31/03/2011

Employer’s should be careful in stating the financial position of the business to prospective employee’s if such information could be relied on by the employee in deciding whether to accept employment.

In November 2010, the Federal Court heard the case of Moss v Lowe Hunt & Partners Pty Ltd [2010] FCA 1181.

The former employee alleged that he was mislead in accepting employment.  The representations by the employer were:

1. that it was a financially successful agency in Australian advertising;
2. that it was in a great position and likely to be successful in the future;
3. (in response to an enquiry by the prospective employee) that the redundancies of employees placed it in a very healthy financial position; and
4. that the savings would translate from a $1millon loss to a $1million operating profit.

The employee was, before accepting employment, operating his own business as a sole trader and was contracted to do some work with the employer.  The employee ultimately accepted the offer of employment and signed a contract for a package of $330,000 gross.  Part of the acceptance of the employment was that the employee ceased operating his own business (Pegasus).

Some 15 months after accepting employment, the employee was made redundant.

The court proceedings were commenced by the employee and Pegasus.  Pegasus claimed it suffered a loss of opportunity because the employee who was the sole operator in the business took up the employment offer with Lowe Hunt.

The Court held that:

“In all the circumstances, I think it is most unlikely [the employee] would have accepted [the employer’s] offer but for his repeated assurances about the strength of the business and the implicit representations concerning its financial security.
……
I conclude that it is more likely than not that [Pegasus] lost a valuable commercial opportunity.”

There were competing expert opinions obtained by the parties as to the lost opportunity, but the Court awarded damages to Pegasus in an amount of $245,000 plus interest for the lost opportunity of the employee ceasing to operate Pegasus for the 15 months he was employed by Lowe Hunt.

It is therefore important that an employer be cautious in making statements to prospective employees when answering questions about the business, where that information may be material in the employee accepting an offer of employment.

If you have any questions in regard to this article, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.