Employment agreements – what basic provisions should be included?

It is trite to say that there is no ‘one size fits all’ employment contract.

Employers and employees should consider their particular contractual needs on a case-by-case basis, or at least a class-by-class basis (for example, junior clerical staff, paralegals, professionals), because one size will not generally fit all in practice and may result in overkill or the omission of important provisions.

However, all contracts (whether in the form of a letter of offer or a more formal agreement style document) should address the following provisions as a minimum:

a. Parties, definitions, interpretation

Every contract should of course spell out who the parties are to the agreement. It is also useful to include a set of definitions for terms used in the agreement, which saves on repetition and space, and to set out the way various grammatical references in the agreement should be interpreted. These clauses help to give contractual certainty in interpreting the agreement.

b. Commencement date

The contract should specify when the employment relationship will commence.

c. Minimum legislative terms and conditions

For the sake of clarity, it is advisable that the agreement is stated to be subject to minimum legislative conditions and, if applicable, award conditions. It should also be stated that these minimum legislative and award conditions are not part of the contractually agreed conditions.

d. Position and duties

The contract should specify the employee’s position and it is desirable for the employer to have a written position description in place for the job in question.

It is also common practice to set out the general common law obligations of an employee to the employer, for example, to use their best endeavours to further the employer’s interests, act honestly and not to engage in any other work which may conflict with the employer’s interests, unless agreed by the employer.

The provision can also provide the employer with some scope to change the employee’s duties so long as the nature of the position is not substantially changed (other than by agreement) and the duties are within the employee’s capacity.

The provision can also provide that the agreement will continue to operate even where there are changes in the employee’s role and operational issues.

e. Employment status

It is important to confirm the employer’s basis of engagement, that is, on a full-time, part-time, casual or other basis.

f. Place of employment

A clause of this nature can enable an employer to direct an employee to work at alternative places, subject to a reasonability requirement.

g. Hours of work

For full-time employees, the employee’s standard hours of work will normally be 38 hours per week, which can by agreement be averaged over a period allowed by the applicable industrial award. For award-free employees, hours can be averaged over a period of up to 26 weeks.

At least for award-free employees, the agreement can provide that the employee may be required to work additional reasonable hours to fulfil their responsibilities and that their level of remuneration reflects this requirement. This arrangement reflects the legislative scheme of a standard full-time 38 hour week which can be averaged over a period of up to 26 weeks by agreement, plus additional hours that are not unreasonable.

This provision would not be included for employees being paid as per award (unless an annualised wage or common law salary is being paid in accordance with award and general law obligations).

The normal office hours of the employee should also be set out as a baseline for the attendance of the employee.

For part-time employees, award requirements generally mean that the schedule must specify the:

a.           commencing and finishing times of work
b.           the days of the week on which the employee will work, and
c.           the number of hours to be worked each day.

Most awards contain a minimum period of engagement for part-time and casual employees. It is not generally necessary to specify hours of work for a casual employee because their hours of work should be inherently uncertain.

It is particularly important to consider the working hours provisions of any applicable award/enterprise agreement when formulating contractual obligations.

h. Employer policies

For employers, it is common to set out the status of employer policies as directions by the employer and not contractual terms forming part of the employment agreement which are mutually binding and enforceable.

There have been a number of cases in which employers have been held to policy statements that they will act in a certain way, such as investigating any complaints that are made.

In a practical sense, policies should be flexible and may need to be changed from time to time according to circumstances. They are not matters that should be the subject of agreement between the parties. It is accordingly important to consider the matters that should be included in the contract of employment as opposed to operational policy.

i. Remuneration

It is common to specify the regularity of payment of remuneration in the agreement, although award requirements should be checked if applicable.

The employee’s weekly or annual wage/salary (or hourly rate for casuals) should be included in the agreement or schedule.

It is important that any award or enterprise agreement requirements be taken into account when considering contractual remuneration provisions. The starting point is that all award-covered employees must be paid at least the minimum award rates for standard hours, penalty rates and overtime, as well as allowances and other award required payments.

For award employees, an employer can pay above award rates as an ‘all up’ figure, but it is important that properly documented arrangements are put in place to formalise such arrangements and provide the employer with a level of protection. There are two choices open to employers covered by the Legal Services Award 2020. The first is to utilise the annualised wage arrangement under clause 17 of the award.

This enables an employer to pay a full-time employee an annualised wage in satisfaction of any or all of the award provisions relating to minimum rates, allowances, overtime, shift penalty rates and annual leave loading. An annualised wage must be no less than the amount the employee would have received under the award for their work. It is necessary to specify in writing:

a. the annualised wage payable
b. which applicable award provisions are satisfied by payment of the annualised wage
c. the method of calculation of the annualised wage, including specification of each separate component of the annualised wage and any overtime or penalty assumptions used in the calculation, and
d. the outer limit number of ordinary hours which would normally attract a penalty rate payment and the outer limit number of overtime hours which the employee may be required to work in a pay period without any extra payment.

