What are employment contracts?
An employment contract is a legally binding agreement that outlines the terms and conditions of the working relationship between an employer and an employee in Australia. A contract serves as an tool for establishing clear expectations and responsibilities for both parties and ensuring compliance with Australian employment laws.
Although verbal agreements can be legally binding, a written contract provides greater clarity and helps avoid potential disputes. Employment contracts are essential for businesses to manage their workforce effectively and minimise legal risks.
They provide a framework for addressing various aspects of the employment relationship, such as:
By clearly defining these terms and conditions, employment contracts help to:
✅ Ensure that both parties understand their rights and obligations.
✅ Manage employee expectations and avoid misunderstandings.
✅ Protect the business from legal disputes and potential liabilities.
✅ Promote a fair and transparent work environment.
Types of employment contracts
Australian employment law recognises several types of employment contracts, each with its own specific features and legal implications. Business owners need to carefully consider the nature of the work, the expected duration of employment, and the employee's role within the business to determine the most suitable contract type.
Legal requirements for employment contracts
Employment contracts in Australia are subject to a number of legal requirements to ensure they are valid, enforceable, and protect the rights of both employers and employees. Business owners must be aware of these requirements to avoid potential legal issues and penalties.
Information statements
On top of ensuring employment contracts are alined with employment law, employers are required to provide certain information statements to employees:
🔵 Fair Work Information Statement provides basic information about employee rights and entitlements under the Fair Work Act. It must be given to all new employees as soon as possible after they start work.
🔵 Casual Employment Information Statement provides information specifically relevant to casual employees, including their rights and entitlements. It must be given to all new casual employees before they start work or as soon as possible after
🔵 Fixed Term Contract Information Statement provides information about fixed-term contracts, including the rules about when they can be used and the limitations on their duration. It must be given to all new fixed-term employees when they enter into the contract.
Probationary periods
Many employment contracts include a probationary period, which is a trial period at the beginning of the employment relationship. This period allows both the employer and the employee to assess whether the employment arrangement is a good fit. During the probationary period, the employer can evaluate the employee's performance and suitability for the role, while the employee can determine if the job and the workplace meet their expectations.
The typical duration of a probationary period is three to six months, but it can vary depending on the industry, the role, and the specific terms of the contract. It's important to note that while probationary periods offer some flexibility, they are still subject to legal requirements. For example, employers cannot dismiss an employee during a probationary period for discriminatory reasons.
Sham contracting
Sham contracting occurs when an employer misrepresents an employment relationship as an independent contractor arrangement to avoid providing employee entitlements. This is illegal under Australian employment law. Employers who engage in sham contracting can face significant penalties.
To avoid sham contracting, employers should carefully assess the true nature of the working relationship. Factors to consider include the level of control the employer has over the worker, whether the worker is integrated into the business, and whether the worker operates their own business. If there is any doubt, it is advisable to seek legal advice to ensure compliance with the law.
Mistakes when drafting employment contracts
SMBs often make mistakes when drafting employment contracts, which can lead to legal issues and disputes with employees. Here are some of the common errors to avoid:
❌ Failing to comply with the NES. Employment contracts cannot provide for less than the minimum entitlements set out in the NES.
❌ Unclear or inadequate restraint of trade clauses. Restraint of trade clauses restrict an employee's ability to work for competitors after termination. However, these clauses must be reasonable in terms of duration, geographic area, and the nature of the protected interests.
❌ Weak confidentiality provisions. Contracts must adequately protect an employer's confidential information.
❌ Inconsistent or contradictory terms with awards or agreements. Employment contracts cannot contradict or undermine the entitlements outlined in applicable modern awards or enterprise agreements.
❌ Lack of proper termination clauses. Termination clauses must outline the grounds for termination and adhere to notice period requirements.
❌ Ambiguity regarding intellectual property (IP). Contracts should clearly state who owns the IP created by the employee during their employment.
❌ Vague or overly broad language. Avoid using vague phrases that can create ambiguity and lead to misinterpretations.
Tips for drafting employment contracts
To create effective and legally sound employment contracts, SMBs should follow these best practices:
✅ Use clear and concise language. The contract should be written in plain English that is easy for both parties to understand.
✅ Clearly define the terms of employment. This includes the job title, duties and responsibilities, start date, hours of work, location of work, salary and benefits, leave entitlements, and termination procedures.
✅ Ensure compliance with all applicable laws and regulations. The contract must comply with the Fair Work Act 2009, the NES, any relevant awards or enterprise agreements, and other applicable legislation.
✅ Include a confidentiality clause. This protects the employer's confidential information and trade secrets.
✅ Consider a non-compete clause. This can restrict the employee's ability to work for competitors after termination, but it must be reasonable in scope.
✅ Specify the ownership of intellectual property. The contract should clearly state who owns any IP created by the employee during their employment.
✅ Provide a clear termination clause. This outlines the grounds for termination and the notice periods required.
Ways to end an employment contract
An employment contract can be terminated in several ways, including:
🔵 By giving notice. Either the employer or employee can terminate the contract by giving the required notice period, as outlined in the Fair Work Act and any applicable awards or agreements.
🔵 By breach of contract. If either party breaches a fundamental term of the contract, the other party may have grounds to terminate the contract.
🔵 By mutual agreement. Both parties can agree to terminate the contract, often through a written agreement outlining the terms of the termination.
🔵 By frustration. If an unforeseen event, such as a natural disaster or a change in the law, makes it impossible to perform the contract, the contract may be terminated.
🔵 By redundancy. An employer can terminate an employee's employment due to redundancy if the employee's job is no longer required. This must be a genuine redundancy, meaning the job itself no longer exists and there are no suitable alternative positions available.
🔵 By dismissal. An employer can dismiss an employee for reasons such as poor performance or misconduct, but must follow a fair procedure, which includes providing warnings and opportunities for improvement.
Final thoughts
Employment contracts are a fundamental aspect of managing employees in Australia. Business owners should prioritise creating comprehensive and legally sound employment contracts that clearly outline the terms and conditions of employment, comply with all applicable laws and regulations, and protect the rights and obligations of both parties.
By following the best practices outlined in this guide and seeking expert advice when needed, SMBs can establish a strong foundation for a successful and compliant workplace.
If you need further assistance with employment contracts or other HR matters, our 24/7 Advice Line is available to all Australian business owners. Contact us on 1300 144 002 today for expert advice and support tailored to your business needs.