An employment contract sets out what you can expect from your employees, and what they can expect from you. These contracts need to be drafted carefully to ensure they comply with all the relevant laws.
Quality employment contracts can also provide you with a business performance boost, and minimise business downside risks.
Despite this, many people fail to get these contracts right, which can cause major (expensive) headaches later on.
What are the traps?
The main traps that we see people falling into with their employment contracts are:
- Failing to clearly set out the job requirements, or to include a ‘position description’ – which makes managing employees near impossible;
- Using employment contracts ‘off the web’ with little or no tailoring to the particular employee or role – which often results in unexpected and unintended consequences;
- Not updating contract templates to reflect changes in laws – resulting in invalid terms and potential costs and penalties;
- Giving away additional rights to employees that are not required at law – making your workforce unnecessarily expensive and your business less competitive; and
- Failing to protect business assets, like confidential information, IP and goodwill.
We will discuss these traps and their solutions below, as well as provide some general tips on how to remedy common problems.
1. Failing to describe the job
Business consultants will tell you that job descriptions are the first step to improving employee efficiency. HR managers will tell you that job descriptions give employees a sense of certainty and direction, which improves retention and performance. Lawyers will tell you that job descriptions are the only valid basis against which you can ‘performance manage’ a poor performing employee.
Given how many good reasons there are for clearly setting out what you expect from a new employee in their job, it is hard to believe how many people fail to do this.
As an employer, you undoubtedly have a type of person in mind when you advertise a role, as well as what qualifications they must have, and what level performance they must meet. The employment contract should reflect this, to give you recourse if the person turns out not to have the pre-requisite qualifications, or is unable to perform the required tasks.
The flow-on effects of failing to particularise a job can be disastrous given the current ‘unfair dismissal’ framework. To terminate an employee for poor performance, employers must generally provide warnings and give the employee an opportunity to respond by correcting or improving the performance issue. The termination process is far more difficult if the nature of the job and level of performance was not clearly set out up front.
Put simply, you cannot legally ‘performance manage’ an employee if you have not clearly set out in writing what you expect from them before they start. The job description is the thing against which you (and the Fair Work Commission) objectively assess their performance. The more clearly the job requirements have been set out, the easier it is to ensure that the employee performs, or gives you a valid reason for termination.
The good news is that this is one of the easiest problems to rectify. We always recommend that employers clearly state:
- The qualifications and licences necessary to hold the job. For example, if the employee needs to hold an electrician’s certificate to perform their role, and they lose this, then they can no longer perform the role, and may be validly terminated;
- The main tasks of the role. The employee will say that they can perform these tasks during the recruitment process. If it is later discovered that they cannot perform these tasks, then this will form a basis of valid termination; and
- The level to which the tasks must be performed. Pay and conditions generally reflect the level of performance you expect from an employee. It is not enough to simply state what tasks you require performed, but you must also set out at what level. Once again, this forms the basis of later performance management, if necessary.
The simplest way to do this is to annex a copy of the job advertisement or, preferably, a detailed position description to the employment contract. Alternatively, the employment contract can contain paragraphs for ‘job requirements/qualifications’ (if any) and ‘main tasks’.
Bottom line: Lack of job description means lack of certainty – and an inability to manage your workforce down the track.
2. Using online freebies
The vast majority of contracts that are obtained off the web for free are worth what you pay for them (i.e. nothing). This is because the contract has not been tailored to suit your business, so it may include irrelevant references or, more importantly, it may not refer to the correct Acts and Awards.
Also, the contract has often not been legally drafted in the first place, so you are replicating other people’s mistakes. Think about it: if you paid good money to a lawyer to prepare a contract for you, would you post it online for other people to use for free? I didn’t think so.
A big problem that can be caused by web precedents is that they may reference incorrect or inapplicable industry requirements (i.e. the wrong Modern Award). This skews both the employer’s and the employee’s expectations of what employment conditions apply to the job. It may also put the employer at risk of an unfair dismissal claim if they rely on the inapplicable information contained in the internet freebie.
Another problem is that the web precedent may contain entitlements offered by that particular business to their employees as an added incentive that is not legally required. If you do not edit or remove this part of the precedent, you pass on this entitlement to your employees, despite the fact that it may be inappropriate or irrelevant (for example, certain fringe benefits, or participation in an employee equity scheme).
Bottom line: You either pay a small amount now to avoid problems, or you pay much more later when things go wrong.
