Rooney v Forest Industries Council of Papua New Guinea [1990] PGNC 128; [1990] PNGLR 407; N914 (26 October 1990)

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EMPLOYMENT LAW - Contract of employment - Wrongful dismissal - Damages for - Assessment of - Relevance of statutory provisions where not pleaded - Effect of liability for taxation - Salaries and Conditions Monitoring Committee Act (Ch No 384) - Income Tax (Salary or Wages Tax) (Rates) Act 1979, s 1.

DAMAGES - Contract - Breach of - Employment contract - Assessment - General principles - Relevance of statutory provisions where not pleaded - Effect of liability for taxation - Salaries and Conditions Monitoring Committee Act (Ch No 384) - Income Tax (Salary or Wages Tax) (Rates) Act 1979, s 1.

(1) For the purposes of assessing damages for wrongful dismissal from employment, the provisions of the Salaries and Conditions Monitoring Committee Act (Ch No 384) are irrelevant unless pleaded on the substantive issues.

(2) The measure of damages was the amount which the employee would have earned under the employment contract and the value of other benefits thereunder for the period from unlawful termination to the time when the employer could lawfully have terminated, less the amount reasonably expected to be earned in other employment.

(3) Because the Income Tax (Salary or Wages Tax) (Rates) Act 1979, s 1, has specifically provided for payment of tax at the rate of 2 per cent on the payment of a lump sum following termination of employment, the income tax which the employee might have to pay is irrelevant to the assessment of damages for wrongful dismissal.
Atlas Tiles Ltd v Briers [1978] HCA 37; (1978) 144 CLR 202 at 212, adopted and applied.
Pupu v Tomilate [1979] PNGLR 108, distinguished.

This was a hearing relating to the assessment of damages for wrongful dismissal under a contract of employment.

J L Shepherd, for the plaintiff.
G J Sheppard, for the defendants.
Cur adv vult

WOODS J.: The trial of this matter on the question of liability was held in March 1989. The decision then went on appeal to the Supreme Court. In December 1989, the Supreme Court dismissed the appeal. The matter has now come back to me for the assessment of the damages for the wrongful dismissal.

As a preliminary point it was submitted by the defendant that the Salaries and Conditions Monitoring Committee Act (Ch No 384) must be applied for the purpose of assessment of damages.

However, I ruled that whilst the Act is a law in force, in the running of a civil claim, it being an Act that could materially affect the plaintiffs case, the issues it raises must be specifically pleaded to show that the plaintiffs case is or aspects of the plaintiffs case are not maintainable.

The defendant failed to plead the issue and I have already ruled accordingly in the original hearing and this ruling still applies and as the ruling was not taken on the appeal that ruling is still relevant at this stage.

I now add further that it is not open to now amend pleadings further and admit the Act for the purpose of assessment of damages as it would presumably create inconsistencies; in relying on the evidence governing an agreement that it is alleged may be void, if the matter had been raised originally and whether the Act does apply even at this stage would still have to be a matter of evidence, evidence which would have been relevant and should have been given at the original hearing. Perhaps these were the documents sought to be tendered at the original hearing but were refused because of the ruling I made then. So without the supportive evidence, which was not admissible at the original hearing, the Act cannot be applied now.

The plaintiff was terminated on 11 June 1988. She was employed under a contract of employment which was for three years from 14 December 1987. The normal measure of damages is the amount the employee would have earned under the contract for the period until the employee could lawfully have been terminated less the amount the employee could reasonably be expected to earn in other employment. The dismissed employee must take reasonable steps to minimise the loss which, in the case of wrongful dismissal, means the employee must seek and accept any reasonable offer of employment. If a person fails to take other employment when one ought reasonably to have done so, damages will be assessed on the basis of the difference between the salary under the broken contract and what would have been received from the substituted employment.

Such damages for wrongful dismissal may also include an assessment of other benefits which the dismissed employee would have received from the continuation of the employment and of course the leading example is the value of board or a rent-free house.

The plaintiff was employed as an executive director on a salary of K21,000 plus other benefits such as housing, motor vehicle, children’s education allowance, which in effect have been calculated to be worth up to around K30,000 a year.

There can be no dispute that this was a very senior position with an exceptionally high remuneration when one allows for the value of the other benefits and this would give great security for the term of the contract. Further, it would be very difficult if not impossible to find another job at that level of remuneration. This could affect any attempt at mitigation of the loss. Immediately after her termination the plaintiff was in a very difficult position because the circumstances and publicity surrounding her dismissal cast doubts about her competence or ability in the job. This would create, and as the plaintiff deposes, created great difficulty or reservations in any attempt to find other employment. It was only when this Court ruled that the termination was wrongful that the plaintiff could stand as a person who could be trusted in such a senior position. But she was still faced with the fact that jobs at such a level are scarce. So whilst the principle is clear that the plaintiff has to mitigate her damages, there were initially no openings at the equivalent level and in so far as she did make attempts to find a job there were no jobs available and the defendant must accept the fact that they created the high level with which she ended up and they now have to bear the effect. Organisations like the defendant have to realise that they cannot play fast and loose with such senior executives and the positions they hold.

