Misleading and deceptive representations in pre-employment negotiations
Rakic v Johns Lyng Insurance Building Solutions (Victoria) Pty Ltd (Trustee)  FCA 430
Justice Bromberg of the Federal Court of Australia recently handed down the decision of Rakic v Johns Lyng Insurance Building Solutions (Victoria) Pty Ltd (Trustee)  FCA 430, which serves to remind EPL underwriters to ask an insured or potential insured whether they are aware of any potentially misleading representations to employees.
The decision is also a timely reminder for employers about the importance of avoiding making misleading promises in pre-employment negotiations.
Whilst employed at Pattersons Insurerbuild (Pattersons), Svetlana Rakic engaged in negotiations with Johns Lyng Insurance Building Solutions (Victoria) Pty Ltd (Johns Lyng) as to possible employment.
Ms Rakic alleged that Johns Lyng make three relevant representations to her during these negotiations. These were that:
- Johns Lyng’s profits and sales in the next financial year, 2013 (FY13), were likely to meet or exceed those for the two previous financial years, 2011 (FY11) and 2012 (FY12) (first representation). At the same time, Ms Rakic was offered a base salary of $115,000 plus superannuation and 2.5% profit share. This was around $100,000 less remunerative than she enjoyed at Pattersons. Further, the director of Johns Lyng described its business to Ms Rakic as a “jewel in the crown”, the “founding business”, and as a “strong and respected business for many years”;
- it was probable that, after March 2013, and for at least the following twelve months, Johns Lyng would remain as profitable as it had been in the previous two financial years (second representation). This was contained in an email that contained details of Johns Lyng’s FY11 and FY12 profit, as well as a forecast of FY13 and predictions of profit share; and
- as at mid-to-late March 2013, there was no reason, of which Johns Lyng was aware, for it not to meet its sales and profitability forecasts for FY13 (third representation). This representation was said to be made by silence.
Ms Rakic then accepted a role at Johns Lyng.
Ms Rakic later brought proceedings in the Federal Court against Johns Lyng alleging that:
- Johns Lyng was far less profitable than represented and that, therefore, the representations were misleading or deceptive;
- she had relied on the representations to leave a better-paid position at Pattersons for the promise of a significant profit share in Johns Lyng, which turned out to be a hollow promise; and
- she had suffered loss because her overall remuneration at Johns Lyng was lower.
Relevantly, Ms Rakic sought relief under sections 18 and 31 of the Australian Consumer Law (ACL) for misleading or deceptive conduct (ACL claim).
Section 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.
Section 31 of the ACL provides, in effect, that a person must not engage in conduct which is misleading, when discussing the availability, nature, terms or conditions or any other matter relating to employment which, is to be, or may be offered.
In order to make out the ACL claim, Ms Rakic was required to establish that:
- the representations were made in trade or commerce;
- the representations were misleading or deceptive;
- she had changed her position in reliance on the representations; and
- that she had suffered detriment as a consequence.
Ms Rakic alleged the first representation was misleading or deceptive in that Johns Lyng either knew that its profits and sales in FY13 were not, in fact, likely to meet or exceed those for FY11 and FY12 and/or did not have reasonable grounds for the representation.
Ms Rakic alleged that the second representation was misleading or deceptive in that Johns Lyng either knew that it would not remain as profitable as it had been and/or did not have reasonable grounds for the representation.
Justice Bromberg considered the second representation to be the crux of Ms Rakic’s case. In finding that the second representation was made, his Honour stated:
statements extolling the virtues of the business and magnifying its solidity and strength, its profits and success, cannot have been understood by a reasonable person otherwise than suggesting that those conditions were likely to continue into the foreseeable future.
Justice Bromberg found that a person in Ms Rakic’s position would have considered that the financial forecasts would convey that Johns Lyng was not aware of any matters that would render the forecast as anything other than likely.
Justice Bromberg found that the first and second representations were misleading in contravention of one or other or both sections 18 and 31 of the ACL, as Johns Lyng did not have reasonable grounds for making the representations at the time. However, his Honour found that the third representation was not misleading. This was because he was not satisfied on the evidence that Johns Lyng knew it was unlikely it would meet its FY2013 forecasts.
Detrimental reliance on the misleading conduct
Justice Bromberg found that Ms Rakic had relied on the representations to her detriment. His Honour accepted that Ms Rakic wanted to leave Pattersons, but did not accept that she was so anxious to leave for any offer of employment. He found that she would not have left Pattersons had Johns Lang presented her with a completely different profit forecast for FY13.
In determining the quantum of Ms Rakic’s loss, Justice Bromberg applied accepted authorities and asked these questions:
- What would Ms Rakic have done had she not been induced to action by Johns Lyng’s representations?
- Are Ms Rakic’s job prospects any different now to what they would have been had she continued at Pattersons for a period of time?
His Honour considered that Ms Rakic “was on a good wicket” and that, absent Johns Lyng’s misleading conduct, she would have worked for Pattersons for a further 2½ years, at an annual salary of $274,646 and then left for a role with an annual salary of around $220,000 until 1 November 2016.
After deducting amounts that Ms Rakic had in fact earned after ceasing employment with Johns Lyng, his Honour arrived at a total figure of loss of $333,422. In a subsequent decision issued on 5 July 2016, his Honour ordered Johns Lyng to pay Ms Rakic damages in that amount plus interest of $36,391.45, to a total of $369,813.45.
Justice Bromberg also ordered Johns Lyng to pay 90% of Ms Rakic’s costs; on a party and party basis up to the date on which she had served Johns Lyng with an offer to settle, and on an indemnity basis thereafter.
It is well known that representations about products and services in trade or commerce can expose a business to liability, if the representations are misleading or deceptive.
However, it must also be recognised that misleading or deceptive representations about the terms and conditions of employment can expose a business to liability, if the representations are made in trade or commerce; such as during pre-employment negotiations.
For this reason, underwriters should consider whether they need to expressly ask an existing or potential insured organisation whether it is aware of any possibly misleading or deceptive representations made to applicants for employment. This case shows that such representations can expose an employer to a serious liability risk.
Additionally, this decision serves as strong notice for businesses trying to entice new employees with unrealistic representations about the employer’s business or the terms of employment.
Date: 7 July 2016