What do Employment Contracts and Prenups have in Common

Employment contracts aren’t mandatory in Australia but their absence can create all sorts of confusion and resentment for everyone. Just like a prenup, understanding who owes who what can be a solid foundation upon which to build. So, what should be in an employment contract? And how can they protect employers?

Employment relationships are a bit like a marriage – but without the lifetime commitment and the acts of physical affection! You enter into it full of excitement, hope and promise, and commit to perform to what you understand is the required standard. The idea that something may go wrong is far from your mind in those early heady days.

So, if employment relationships are like a marriage, then employment agreements are a bit like a prenup. Just like a prenup they spell out financial matters and other issues to do with separation and divorce, or in the case of an employer, performance expectations and what happens if the employment relationship ends. Or they should.

Too often, when the employment relationship goes sour, there is no documentation around what each party agreed to and that’s when the bitterness, resentment and desire to ‘go for everything you can’ sets in.

For those employees not covered by an Award or are on a salaried agreement that exceeds any Award payments, a solid employment contract is essential to get off on the right foot.

Are written employment contracts mandatory?

Surprisingly, there is no legal obligation for employers to provide a written contract of employment to an employee in Australia. So, just like a prenup, they are essentially a ‘voluntary’ exercise.

An employment contract can be verbal and this is often the case in industries with highly casualised workforces engaged under a specific Award – e.g. hospitality, construction, and clerical. The casual comes on board, often starting work right there and then, provides their bank, tax and super details and is told which Award they will be employed under. They then get paid based on the hours submitted in a written timesheet or via a time tracking app like Deputy, Clockify, TimeCamp or the like.

Whether you have a written agreement or not, no employment contract should have terms and conditions that provide for less than the legal minimum set out in National Employment Standards (NES) or any awards, enterprise agreements or other registered agreements that may apply to the appointment.

All employees are covered by the NES, regardless of whether they’ve signed a contract or not. An employment contract can’t make employees worse off than their minimum legal entitlements.

Why should we go to the trouble of providing a written contract?

Quite simply, a written agreement creates clarity and reduces confusion and misunderstandings in the employment relationship.

Like a prenup, a written contract circumvents the ‘he said, she said’ argument that inevitably occurs when someone isn’t getting what they think they’re legally or morally entitled to.

When you have a written agreement, clearly spelling out your expectations, the whole performance management piece becomes that much easier as the employee has accepted the terms and conditions outlined in the contract.

In the case of salaried employees, who may not be covered by an Award or agreement, or who are being paid considerably higher than the applicable Award (including penalties, leave loadings, shift allowances, etc) an employment contract becomes even more important.

What should be in a best-practice employment contract?

Essentially, anything you want to rely on both at the outset of the agreement and then in times of trouble should be clearly outlined.

Legal name of the employer

This is to make sure there is no confusion about the employing entity if trouble brews and the Fair Work Commission (FWC) or lawyers get involved. If you operate under a trading name, it is best you be clear about the company that owns that trading name. For example, Smith Enterprises Pty Ltd. trading as King Pins.

Statement about the right to legally work

While it’s your obligation to check someone’s legal right to work in Australia prior to engaging them, sometimes this doesn’t happen, or the information you are given is false, so having a clause that enables you to terminate a person’s employment if it becomes known that they do not have the legal right to work under the terms agreed. It only needs to be a one-liner.

We use this paragraph – This offer of employment is subject to you having the legal right to work in Australia. In the event that you do not have the legal right to work in Australia, the Company will discontinue the engagement of your services immediately.

Position title

This confirms that the role the person applied for, and was interviewed for, is what is being offered.

Reporting manager

This clarifies the person’s reporting line, so there’s no confusion about who is their Manager. Ideally, you would put the Reporting Manager’s job title, rather than name, so the contract outlives any change of personnel.

Start date

This one is pretty obvious – good to have clarity around when the person is actually contracted to show up. Of course, it doesn’t mean you can’t amend it if required.

Employment status and agreed days and hours of work

This clarifies whether the person is full-time, part-time or casual. In the case of permanent full-time and part-time appointments, you would confirm the agreed paid hours – an ‘average’ of 38 hours per week for full-timers and whatever the hours and days are for part-timers.

Probation period

The Fair Work Act allows for a probation period of 6 months in any permanent full-time or part-time employment contract. You cannot effect an ‘in probation termination’ if you’re unhappy with how someone is turning out if you haven’t made it clear there is one.

Location of work

In the brave new world of hybrid work arrangements, it is important to be clear about where you are expecting the person to work – the office, at home, or a combination of both.

Salary, superannuation and any other benefits

Again, it’s pretty obvious why you’d include this in an employment contract. But make it clear whether:

• the salary is inclusive or exclusive of superannuation
• you’re paying superannuation in accordance with the legislated Superannuation Guarantee Levy (SGL) or more

Clear description of any incentive schemes

This really trips some people up. If there is an incentive scheme of any sort attached to the position, be clear about it in the contract. If you haven’t fully worked out what the scheme is or how it will work, at least offer a date whereby it will be resolved. Also state that the scheme can be altered at any time after appropriate consultation with the employee. Whatever you do, don’t offer an incentive program in writing only to then take it away after the person has signed the contract because it hadn’t been thought through properly!