I am satisfied that the plaintiff has done her best to mitigate her damages, has acted reasonably and, apart from the piece-work already in evidence, she was unable to mitigate her damages and the defendant is liable for the salary and value of benefits which the plaintiff would have earned under the contract. There is no clause providing for any termination upon condition, unlike most government contracts of employment which give the right to terminate on some months notice. There is no such right here which means the defendant is liable for the full term. The contract is a contract of employment under the Forest Industries Council Act (Ch No 215) and therefore I agree that the defendant and the plaintiff contracted out of the Employment Act (Ch No 373) and therefore the power in the Employment Act to terminate before the expiration of the term does not apply.

I cannot agree with the submission that, by virtue of s 34 of the Employment Act, the defendant could have legally terminated the contract at the end of two years and therefore the liability for damages can only be calculated to 14 December 1989. I am satisfied that the Employment Act does not apply to the plaintiffs contract as her employment was effected under the Forest Industries Council Act. If s 34 applied, then other sections such as s 19 and s 22 would apply and the contract would be null and void at the outset, but that Act was never pleaded and anyway the application of s 19, for example, would be somewhat absurd.

The defendant is therefore liable to pay the value of the plaintiffs salary and other entitlements from the date of termination to 14 December 1990, being the due date for expiry of the contract of employment.

Whilst the plaintiffs employment was terminated on 11 June 1988, she was paid salaries entitlements for 30 days in lieu of notice, as the termination calculation states, plus a further 10 days for accrued leave. This would take the date from which her salary was cut off as 40 days after 11 June, namely, 21 July 1988.

On tax: is the amount for salary to be calculated on the gross salary with no reduction for the tax that would have been paid or should it be a net salary calculation after tax? It can be argued that if it is the gross salary then that would be a windfall to the plaintiff as she would not have actually received that in her hands as an amount for tax would have been deducted each pay day. This is the principle in British Transport Commission v Gourlay [1955] UKHL 4; [1956] AC 185, a case dealing with compensation or damages for personal injuries. However, in more recent years the principles in that case have been closely examined and also there have been taxation amendments which bring in new tax liabilities.

When we make awards for damages for wrongful dismissal and also, of course, for loss of income for injuries we are giving a lump sum to replace the regular salary or wage the plaintiff would have received. But who are we to conceptualise one form of payment in the terms of the other and then give ourselves the task of the examination of a party’s affairs in relation to liability to taxation. As Barwick CJ discussed it in Atlas Tiles Ltd v Briers [1978] HCA 37; (1978) 144 CLR 202 at 212:

"If there is a choice between holding that liability to taxation on taxable income is an irrelevant and remote circumstance in the assessment of damages or loss of income and imposing on Judges a task which they are not fitted to perform it would be better to choose the former leaving it to the Legislature to determine whether and if so to what extent damages awarded for personal injuries or loss of income should be included in assessable income."

This is not to say that the legislators are likely to appreciate the consequences of their interference but at least whatever rule they make is more likely to secure uniform and certain results than the course of leaving the estimation of tax liability to judges of first instance.

Whilst there may be arguments that awards for loss of income or loss of earning capacity must be looked at differently than awards calculated by virtue of a contract of employment, in the end, why should judges become taxation agents when the legislature has clearly taken upon itself to decide the tax liability of the citizen. If a person receives a salary or wages on a regular basis over the year, a certain rate of tax applies; however, if a person is deprived of a regular income but instead obtains it as a lump sum in compensation or damages whether because of injury or for wrongful termination then the taxation authorities, in the Income Tax (Salary or Wages Tax) (Rates) Act 1979, have declared such lump sum is only taxable at 2 per cent so there is no need for the court to go into questions of whether the plaintiff is receiving a windfall; the legislature has applied its own criteria. The legislature could have gone the other way and deemed it to be considered as a periodic payment and allowed the Gourlay principle to be applied (British Transport Commission v Gourlay), but it did not do so. Instead, it specially enacted how the amount should be regarded for taxation purposes.

Further, as Barwick CJ considered, it is important to bear in mind that the wages, salary or earnings are not themselves taxed, they simply form part of the assessable income from which the taxable income is derived, for example, after allowable deductions are made. Whilst it may be possible after due assessment of income tax has been made to calculate how much each dollar of the assessable income has borne tax, income tax cannot be said to be levied at any particular rate on each dollar which forms part of the assessable income. We all know that in an ordinary salary or wage-earner situation, a stipulated amount is deducted periodically at the source but the total of the sums deducted does not necessarily represent the amount of income tax payable. That is only truly calculable when the income earner places his statement before the tax authorities. Barwick CJ refers to different examples (at 215) which show that unless one becomes a tax agent or assessor and investigates the whole of a person’s income one cannot determine what the liability to tax is. All these go to the conclusion that the court cannot and should not have to make even the "roughest" estimate of tax liability.

