Many people believe that if they do not have a written employment contract, they are not bound by a contract with their employer at all. This is a common mistake, as an employment contract exists whether written or not, the moment the employer and employee agree on terms of employment. The contract terms can be either express, that is written or verbally agreed, or implied by law, or a combination of both.
It is common for employers to have written contracts of employment setting out the express contractual terms of the employment relationship, and the duties owed by the employee when performing work. In addition, there are a number of terms implied into the employment contract regardless of the parties’ intentions. Implied terms can be implied by operation of law, as a result of custom and practice, implied by fact or by statute. These terms include, for example, the employees’ duty of fidelity and good faith, and an employer’s duty of care. In circumstances where an employment contract does not have an express term of notice, a term of reasonable notice will also be implied.
The contract of employment is essentially the legal foundation of the employment relationship which defines rights, obligations and expectations between the parties, and should act as the foundation of any good employment relationship. Unfortunately, this fundamental element of the relationship is so often overlooked or given cursory attention. By way of example, no-one would build a house without ensuring the foundations have been properly laid, the dimensions of the house agreed and the cost of building understood. So to should the employer and prospective employee approach the employment contract in this way. The crucial elements of the employment relationship should be discussed and set out in the contract before the employee commences.
There is no prescribed form that an employment contracts must follow, and many different styles are used, including letters of offer, formal executive service agreements, and covering letters accompanied by a standard terms and conditions sheet. Generally, the nature and specificity of a written employment contract will vary depending on the seniority and duties of the employee, and whether they are covered by an industrial instrument such as an enterprise agreement or Modern Award.
Whatever the style, to ensure that the contract of employment is complete and legally sound, there are a number of recommended matters which ought to be dealt with, including:
- Position description (what is it you actually want the employee to do and will this change over time)
- Salary review and appraisal (how you maintain the relationship)
- Discretionary benefits such as bonuses and other incentive payments
- Duties (what is expected of the employee and the scope of the role, including behavioural requirements)
- Term of the contract- which may be indefinite or fixed
- Probationary period
- Location of the employment
- Policies (and how they are to be treated)
- Termination with notice and termination without notice
- Restraints of trade (to protect the employer’s goodwill on termination)
- Confidentiality clauses
- Intellectual property and moral rights
- Company property (and its treatment on termination)
- Variation of the contract terms (like all matters things change over time, so should there be an ability for the contract to do the same)
- Exclusion of other terms and representations (no one wants to be blind-sided by something they said or did prior to commencing the relationship)
- Governing jurisdiction (if it all ends unhappily, where will the claim be brought)
Litigation over the meaning and intention of contractual terms in employment contracts is becoming more frequent in Australia, and the Courts are regularly being asked to determine disputes about breach of contract claims in a variety of employment related situations. These include, but are not limited to, unlawful termination claims, policy incorporation claims and reasonable notice claims where the contract is silent as to notice for termination, or the contract is out of date and no longer applies to the position or duties being performed by the employee at the time the employment comes to an end. Breach of contract claims can be notoriously expensive to defend, and may prove very fruitful for an employee where they can show breach.
Another contentious area, which employers need to consider when engaging managerial level staff, is the best structure for payments to executives including an appropriate mix of remuneration, incentives benefits and termination payments to ensure that their contracts of employment do not oblige them to make termination payments which could put the company at risk of breaching the Corporations Act 2001 (Cth) provisions, and ASX Listing Rules. Benefits that are payable to company officers and executives on termination are now, except in limited circumstances, capped unless shareholder approval is obtained. For listed companies, seeking shareholder approval (particularly, outside annual general meeting season) can be costly, and potentially damaging to reputation, if unsuccessful. Well drafted clauses in executive service agreements can spare employers lengthy and costly exit negotiations with departing executives, and provide the necessary flexibility for making payments on termination that conform with the Corporations’ legislation without the need to seek shareholder approval.
Ensuring that all bases are properly covered when preparing contracts of employment can be difficult. As a starting point, we recommend that employers think about the following matters carefully to guide their contract creation and administration procedures:
- Establish a standard contract template that can be tailored as appropriate;
- Nominate a person authorised to amend and issue contacts;
- Ensure contracts are signed and returned by the employee prior to commencing employment;
- Issue updated contracts when employee’s change position or other significant changes in terms and conditions occur;
- Store signed contracts in a central location;
- Ensure that any variations are agreed in writing and kept with the original employment contract; and
- Review contract templates regularly to ensure changes in law are reflected, and compliance with minimum legislative and modern award requirements is being maintained.
Hopefully if you follow these basic principles, you will build a successful and fruitful employment relationship on a sound and secure foundation that will nurture growth and profits for both employer and employee.
If you require advice or assistance to review and update your contract of employment templates, or have a particular contractual dilemma you wish to discuss, please do not hesitate to contact our office for specialist advice.
This alert is not intended to constitute, and should not be treated as, legal advice.