3. Failing to update templates
Most businesses have a template employment contract that they use as a starting point for each new employee. Some larger businesses may even have templates for different types of employees (for example, permanent, casual and fixed-term employment contract templates).
Templates are a helpful resource provided they are kept up-to-date. The problem is, not a lot of businesses have the people power to review their templates as often as they should.
Employment law has changed a lot over the past 5 years – the Fair Work Act introduced sweeping reform, and there have been two subsequent amendments to that Act, plus a number of Modern Awards and updates to the ‘best practice’ guidelines. Out of date templates are likely to cause more harm than good by creating a false sense of security that prevents the employer from checking what legal requirements and entitlements apply to that particular new employee.
Also, if an employer tries to enforce a contractual provision that has been overridden or nullified by changes in the law, they may be at risk of an unfair dismissal claim.
Bottom line: If your template is rubbish, the end product won’t be any better. Keep them up to date.
4. Giving away additional entitlements
Many employment contract templates that we see employers using are far more generous than the law requires. The employer is actually giving away additional entitlements to an employee because the contract overstates what the employee would otherwise be entitled to.
For example, many contracts contain a requirement for one month’s notice of termination despite the fact that the statutory notice requirement may be as little as one week (depending on the length of service and age of the employee). Unless this is specifically advantageous for the employer, it is really just creating an additional (and unnecessary) entitlement for the employee. To avoid this problem, we often recommend to employers that their employment contracts simply make reference to the employee having leave entitlements and notice periods in accordance with the relevant minimum statutory provisions without specifically stating those entitlements, so that the entitlements can fluctuate with any changes in the law.
Similarly, the superannuation guarantee is one area that employers will feel the sting in the coming years as it is intended that the compulsory superannuation guarantee contribution will rise yearly. Employers can avoid this by stating an employee’s package as “inclusive” of superannuation, so that any rise in the superannuation guarantee will be absorbed by the employee.
Now is a good time to remind employers that they cannot contract out of an employee’s statutory entitlements. However, employers can specify what entitlements an employee will receive (especially if the amount stated in the contract is more favourable for the employee than what they would receive at law). Those statutory entitlements may change after the contract is made, but the employee will always have a right to receive the more favourable entitlement, whether it is the entitlement in the contract or the entitlement at law.
Bottom line: Why give away more than you need to?
5. Not protecting valuable company assets
When you employ someone you expose them to all of your business assets – both physical (such as machines and files), as well as intangible (such as you IP and customer relationships). Good internal policies and your employment contracts are your only defence against damage to these assets should one of your employees turn against you.
If your employee will have contact with your customers and clients then your employment contract should have at least a basic ‘non-solicitation’ clause of an appropriate length, whereby the employee is not allowed to approach customers and clients after ceasing employment. And yes, appropriately worded, these do stand up.
These days most employees use their mobile phone for work-related purposes. As a general rule, you should seek to own the number they are using. If this is not possible, then the employee should be required to forward any enquiries they receive for a period of time after employment.
Your employees should also be required to return any work-related materials and IP (including copies) at the end of their employment, and keep any business-sensitive information confidential after moving on.
Your employment contracts also need to address the issue of assigning rights to IP brought to and created during employment. Although an employer will, as a general rule, automatically get title to IP created during employment, the employee may be required to sign documents to assist you register certain IP assets. This should be a term of their employment.
Bottom line: Don’t let your business assets walk out the door with your ex-employees.
Our 5 top tips for getting it right
It’s not all doom and gloom – with some know-how and some caution, you can produce a solid employment contract. The following are our 5 top tips for getting your employment contracts right:
- Include a detailed position description with each employment contract, including any required qualifications and a summary of the main tasks to be performed by the employee.
- If your business uses an employment contract template, have the template reviewed by a lawyer annually around the start of each calendar year. This review should capture any new or proposed changes in legislation.
- Ascertain whether your employee is covered by a Modern Award and, if so, record that Award in their employment contract. This can help avoid costly arguments in the future.
- Keep the provisions relating to leave entitlements, notice periods, redundancy pay and other employee entitlements generic, so that the employee’s entitlements in the contract reflect those that he or she would receive at law.
- Give careful consideration on a case-by-case basis to any post-employment restraint or anti-competition provisions in your employment contracts. While these types of provisions are appropriate for some employees (especially executive employees), they do need to be reasonable in the circumstances in order to be enforceable.
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The information contained in this post is current at the date of editing – 27 March 2023