But to conclude in this case, we have a clear agreement to pay a certain amount, the fate of that salary whether already pledged away or bound to be applied to the payment of income tax is irrelevant. The employee is bound to pay what it had agreed to pay, undiminished by any consideration of the obligation to pay tax. And anyway the legislature has clearly stated that if such income is paid in a lump sum following such a situation as the present then the tax liability is 2 per cent as per the Income Tax (Salary or Wages Tax) (Rates) Act 1979, s 1.

I realise that, in Pupu v Tomilate [1979] PNGLR 108, the National Court there followed Gourlay’s case on the basis that the law applicable in Papua New Guinea is the English Common Law: see Sch 2.2 of the Constitution. However, whilst I am referring to the Australian case of Atlas Tiles Ltd v Briers I am not applying Australian law, I am adopting the statements in that case as applicable here in Papua New Guinea in wrongful dismissal cases where the tax authorities have clearly provided what the taxation position shall be. Perhaps the Income Tax (Salary or Wages Tax) (Rates) Act 1979 was not in force at the time of Pupu’s case. Again the Supreme Court, in Kerr v Motor Vehicles Insurance (PNG) Trust [1979] PNGLR 251, agreed that Saldanha J in Pupu’s case correctly applied Gourlay’s case but again Kerr’s case was a motor vehicle injury case not a contract of employment case and also the court then did not appear to have to consider the Income Tax Act to which I have referred. The effect of the Income Tax Act is initially of course to cast into doubt the second factor relevant in Gourlay’s case, because now the payment of compensation for loss of office is clearly taxable as an item of income in its own right without any part exemption as applied in the United Kingdom.

I am therefore satisfied that the principle as stated by the Supreme Court in Kerr’s case that the income tax the plaintiff would have had to pay is to be taken into account is not applicable in this case. I note further that one of the judges in Kerr’s case did note there was an absence of argument before them as to the conflict between Atlas Tiles’ case and Gourlay’s case so he felt that Gourlay’s case should be applied.

With respect to this tax liability it is not up to the court to do any calculation of either saying that as the plaintiff will lose 2 per cent therefore the court should add on 2 per cent and make separate orders for it. The plaintiff is liable to income tax like any other person. It is not the court’s job in such situations to be tax assessors. The court comes to a figure for damages for wrongful termination and if it is the defendant who is initially responsible to pay the tax or ensure it is paid therefore whether they deduct it out of the judgment and pay it themselves or trust the plaintiff to do so is up to them. The fact that it comes out of the judgment is as stated by the law; it is the plaintiffs money that goes in tax, not something that the defendant must cover over and above its initial liability.

Salary for balance of 1988 being the amount
submitted less the further 10 days leave as
per the termination calculation.	K8,110.13
Salary for 1989 with CPI	K21,000.00
Salary for 1990 with CPI	K21,651.00

Leave fares as calculated for 1988 and 1989 being K344 times 6.5 fares for each year totalling K4,472.

Motor vehicle entitlements calculated at the rate of K20 per day being 914 days at K20 making K18,280.

Accommodation housing allowance as per cl 18 of the agreement being 914 days at K400 per 7 days totalling K52,228.50.

Domestic staff and electricity allowance as per cl 19 of the agreement calculated at K125 per month thus for two and a half years coming to K3,160.

The education allowance as per cl 20 of the agreement with CPI increase included comes to K26,325.50.

On interest, the plaintiff has been out of her money since her termination. However, as the full amount was not due to her at that time but is calculated on what she would have received at regular intervals since then the normal rate of 8 per cent does not apply. Instead interest should be assessed at 4 per cent from the date of termination plus 40 days to today.

As I have already said, any tax liability on that under the Income Tax (Salary or Wages Tax) (Rates) Act 1979 is borne by the plaintiff out of the lump sum but presumably the onus is on the defendant to ensure that that amount is paid so I do not have to make orders splitting the amount of the judgment.

I cannot help considering that the facts of this case and the amounts involved should be a lesson to the Government and to the way salaries and contracts are arranged by what seems to be public bodies. The cost of playing fast and loose with salaries and termination can be quite high.

Lawyer for the plaintiff: K Y Kara.
Lawyers for the defendants: Warner Shand.

National Court of Papua New Guinea

Rooney v Forest Industries Council of Papua New Guinea [1990] PGNC 128; [1990] PNGLR 407; N914 (26 October 1990)