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Businesses often have a standard employment contract or letters of offer that they send to their new employees. Generally, these documents will cover the most obvious aspects of employment, e.g. wages, duties and leave entitlements. However, if these haven’t been properly drafted in the first place, they can cause a major headache later on. To help you avoid this headache, these are our key tips and traps to look out for in employment contracts.
Written employment contracts
It may sound obvious, but the best way to protect your business is to make sure that you have written employment contracts in place. We often find issues arising where employers and employees have different views on what the employment agreement is because they rely on a verbal agreement or on a short letter of offer.
We have also seen people using contracts that they have found on Google. These contracts are only worth what you pay for them. This is because the person who has drafted the contract has not considered the contract in the context of your business. It may include irrelevant references to legislation and Awards, or it may even suggest that the law in a different country applies.
If you have had your employment contract template drafted by a lawyer, it is important to make sure it is regularly updated. Employment law is an area of law that can change rapidly in a short period of time. For example, the National Minimum Wage usually increases on 1 July each year. This can have flow-on effects to the rates payable under Modern Awards. Other terms of Modern Awards are also updated regularly. The problem is that people often forget to look back over the terms of the contract and when it was last updated, particularly in the excitement of hiring a new employee.
Out-of-date templates or internet templates can give you a false sense of security that you are protected. If you try to enforce a clause in the contract that has been overridden by a change in the law, you risk an employee bringing a claim against you. Andreyev Lawyers has prepared a comprehensive employment contract template for the Australianbiz site which is regularly updated.
Performance expectations
One of the most common traps we see business owners fall into is that they fail to adequately set out the performance expectations for their employees. If an employee cannot perform to the required standard, or does not seem to want to, clear performance expectations make it much easier to performance manage an employee.
To terminate an employee for poor performance, you generally need to provide warnings and give the employee a chance to respond by improving their performance. If an employee brings an unfair dismissal claim, the Fair Work Commission will look to see what the role of the employee was. As you can imagine, this can be pretty hard if the position description was never written down.
The good news is that usually performance expectations are very simple. We recommend that employers state the job requirements, qualifications, main tasks and key performance indicators in their employment contracts. The simplest way to do this is to attach a detailed position description to the employment contract.
The position description should include a line that states that the employee is required to meet the expectations associated with their role, as notified to them from time to time. You can also state that there will be consequences if the employee does not meet your expectations, including disciplinary action.
The job description you started with when you first hired someone is unlikely to stay the same as their role progresses, so you should review each employee’s job description at least annually. Performance reviews can be a great time to discuss and update job descriptions. This helps to eliminate any tension between your expectations of the employee and their understanding of the role. You can then provide a revised written job description shortly after the performance review to confirm the new terms.
Ownership of intellectual property
It is increasingly common that the value in a business is in its intellectual property. The business is distinguished from competitors by its ideas or how it does something. It is therefore very important to protect your intellectual property from employees.
The whole point of having an employee is so that they can assist you to build your business. They help you to create your intellectual property and you thank them for that by remunerating them and providing other entitlements. However, when an employee leaves your business, they may feel that they have some ownership over ideas, documents or products that they helped design and build. A departing employee may take your intellectual property with them, essentially stealing what is most valuable to your business.
You should include a clause in your employment contracts about your intellectual property to ensure that there is no ambiguity about who owns it. This clause should make it clear that:
In terms of legal formality, the intellectual property clause should also require that the employee assign or transfer any rights they have in the intellectual property to you.
Restraint clauses
Restraint clauses are often included in employment contracts to protect your interests after an employee leaves your business.
The most common restraint clauses we see in employment contracts are non-compete or non-solicitation clauses. A non-compete clause prevents your employee from competing with your business for the duration of their employment and for a specified time after they have left your business. A non-solicitation clause prevents employees from working with certain people who are key to your business, such as your clients, suppliers and continuing employees.
The key reason to include a restraint clause in your employment contracts is to protect the goodwill in your business. You have spent considerable time building up your business, so understandably you want to prevent an employee competing with your business by using the contacts and knowledge you have given them.
The restraint clause in your employment contracts should not go beyond what is reasonable to protect your business. This will depend on the nature of your business. However, restraint clauses that are too unreasonable or burdensome on your employees will often be found to be unenforceable by the courts.
A non-solicitation clause should be in the employment contracts for most of your employees, but the non-compete clause is usually only appropriate for senior or executive employees. For example, it may be reasonable to stop your HR manager from contacting your employees in an attempt to entice them to work with a new employer.
We recommend that the time frame for which the restraint applies is relatively short or that you use a ‘cascading clause’. The cascading clause nominates a number of time periods in a descending order, with the longest reasonable period applying. You can assert that the longest period is reasonable and applicable. But, if the clause is challenged in the courts, the court can read down the clause to one of the shorter periods you have nominated.
The restraints should also refer to a geographical area. To determine this, you should consider where the employee has worked and where your business operates. Again, how wide that area is will depend on what is reasonable for your business.
Employee entitlements
We often see employment contracts that are far more generous to employees than the law requires. You may end up giving away additional entitlements because your contract overstates what your employees are entitled to.
For example, we have seen contracts where the default requirement is that the employer must give the employee one months’ notice of termination. However, the statutory requirement can be much less, depending on the employee’s age and length of service.
You cannot contract out of an employee’s statutory entitlements, but you can specify what entitlements the employee can receive. Statutory entitlements can change, but the employee will always have the right to receive the more favourable entitlement – either what is in the contract or their entitlement at law.
We recommend that employment contracts simply state that the employee receives leave entitlements and notice periods in accordance with the law, without specifically stating what those entitlements are. This avoids over or understating the entitlements and ensures that the contract is flexible to any changes in the law.
There are a number of traps that you can fall into with your employment contracts, but they are a valuable resource for your business. We recommend that you carefully consider how you regulate your relationship with your employees in an employment contract on a case-by-case basis. Considering some of the traps that are out there, having a properly-drafted employment contract might just give you a competitive advantage in the marketplace.
Andreyev Lawyers works with business owners, helping them with all the aspects of running a business. Recognising that employing staff can be a significant challenge for business owners, we assist our clients to manage the legal aspects of their employment relationships from beginning to end. For specialist advice on employment law and other commercial matters, contact Simone Daniells on 1300 654 590.
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