Understanding employment contracts

This is the fourth part of a series of employment law articles by Whitehall Workplace Law discussing some of the legal and practical matters small businesses ought to consider in relation to the employment life cycle of an employee, that is, from the recruitment stage to the employee ceasing to be employed. Part three of the series published on 8 June 2017 dealt with how to avoid litigation when recruiting. This piece looks at the importance of understanding employment contracts.

A written employment contract is an important legal document. The legal requirements relating to the formation of contracts and the terms of the contract itself can sometimes be overlooked, or inadvertently misunderstood leading to confusion, disputes and costly litigation.

Every Australian employee has some form of contract of employment. Ideally, the employment contract will be written, competently drafted and tailored to the specific business with sufficient awareness of the interaction with any relevant statutes, modern award, enterprise agreement or other instruments.

A person employed without any written contract still has a contract of employment, albeit most of the terms of that contract are likely to be implied. This can lead to confusion about what the employer’s and employee’s rights and obligations are. This approach should be avoided.

Also, where an employee’s position changes this can sometimes (depending on the terms of any initial contract of employment and the extent of the change) lead to the creation of a new contract, with uncertainty about the terms of that contract.

It is not possible to provide a complete checklist here of all the relevant matters when producing or updating employment contracts. However, here are some key points:

1. Check whether there are any applicable modern awards or enterprise agreements. How will the contract interact with any such instruments?

2. Check that the contract is in the name of the proper employing entity.

3. Is there a probation period? Note that the minimum employment period before an employee can pursue an unfair dismissal claim is 12 months for a “small business employer” (defined as “fewer than 15 employees” including in any associated entities). For other businesses the period is 12 months.

4. If your business provides bonus or incentive schemes, are they intended to be discretionary? This can be a complex area. Some employers have been required to make significant payments for bonuses which were described as “discretionary”.

5. If your business pays annualised salaries / over-award payments is there an effective clause?

6. How are any HR policies and procedures dealt with? Some contracts mistakenly incorporate these documents into the contract of employment which can be problematic.

7. Make sure that your confidential information is sufficiently defined and protected; avoid “one size fits all” clauses.

8. Include a clause dealing with the required period of notice for termination; avoid vague or uncertain notice periods.

9. If the contract of employment will include restrictive covenants / restraints, there are numerous detailed and important matters to be addressed. These clauses should be narrowly drafted and go wider than is reasonably necessary to protect the legitimate interests of this business. Some of these issues will be addressed in a later part. These clauses require very careful attention in order to be enforceable. Whitehall Workplace Law is able to assist with these matters.

10. What legal jurisdiction will apply to the contract? Why?

11. Does the written contract contain the entire agreement or are there other documents which should also form part of the written contract?

Jeremy Cousins, Principal, Whitehall Workplace Law