THE IMPORTANCE OF EMPLOYMENT CONTRACTS
Employment contracts are essential to any business and employers should use them as a tool to protect the interests of the business and to effectively manage staff
Without employment contracts, businesses expose themselves to unnecessary and avoidable risk.
What is an employment contract?
An employment contract is a legally binding agreement between an employer and employee which sets out the terms and conditions of employment.
Employment contracts can be in writing or verbal. However, written employment contracts are preferable to verbal agreements because verbal agreements can be difficult to enforce or rely upon, especially when disputes arise.
Employment contracts must comply with the Fair Work Act 2009 (Cth) and the applicable award or enterprise agreement.
Employment contracts must not provide less than the employee’s minimum legal entitlements or unlawfully restrict the employee from benefitting from those entitlements regardless of whether the employee is paid at or above the award rate.
Benefits of a written employment contract
The benefits of a written employment contract include the following:
- Easier to enforce than verbal agreements.
- Protects the interests of both parties.
- Provides certainty.
- Can be drafted to ensure the commercial interests of the business are protected, for example, restraint of trade, non-solicitation, intellectual property, and confidentiality clauses.
- Can be used to clearly set out the terms and conditions of employment including employee’s position, duties, rights, responsibilities, pay, and other benefits avoiding unnecessary miscommunication.
Risks of not having written employment contracts
Without written employment contracts, employers will find it difficult to protect their interests and enforce employment obligations (for example, post-employment restraints, confidentiality etc.) Employers also run the risk of expensive and avoidable claims by employees.
Verbal agreements are ineffective and unreliable. It is difficult to rely on what someone said (sometimes many years earlier) based on memory if it is not written down. Courts may not be able to enforce the terms of a verbal contract if the existence of the contract or its terms are uncertain.
Further, misunderstandings could arise regarding important aspects of the agreement, such as payment details or the position.
Such misunderstandings could lead to disputes between the employer and the employee and a breakdown in the employment relationship.
While not all disputes can be avoided, there is a better chance that a dispute will be resolved quickly and reasonably if the parties can refer to the terms of a written employment contract.
What should an employment contract include?
Employment contracts should address the following:
- Identity of employer and employee.
- Type of engagement (ie, casual, part time, full time, fixed term).
- The applicable modern award or enterprise agreement (but do not incorporate the award or enterprise agreement into the contract).
- Commencement date.
- Position title, duties and responsibilities of the employee.
- Reporting lines.
- Remuneration including rates of pay and when and how payment is to be made, including whether payment is inclusive of allowances, annual leave loading, overtime rates, penalty rates and shift loadings etc (and offset clause if applicable).
- Arrangements for superannuation.
- Hours of work.
- Location of where work is to be performed.
- Leave entitlements.
- Termination including resignation, redundancy, abandonment and other obligations on termination.
- Confidentiality obligations and the protection of intellectual property.
- Any restraint of trade during or post-employment.
- Compliance with policies and procedures.
- Employee warranties, including in relation to information provided, qualifications and authorisations.
If you do not have existing employment contracts, Employer Assist recommends implementing them for all employees. Employer Assist can provide AAAA members with template employment contracts tailored to suit any individual requirements and provide advice on rolling these contracts out to new and existing employees.
Offset or set-off clause
There is a common misconception by employers that paying a salary, or an above award rate circumvents the need for a written employment contract or to pay any additional entitlements such as overtime, allowances, penalties, loadings etc. However, this is not the case.
If paying an employee, a salary or an above award rate, the payment must be sufficient to compensate the employee for the minimum entitlements under the legislation and award (or enterprise agreement).
Also, and importantly, the payment should be set off against those minimum entitlements.
Offset or set off clauses are commonly used in employment contracts for employees who are paid a salary, an “all-inclusive rate” or earn more than minimum entitlements under an award or enterprise agreement.
It is important for employers to review and, where necessary, revise their offsetting arrangements regularly to minimise risks and ensure all arrangements are clearly and appropriately documented in writing.
Policies and procedures
Employees should agree to be bound by all policies and procedures of the employer as a condition of their employment but should not be incorporated into the employment contract. However, policies and procedures must be consistent with any legal obligations under the legislation and award or enterprise agreement.
Employees should be inducted into policies and procedures when they commence work and when any new policies or procedures are introduced.
AAAA Member Benefits
Employer Assist provides advice on all aspects of employment law including employment contracts. Employer Assist can assist members with template employment contracts at member rates.
Please contact Employer Assist on 1300 735 306 or firstname.lastname@example.org if you have any questions relating to this article or to discuss any employment issues that arise in your business.
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This document is intended for general information purposes only and should not be regarded as legal advice. Please contact Industry Legal if you require advice.