By Katherine Argyriou
It’s very common practice for small to medium-sized enterprises not to issue employment contracts to employees or neglect to follow up in getting them signed. Although common, it’s not best practice, and failing to provide an employment contract can open up a realm of insecurity to the employee, and risk and vulnerability to the employer.
The overarching reason why employment contracts are best practice (or alternatively, a necessity) is clarity. Explicitly outlining the terms and conditions of employment provides clarity surrounding the arrangement both to the employee and the employer and mitigates the risk of potential disputes over obligations or entitlements (and subsequently claims).
In this article, I’ll point out ten good reasons why all companies should ensure every employee has an employment contract in place.
1. Employment type
Whether it be full-time, part-time, casual, fixed term or a maximum term arrangement, the type of employment must be specified. Different types of employment attract different entitlements, such as overtime, leave accrual, restrictions on termination and minimum pay rates so it’s essential that the status of an individual’s employment is clearly established from the outset.
Having said that, it’s not enough to just list the employment type in a contract, but rather the employer should ensure that the terms/conditions/obligations for each individual is consistent with their employment status. That is, the practical employment arrangements must reflect the individual’s employment status. Failure to do so may result in an employee being held to be properly engaged upon a basis different to what was intended, which contains the possibility for back payment. Refer to the Westpac v Rossato article we published earlier.
2. Notice periods
Notice periods for termination, redundancy and resignation are provided for in the Fair Work Act 2009 (‘FWA’) and dictate an absolute maximum of 5 weeks’ notice. Alternatively, employers can agree upon their own higher notice periods which will be included in an individual’s employment contracts, making them a binding obligation on the employee.
Clauses can be included in contracts to restrict employees’ activities after their employment with the company ceases. These clauses may restrict the post-termination activities of an individual based on distance, time, industry or conduct.
In order for a restraint clause to be enforceable, it must be reasonable. There is no one definition for what is a “reasonable” restraint and instead, the clause will be tested by the courts. Among other things, the court will consider whether the restraint genuinely protects legitimate business interests.
4. Award coverage and classification
Although all employees have entitlements under the Fair Work Act (2009) and National Employment Standards (‘NES’), some employees may be covered under a relevant Award and therefore have additional entitlements.
Explicitly (and correctly) classifying an employee within their employment contract allows both employer and employee to be made aware of any additional entitlements given by the relevant Award, as well as minimum pay rates. Award coverage and classification encourages both references to the relevant Award and subsequent compliance.
5. Ordinary hours
Defining the ordinary hours of the business allow for a better scope of entitlements payable outside of ordinary hours, such as overtime and penalties. Clarity surrounding the company’s ordinary hours of work mitigates the risk of underpayment, and potential for employees to claim back pay for entitlements unpaid.
Ordinary hours are usually defined in the relevant Award relating to the business, if applicable.
6. Annualised salary
Annualised salaries are a commonly confusing concept for employers. An annualised salary differs from an hourly rate of pay in that an annualised salary is a fixed amount paid regularly to the employee over the course of the year, whereas an hourly rate, and subsequently payslip each week, can constantly be changing given the time and day of work, public holidays, overtime etc.
A salary should be calculated to ‘reasonably compensate’ the employee of all relevant Award (or otherwise) entitlements. Instead of receiving extra payment for overtime or weekend shift penalties, the employer should calculate the possibility and frequency of an employee working hours that attract such penalties, and then incorporate them into the salary calculation. This is what ‘reasonably compensate’ means.
Once an annualised salary is finalised, the way it has been calculated should be listed in the employment contract. By doing so, there is no claim for back payment of penalties unpaid, as the salary ‘reasonably compensates’ the employee for all such penalties.
Providing employees with information within the employment contract as to what policies the company has in place makes compliance with such policies a term of their employment. This means that if an employee is ever in breach of a policy, the employer has grounds for disciplinary action.
It is desirable to issue company policies separately to the employment contract so that they are easier to vary. Upon this basis, care should be taken when drafting the employment contract to ensure that the policies and procedures are not given contractual effect.
8. Duties and expectations
Employment contracts can set standards and expectations of employees and give employers a benchmark for what conduct may give rise to disciplinary and counselling processes, or even termination. Without defining and setting expectations, it is difficult, if not impossible, to counsel employees when they fail to reach them.
Clauses specifically outlining the procedure for and obligations surrounding termination is a key aspect of employment contracts. Especially with fixed-term employment, in the absence of termination clauses, dismissing employment without attracting risk can be quite delicate.
Alternatively, issuing employment contracts with termination clauses outlining procedures for termination at the end of term and termination with or without notice, employers mitigate the risk of, once again, back payment for unpaid terms or notice periods.
10. Risk mitigation and control
Arguably the most important reason to implement employment contracts is to set legally binding obligations, agreements and expectations of employees to the company. Without doing so, the employer opens the company up to potential claims for an array of scenarios aforementioned in this article.
Employment contracts are invaluable to all companies, regardless of size, and provide indispensable clarity surrounding the employment relationship. A properly drafted employment contract will also enable the employer to undertake effective and efficient employment relations processes where required.
HR Assured’s software, HRA Cloud is fully equipped with employment contract templates, as well as other documents and policies, making it easy to manage this process. For further information or advice regarding employment contracts or any HR issue, please contact HR Assured’s Telephone Advisory Service.
Katherine Argyriou is a passionate Workplace Relations Consultant at FCB Group and HR Assured Australia. Katherine provides in-depth advice on a range of employment relations matters with a particular interest in the employee life cycle.