How well do employment contracts hold up in court?

As a rule of thumb, it is always better to assume that the terms of an employment contract will hold up in court. However, the reality is that courts will not always enforce all contractual provisions.

Specific clauses or even the entire contract may fail for two general reasons: poor legal drafting or provisions that are overly restrictive of employees’ rights.

The first can happen when a template has been used over and over for so many years that no one is quite sure any more what certain provisions mean. It may have become legally out-of-date or it is inaccurate with the duties that a particular employee actually performs. The problem is relatively easy to fix with regularly scheduled legal check-ups.

The second situation can be more problematic because it involves balancing the rights and responsibilities of both parties to a contract. Three particular areas deserve special attention:  probationary periods, restraint of trade clauses, and notice provisions.

Probationary periods

It is common for contracts of new employees to contain the requirement of a probationary period − an initial period of service during which time both the employee and employer can decide whether they wish to continue with the relationship.

However, probationary employees are still protected by some provisions of the Fair Work Act 2009. If the employee has served for at least six months (12 months for very small employers) they may still make an unfair dismissal claim. They also enjoy the same FWA entitlements to paid annual leave, paid personal/carer’s leave and minimum notice periods as non-probationary employee.

Employers should be aware the oral representations made during an interview. Statements such as, “this is a permanent position” may be interpreted as waiving a probationary period. Both parties should also understand the implied legal responsibilities, including the obligations to act in good faith and in mutual cooperation.

Restraint of trade clauses

An employer’s confidential information, including things like financial information, client lists, trade secrets and intellectual property are protected under law. Contract clauses that prohibit their use outside of a particular employment relationship are likely to be enforced. However, this is not true of general skills or information that an employee may learn during the course of employment.

In NSW, courts will enforce a non-compete clause only to protect an important business interest of the employer and only if the restraint goes no farther than necessary. Courts will consider questions such as whether:

  • the time and geographical limitations are reasonable;
  • the activities restrained are clearly defined; and
  • the category of prohibited contacts is appropriately limited.

A covenant against poaching co-workers may be valid if the employer is able to demonstrate a legitimate interest against this particular form of competition there is necessity to protect the interest. However, courts generally frown on these restrictions.

Notice

It is not necessarily true that a contract can be terminated without notice. The law may imply that the agreement can be terminated only on “reasonable notice” or payment in lieu of notice. What is “reasonable” may depend on factors such as age, seniority, length of service, salary and any detriment the employee suffered in order to accept the position. In some cases reasonable notice can be as much as 12 months’ notice or payment in lieu thereof.

Even when contracts specifically provide that employment may be terminated on notice, the FWA prescribes minimum periods of notice that an employer must give an employee. However, contracts may give an employer the right to terminate the employment without notice if an employee has committed serious misconduct, such as fraud, theft or violence.

Rolf Howard, Managing Partner, Owen Hodge Lawyers

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