Employment Contracts - Critical Clauses

Critical clauses in employment contracts

As business owners, most of you will have basic standard employment contracts or letters of offer that you use for new employees. These basic documents are generally sufficient when it comes to covering the obvious things like remuneration, hours of work, basic duties and employee entitlements such as leave. What they usually fail to cover, though, are the real issues that might go wrong in an employment relationship. When something actually does go wrong, these basic documents fail to provide you with protection, recourse and remedies.

In this article, we discuss some of the critical clauses that are often missing from basic employment documents. We cover what each critical clause does and why it is important, and the potential consequences of not including the clause in your employment documents.

Performance expectations clause or job description

This is THE big one. Nine times out of ten, business owners come to us because they are having issues with an employee who either cannot perform to the required standard or does not seem to want to. Without clear performance expectations and targets it is very difficult to performance manage an employee, and it is even more difficult to lawfully terminate an employee for underperformance.

Usually the performance expectations clause in the employment contract can be very simple. It should record that there are performance expectations and targets of the employee’s role, and that these will change (reasonably) over time. It should stipulate that the employee is expected to meet the expectations and targets associated with their role as notified to them from time to time. And it should state that there will be consequences for the employee if they do not meet their expectations and targets including disciplinary action and, ultimately, dismissal.

From there, you should ensure that there is a comprehensive job description for each of your employees setting out the duties, expectations and targets or key performance indicators associated with their role. You should ensure that each new employee you take on has a job description from Day 1 (and a copy of it should be attached to their contract).

Going forward, you should review each employee’s job descriptions regularly. We suggest that you discuss and update job descriptions at your employees’ performance reviews, and provided a revised written job description shortly afterwards to confirm the new terms.

Ownership of intellectual property clause

For many businesses now, particularly a lot of start-ups, their value is in their intellectual property. It is not what they do, but rather how they do it or the ideas they have, that distinguishes them in the marketplace. Despite this, many business owners fail to protect their intellectual property from their employees.

Your employees are the people who are going to be helping to creating most of your intellectual property. You reward them for doing so via their remuneration and other entitlements and benefits. Often, however, employees feel that they have some stake or claim on the ideas, documents, programs and products that they are helping to design and build for you. The consequence is that many departing employees will take your intellectual property with them when they leave, essentially stealing your most valuable asset. Including a clause in your employment contracts about intellectual property ensures that there is no ambiguity about ownership interests and rights.

Your intellectual property clause should make it clear that your intellectual property is valuable property and that you are the exclusive owner of it. The clause should say that any intellectual property (including ideas and inventions) created by the employee while working for you becomes your property. You are paying the employee for their time and work, so you own the product of that. For legal formality, the clause should also require the employee to assign or transfer any rights that they may have in the intellectual property to you.

Job-specific requirements clause

It is surprising how many employers fail to set out job-specific requirements when hiring new employees or promoting existing ones. Things like professional accreditations, memberships, licensing and criminal background checks may be prerequisites to a particular job role.

The reality is that if an employee ceases to qualify for the prerequisite, they may not be able to perform their job. This is often the case for professional employees such as accountants, lawyers and medical professionals, or for employees who are required to maintain certain licensing such as real estate agents and financial planners.

Roles with prerequisites should clearly stipulate the requirements in the employee’s employment contract, and state that failure to meet the requirements on an ongoing basis may result in dismissal. Your employment contract should also give you the option to put the employee on unpaid leave (i.e. suspend their employment) during any period that they do not meet the legal or professional requirements of their job role.

Restrictive covenants

Restrictive covenants are becoming increasingly common in employment contracts, but so often they are still misunderstood or poorly executed.

When we talk about ‘restrictive covenants’, we are generally referring to non-compete or non-solicitation clauses. Non-compete clauses require employees not to engage in activities which would compete with your business for the duration of their employment and for a specified period of time after their employment ceases. Non-solicitation clauses require employees not to work with certain people who are key to your business, such as your clients, continuing employees and suppliers.

There are a number of reasons why business owners use restrictive covenants in their employment contracts, but the overarching goal is to protect the goodwill in their business. This should be kept in mind when preparing a non-compete or non-solicitation clause – it should not go beyond what is reasonable to protect your business. Restrictive covenants that are seen to be unreasonable or punitive will often be ruled to be unenforceable by the courts.

We generally recommend that non-solicitation clauses be adopted in employment contracts for most employees, but that non-compete clauses be reserved for senior or executive staff. It may be reasonable to expect that a departing administrative assistant should not contact your clients in an attempt to entice them to work with their new employer. But it is unlikely that the assistant will be able to do much damage to your business by setting up in competition with you in the workplace.

In terms of the time period for which the restraint applies, we recommend that you either select a fairly short (i.e. less than 12 months) timeframe that is reasonable in the circumstances, or you adopt a ‘cascading clause’ structure. The cascading clause is designed so that there are a number of time periods specified in descending order, and the longest reasonable period applies. The employer generally asserts that the longest stated period is a reasonable period and is therefore applicable by default, but if the courts determine otherwise on a challenge then the clause can be “read down” to a shorter period.

The territory that the restraint applies in should be selected by considering where the employee worked and where your business operates. In some instances, a small territory may be appropriate, particularly for a non-compete clause where you are restricting them from competing with you in the marketplace. For non-solicitation clauses, however, it is easy to argue that the territory should be larger because it is key people you are restraining them from dealing with – and those people might be spread far and wide.

Employment contracts are one of the most valuable documents in a business owner’s arsenal, and yet many do not see them that way. In the competitive and complex marketplace in which businesses now operate, it is important to carefully regulate how your workers deal with you and the outside world. In our experience, most business owners’ employment documents fall short of what is really needed to protect their business. Just think of the competitive advantage a properly-drafted employment contract could give to your business.

For help drafting your employment agreements and restraints, call us on 1300 654 590.

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