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Employment Contracts Explained

A version of this article will be published in 'My Business' Magazine, July 2005. This article also appears on the Australian Business Limited website.

Every employment relationship where an employee performs work for a wage, salary or commission is underpinned by a contract of employment. This is a legally enforceable agreement, either oral or written, (or partly written and partly oral), between an employer and an employee that defines the terms and conditions to which both parties must adhere.

It is not essential that an employment contract be in writing, except in some instances including where the relevant award requires it. However having the terms and conditions of employment in writing is a prudent practice for most businesses.

Regardless of whether there is a written employment contract, the terms of the relevant statutes and awards apply.

The benefits of having employment contracts in your business

Having well-drafted employment contracts within your organisation ensures that:

• your employees are clear about what is required of them and their entitlements
• as an employer, you can avoid the costs associated with disputes over terms and conditions of employment
• as an employer you are in a stronger position to justifiably terminate employment if an employee does not meet the contract's requirements.

Each contract is individual in the sense that content will vary between the individual employee and employer.

Every contract will have at its core, the rights and liabilities between an employer and an employee, and will prescribe certain terms or set minimum standards.

Tony Vernier, partner of Australian Business Lawyers, says:

"Employment contracts will play a bigger role now that the Howard Government will introduce legislation exempting employers with less than 100 employees from unfair dismissal claims. Employees will look to make other types of claims. Having a good contract of employment can help to minimise the risk of some of these other claims."

The principal documents impacting on the employment relationship include an:

• individual contractual document
• award or collective agreement
• Australian Workplace Agreement (AWA)
• apprenticeship or trainee document (under special statutory provisions)
• unregistered collective agreement

As an employer it is your responsibility to ensure that the terms and conditions of employment are clear to your employees.

Components of an employment contract

Frequently an employment contract will include:

• job title or position
• period of employment
• which award (if any) and/or agreement covers the employee
• duties
• reporting line
• location
• the employee's classification and rate of pay
• the employee's employment status - full-time, casual, part-time etc.
• the employee's job description and performance expectations
• hours of work, including overtime and shift work expectations
• requirements for reporting absences
• details of any probationary period
• pay arrangements, pay day
• remuneration review process
• leave provisions
• sick leave provisions
• superannuation contributions
• information about induction training if required; how, when, how long, where and the expectations of the employee following training
• the period of notice required for termination of employment
• summary dismissal provision
• reference to particular company standards and policies
• confidentiality and intellectual property requirements

Further, you may wish to include clauses that restrain an employee from competing with the company during their employment, and certain restrictions on their competing with the company after their employment ceases. For example, for more senior employees, you may wish to prevent them from doing work for your clients for a period of time after their employment ceases.

Vernier says: "Restraints on ex-employees soliciting clients are important for businesses. If a former employee sets up in competition, the last thing a business wants is for that employee to start poaching clients. A clause in a contract of employment that contains a reasonable restraint on soliciting clients can reduce the risk of losing clients to the former employee".

To ensure you have sufficient flexibility to respond to changing business needs, other clauses you may wish to include are clauses entitling you to alter the employee's position, position description, or location (within reason).

Implied terms

In addition, there are IMPLIED terms in all contracts of employment. These terms are not recorded in writing, or even discussed by the parties, but nevertheless the courts say that those terms are implied in contracts of employment. (unless expressly excluded).

Examples of terms that are typically implied into oral and written contracts of employment are:

• the employer and employee's duty of 'mutual trust and confidence'
• the employer's duty to provide a safe work environment
• an employee's duty to obey lawful directions given by the employer
• an employee's duty to exercise reasonable care in carrying out the work
• an employee's duty of fidelity and good faith to the employer (this covers a range of matters including for example, an employee is not to deliberately damage the employer's reputation or to steal from the employer).

A breach by the employer of its duty not to destroy the mutual trust and confidence could be used as a cause of action by employees excluded from making unfair dismissal claims. "This is a relatively new cause of action which could support a claim in some terminations" says Vernier.

Entering into an employment contract

Typically the process is straightforward - the employer provides a document to an applicant which sets out the terms of employment that will apply if the applicant accepts the job. After the employee considers the document, any requested amendments are discussed. If agreement is reached on any changes, the employer alters the written document. Then the employee signs the document and starts their new job.

Termination of contract

An employment contract is for the period agreed by both parties. Frequently an employment contract is for a continuing period, which means it operates until either the employee resigns or the employer terminates the employment.

If the employer wishes to terminate the employment for reason or poor performance or conduct, the starting point is to look at the notice period in the contract of employment. This is the minimum notice that must be provided. Sometimes an employee should be provided with a greater period of notice, for example when section 170CM of the Workplace Relations Act 1996 (Cth), an award or agreement prescribes a greater period of notice.

On a final but very important note

As a manager or employer you are probably involved regularly in the preparation of employment contracts. Being aware of the critical provisions to include in each circumstance will help you streamline the process, and minimise the risk of expensive proceedings down the track.

There are quite definite do's and dont's involved in drafting employment contracts. This article has just touched on some aspects of the process.

Managers responsible for recruiting staff and preparing employment contracts need to get their head around such issues as:

• Which employees should have employment contracts and when should employees receive fresh employment contracts.
• How to draft terms to meet specific needs - such as probationary periods, employee duties and termination provisions.
• How to draft provisions to protect your company's confidential information and relationships with key stakeholders.

If you don't feel confident about any or all of the aspects involved in drafting employment contracts it is recommended that you seek the advice of experienced workplace lawyers. Where appointing a very senior employee, it is almost always best to involve experienced workplace lawyers.

For further information, please contact Tony Vernier, Partner, on (02) 9458 7311.

Australian Business Lawyers will be running a seminar called "Do's and Dont's in Drafting Employment Contracts" to be held in Sydney 26 July; Parramatta 28 July and Melbourne 3 August 2005. For further information on these events, please click here.