent them from soliciting clients or employees, they are reliant on post termination restraint clauses in the employment contract.

Post-employment restraints are open to legal challenge on the grounds that they are unreasonable. In order to be enforceable, the employer must show that the restraint is reasonable and goes no wider than is necessary to protect their identified legitimate business interests. On the other hand, during a period of garden leave, it would be a lawful and reasonable direction to require employees not to compete, or to make contact with customers. The employer does not have the onus of proving this when the employee is on gardening leave.

Further, employment contracts can include both restraint of trade and gardening leave clauses. In DP World Sydney Limited v Guy [2016] NSWSC 1072 (1 August 2016) the NSW Supreme Court determined that the time served by a senior employee on gardening leave did not count toward a prescribed restraint period under the terms of the employee’s employment contract. However, gardening leave periods will often be considered in assessing the overall reasonableness of post-employment restraints.

The disadvantages of longer notice periods
It is costly to be pay a senior executive to essentially be idle. Whereas with a restraint of trade clause, the employer gains protection (in theory) without having to continue to pay the resigning employee. If an employee is sacked (other than for misconduct) the company also needs to honour the longer notice period as well.

Gardening leave provisions may be subject to challenge also. For example, in Actrol Parts Pty Ltd v Coppi (No 2) [2015] VSC 694 the resigning employee joined a competitor during gardening leave. Ordinarily, this would be a breach of the employment contract by the employee, however the employee argued the contract of employment did not contain any written provision entitling the employer to place him on gardening leave. The Court ruled it was reasonable and equitable to imply the gardening leave term. However, it also ruled that the employer had breached and repudiated the employment contract by asking the employee to hand back his motor vehicle and company mobile phone. Given these items were part of the employee’s remuneration, the employer’s actions in removing them were repudiatory, allowing the employee to treat himself as relieved of further compliance with the employment contract.

When drafting an employment contract, an employer needs to consider both the length of the notice and what options the employer has available to it during the notice period. Employment contracts should provide for the right to make a payment in lieu of notice, and the option to direct employees onto gardening leave.

With regards to the length of the notice period, a longer notice period may be more appropriate for senior employees who are likely to have access to highly confidential information, and significant customer connections. Placing the employee on gardening leave during a longer notice period restricts the employee’s ability to use that confidential information and gives the employee’s successor time to build up a relationship with customers. It can also be much easier to enforce a gardening leave provision than a post-employment restraint of trade provision.

Alternatively, for employees who have more limited access to confidential information and customer connections, and can be more readily replaced, a shorter notice period, with the option of payment in lieu of notice, enables the employer to move that employee on from the workplace sooner rather than later, with minimal wage costs.

This content is general in nature and provides a summary of the issues covered. It is not intended to be, nor should it be relied upon, as legal or professional advice for specific employment situations.

Olexo Workplace Law recommends that specialist legal advice should be sought about specific legal issues.