Expected behaviour in the discharge of duties and responsibilities

This is a bit like a mini Code of Conduct and you might think it’s overkill. But just like a marriage, we often enter into employment relationships just expecting that everything will work itself out and the other person will know how to behave around the in-laws.

A clause about what is expected sows the seeds of obligation and can be very powerful in influencing positive behaviour from the outset. We include things that, if not enacted, may lead to a question mark over their suitability for the organisation:

• Devote the whole of your time, attention and skill during working hours to performing your duties.
• Follow and comply with all reasonable and lawful directions given to you by the Company, including the Company’s policies and procedures.
• Be faithful and diligent, and actively pursue the Company’s best interests at all times.
• Not compete, directly or indirectly, with the Company
• Not conduct yourself in a manner, whether during or after work hours, that causes damage or potential damage to the Company’s property or reputation.
• Not use the internet, email or voicemail at the Company’s workplace for excessive personal use, to view or distribute offensive or illegal material, or in any manner not consistent with the Employer’s workplace policies.

You get the idea.

Work health and safety requirements

Again, with hybrid work arrangements, you still have a duty of care, even when someone is working from home. So a clause in the employment contract that clearly states the employee has a responsibility for maintaining a safe workspace in their home in accordance with the Company’s WHS Policy creates the sense of mutual obligation and will benefit you in any investigation that arises out of a work cover claim – if you’ve provided the employee with a WHS Policy of course!

Leave entitlements

A simple link to the NES Minimum Entitlements suffices here if you are only offering the standard leave entitlements. However, if you are offering anything more than that, such as an additional weeks’ annual leave or anything, then it is critical you formally note that.

Conditions under which the agreement can be terminated by either party

Employment relationships usually end at some point – either by voluntary resignation or termination by the employer for reasons of poor performance.

Having a clear understanding of how the relationship may end, what notice periods apply, and who will owe who what, makes it less stressful and painful for everyone. We particularly recommend including a clear list of the things that can result in instant dismissal, such as:

• fraud, theft or misappropriation of Company property
• assault, or threatened assault of a colleague, or customer
• breach of confidentiality resulting in harm to the Company
• willful or gross negligence in the performance of your duties
• possession of, or consuming, unauthorised alcoholic/intoxicating beverages and/or illegal drugs during hours of employment, including meal-breaks
• storage, display and/or transmission of pornographic or offensive material within the workplace or on a computer owned by the Company.

Confidentiality clause

Again, this covers you against anyone leaking any confidential information to any unauthorised person, including salary details with colleagues.

Use of company property clause

This clause states that the employee is responsible for the care of any company property they may be provided with, or have access to, as part of their employment – laptop, mobile phone, company vehicle and so on. It also makes it clear that the property has to be returned in good condition at the end of the employment relationship.

Intellectual property clause

Companies in Australia should have a solidly embedded strategy for the protection of their IP, starting who owns it. In Australia, the employer owns the IP created by an employee if it is related to the employer’s business.

But with the growing gig economy and an increased reliance on contractors rather than employees, it becomes even more important, particularly when the person is being employed to create and initiate new ideas, either for the Company or clients of the company. Think software engineers, app designers, writers of code, network architects (pretty much everyone in IT), advertising and marketing, digital media, and so on.

Restraint clause to prevent solicitation of clients

This is a particularly important clause to include for roles where relationship building leads to revenue – like sales roles, recruiters, lawyers.

Most companies recruit salespeople on the back of their track record and that track record comes from having built great relationships that will potentially follow you to a new company providing a similar service.

The last thing you want is to have your customer base and revenue stream diluted by the departure of a key member of the sales team. A Restraint clause allows you to impose a restraint on anyone actively enticing clients or employees of the company across to a competitor.

But be warned – you must be able to prove the employee directly approached a client and enticed them away. If a client learns of the employee’s new appointment by some other means (e.g. LinkedIn) and independently approaches them, you have no real leg to stand on.

However, restrain clauses are a powerful psychological tool.

What should be attached to an employment contract?

There are a few things that you should include with an employment contract before the employee is asked to sign it. One is a legal requirement, the others are optional but recommended.

Fair Work Information Statement

Regardless of whether your employment contract is written or verbal, you are required by law to provide every new hire with a copy of the Fair Work Information Statement. It can be provided in person, by mail, by email, with a link to the page in the employment contract, or by fax.

Job description

Ideally, you will have a current job description for the role being offered and this should be provided to the employee prior to the interview process or attached to their employment contract. Again, the provision of this document brings clarity to the relationship and establishes the performance expectations up front.

Key company policies

If you want to create complete clarity around the expectations you have, then you may also wish to include a copy of any of the Company‘s Policies that, if breached, could result in termination of employment.

However, the mention of compliance with Company Policies in the clause to do with expected behaviour will suffice, as long as a copy of those Policies are made readily available to the employee during their induction period. Things come unstuck if you can’t prove you provided a copy of the Policies to the employee.

Your most powerful relationship ‘safety’ tool is now in place

So, there’s your employment ‘prenup’ in a nutshell.

You’re clear about what you’re offering and the performance and behaviour you expect and they’re clear about what they’re signing on for. Both parties have gone in with their eyes wide open, albeit still with rose-coloured glasses perhaps perched firmly on your noses.

This contract then becomes the framework within which any discussions around performance can reasonably take place. The employee has confidence knowing what they need to be doing to win your approval and you have comfort knowing they understand what won’t create a happy time for them.