In our first two publications of the Back to Basics Series, we first examined the salient factors which underpin the employment relationship, and secondly considered the types of employment arrangements which exist.
In our third publication of the ongoing series, we now turn our minds to the contract of employment.
An employment contract is an agreement between an employer and an employee which sets out the terms that will govern each individual employment relationship. An employment contract is created as soon as there is agreement between the parties regarding the employment. As such, even if there is no written document, an employment contract exists which governs the terms of the relationship. If there is no written agreement, the terms will be implied by law and fact. This creates significant uncertainty for both parties and a fruitful area for later litigation.
The terms of employment contracts usually cover topics such as the role of the employee, details about their remuneration package, entitlements, the basis for termination and the use of a company’s intellectual property and confidential information, among other things. More importantly, written contracts are extremely important because they set out the duties, the responsibilities and the requirements that are required of both the employee and the employer.
However, simply having a written employment contract will not necessarily provide protection for the parties. The value of a written contract will depend on various factors such as the clarity of the contractual terms, how the contract is drafted and whether it abides by relevant legislation and regulations. These factors will determine the strength and the effectiveness of a contract.
This client alert will focus on the steps a business should take in order to get their employment contracts fit for purpose and ensure that they are robust. As such, below will cover the basics of employment contracts including the formation of an employment contract, terms of a contract and tips on how to ensure an employment contract is robust.
Contract Formation
In all contracts, including employment contracts, the following elements need to be satisfied, to create a valid and binding agreement:
- An offer needs to me made by the employer;
- Acceptance of that offer by the employee;
- Consideration (usually in the form of payment in exchange for work);
- An intention to be bound by both parties; and
- Both parties need to have the capacity to enter into the contract.
Once the above elements have been met, an employment contract is formed. There two main ways for terms to be included into a contract: expressly or by implication. Express terms of a contract can be either written, verbal, or a combination of both. Implied terms, on the other hand, are implications made by fact, law or custom. An example of an implied contractual term is the implied term of reasonable notice, in circumstances where the contract does not have any express notice provisions for termination.
As set out above, there does not need to be a written contract for an employment relationship to be formed, and its absence means the contractual terms may be verbal or implied. Nevertheless, these types of contracts are usually unclear and provide very little certainty about the agreed terms that govern the employment relationship. This ambiguity can often give rise to issues between employers and employees because if a matter ends in a dispute, each party often has a different understanding about the interpretation of the verbal or implied contractual term. It also leaves open the ability for a Court to imply terms in the contract.
A written contract on the other hand, creates more certainty and provides both parties with a set of agreed terms, which are clear and hopefully if properly drafted, not open to interpretation. Written contracts also remove the necessity for terms to be implied by law. For example, an express term setting out the amount of notice required by either party to terminate the contract, obviates the need for an implied term of reasonable notice. Thus, written agreements are extremely helpful in situations when an employment relationship breaks down or there is a disagreement regarding the responsibilities or rights of either the employer or the employee. A written set of terms makes it a lot easier for the employee, the employer or a third party to determine whether there have been any breaches of the contractual terms.
In the recent High Court case of Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (“CFMMEU”), the Court confirmed that in most cases where there is a wholly written contract, the conduct of the parties following the signing of the contract, will not be admissible to alter the terms of the contract. Again, this confirms that having a written contract creates certainty and avoids misunderstandings between employers and employees.
Terms of a Contract
When an employer is looking to draft an employment contract or amend an existing contract, an employer should do so in a way which abides by Australian employment laws and protects their business interests. One of the most straightforward ways for a business or employer to protect their business interests, and protect themselves against any future allegations, is by ensuring that the employment agreements include the certain terms.
While it would be more straightforward if there was a “one size fits all” contract, unfortunately the nature of employment law does not allow for that to occur. The contractual terms required to be included in contracts depend on various factors such as the type of employee being hired and the industry that the business is operating within. For example, contractual terms for part-time employees, full-time employees and casual employees are different. This is further complicated by the fact that a type of employee, such as a full-time employee, in one industry may require completely different contractual terms than full-time employees in a different industry. If for example the employee is covered by a modern award or operates in an industry where the protection of confidential information and intellectual property is important, it will be necessary to ensure the contract contains robust contractual clauses dealing with such matters. It is also self-evident that the contractual terms for more senior staff should be different from those applicable to junior staff and the written contract should reflect these differences.
There are various laws in Australia that set out minimum requirements that govern different types of employment relationships. One of the major pieces of legislation in the employment space is the Fair Work Act 2009 (Cth) (“FWA”). The FWA sets requirements such as the minimum wage requirement and standards of employment that are called the National Employment Standards (“NES”). Other pieces of legislation that govern minimum requirements for employees include the Superannuation Guarantee (Administration) Act 1992 (SGAA) and the Work Health and Safety Act 2011.
The NES are minimum entitlements that all employees must be granted. These are the absolute minimum standards or ‘non-negotiables’ and a result, any employment contract whether written or not cannot provide less than the minimum requirements provided by the NES or applicable modern award or other industrial instrument. It is instructive that even very large organisations sometimes get this wrong. In the case of Arundell & Ors v Macquarie Bank [2020] FCCA 2720 and Arundell & Ord v Macquarie Bank (No.2) [2020] FCCA 3313, Macquarie Bank failed to pay their financial advisors for annual leave and other entitlements set out in the NES, and despite having complicated written contracts of employment and the fact that the advisors earned well in excess of the NES minimum, the Bank was found to have contravened the Act, and was liable to make back-payments to its advisors. The salutary point about this case, was the fact that had Macquarie Bank had properly drafted and considered contractual clauses dealing with the treatment of the remuneration received by the Advisors, it may have been better able to defend the claims made against it.
Tips For Creating a Robust Contract
Ensuring that all bases are properly covered when preparing employment contracts can be difficult. As a starting point, we recommend that employers ensure that the contractual terms are clear and comply with the relevant legislative minimum requirements. In addition to terms that an employer must include, there are also numerous clauses that a business can choose to include in order to protect their business interests. For example, many businesses include clauses such as non-compete clauses, non-solicitation clauses, confidentiality clauses and clauses that govern the grounds for termination. The purpose of these clauses is to restrict employees from acting in a way that would go against the business interests during their employment, and in some cases for a period of time following the termination of their employment.
A few additional tips for creating a robust contract include:
- Creating standard contract templates for different types of employees within a business;
- Ensuring that all modifications to a contract are agreed to in writing;
- Issuing updated contracts when an employee’s role or responsibilities change; and
- Staying up to date with legislative changes and minimum requirements.
Taking these proactive steps to protect your business can help prevent issues or misunderstandings from arising with your employees in the future.
Please contact us if you wish to discuss the drafting or review of your contracts of employment and/or whether you require a suite of new contracts of employment for your organisation.
This article is not intended to constitute, and should not be treated as, legal advice.