If an employee works more than the hours provided under the annualised wage arrangement in any pay period, then the employee will be entitled to separate payment in addition to the annualised wage. The clause also requires an annual comparison review with the award and that detailed records of hours of work and breaks are kept and signed off by the employee each pay cycle.

An alternative is to rely on a common law ‘offset’ clause in the contract of employment in order to pay an annual salary rate to an award covered employee. The Fair Work Commission has said that employers may make contract arrangements to pay employees in accordance with a salary arrangement that compensates or ‘buys out’ identified award entitlements without engaging with the annualised wage arrangements provision in the applicable award. However, care needs to be taken to ensure:

a. the contractual offset clause is precise about the award entitlements being covered by the above award wage
b. records of hours worked will still need to be kept and regularly reviewed to ensure that the employee is in fact receiving as much or more than they would be entitled to receive under the award, and
c. the payment of an above award salary amount does not result in the employee being paid less than the award requires for any particular pay period.

The provision can give the employer discretion to review an employee’s salary in accordance with any policies and its discretion. The provision can also set out requirements for payslips and superannuation contributions. Employers should note that awards now set out a limited range of default superannuation funds which employers must use if an employee does not make a choice.

j. Discretionary benefits and bonuses

It is useful to clarify the status of non-core salary payments and benefits. These should be specified to be discretionary and capable of being removed by the employer unless the employee is advised in writing that the benefit or bonus forms part of their remuneration, in which case, it should be spelt out or referred to in the salary provision in the schedule to the agreement.

This is particularly important where employers have commission or other incentive arrangements in place. Issues can arise when an employee has come to expect a certain level of benefit and an employer unilaterally changes the goalposts so that the level of payment is reduced. The issue also commonly arises on termination in the context of whether an employee is entitled to a proportional payment of commission or to payment up to the date of their termination.

k. Confidential information, intellectual property

Provisions should be included protecting the employer’s interests in relation to the use of confidential information by an employee and an employer’s intellectual property rights. More detailed provisions should be considered on a case-by-case basis.

Essentially, an employee can only use information gained through the employment, which can be characterised as confidential, for the employer’s purposes. This obligation also applies for a reasonable time after the end of employment so long as the information remains confidential. However, what is regarded as confidential is generally regarded narrowly by the courts in the absence of a more detailed contractual provision.

If, during the employment, the employee creates anything capable of being the subject of intellectual property rights and which is only able to be created because of their employment, then those intellectual property rights will generally belong to the employer.

This reflects the legal position that an employee should not gain an unfair or unreasonable advantage because of their employment. In an appropriate case, this position should be confirmed or expanded upon in the contract.

l. Termination of employment

Most termination clauses reflect minimum National Employment Standards (NES) termination requirements and include a contractually reciprocal obligation on the employee to give notice as well as the employer, which is generally accepted as a reasonable requirement. There is no statutory minimum obligation on employees to give notice of their resignation.

A provision can also be included enabling an employer to change employment arrangements during a notice period. For instance, an employee may be put on ‘gardening’ leave and not required to attend work, or may be redeployed to another area of the business during a notice period. There may be times when this is preferable to paying an employee in lieu of notice.

A provision should be included setting out the circumstances in which employment may be able to be summarily terminated without notice. These are matters which are so serious that it is recognised that notice of termination should not be necessary. This can include a failure to disclose prior conduct which is so serious that, if it occurred during this employment, would justify the immediate termination of the employment, such as prior fraud or criminal conviction.

A redundancy provision can be included to cover the situation where an employee’s position is made redundant and is no longer required. It is common practice to simply refer to the NES requirements. It is also suggested that clauses be included to put in place obligations for the return of employer property, transitional handovers and conduct during the notice period and post termination.

Employers sometimes wish to include a provision in the contract allowing them to deduct the amount of any debts said to be owing by the employee from amounts otherwise due to them. As a general rule, this type of provision is undesirable and unenforceable. The Fair Work Act 2009 (Cth) (s324) provides that an amount can only be deducted by amounts payable to an employee in relation to the performance of work if:

a. the deduction is authorised in writing by the employee and is principally for the employee’s benefit, or
b. the deduction is authorised by the employee is accordance with an enterprise agreement, or
c. the deduction is authorised by or under a modern award or an order of the Fair Work Commission, or
d. the deduction is authorised by or under a law of the Commonwealth, state or territory or a court order.

Further, the authorisation must specify the amount of the deduction and may be withdrawn in writing by the employee at any time. As an example, an employee may resign and not provide the notice required by their contract of employment.

There is no legislative requirement under the Fair Work Act for an employee to give notice of termination and an employer should not deduct any amount from wages or leave payments due to the employee unless there is some authority that falls within the above description. Many awards, for instance, provide for employees to give notice of termination and allow a deduction to be made by an employer if the appropriate notice is not given.

Finally, it is important to remember that an employment contract is a framework of basic provisions agreed between the parties and is not intended to be an exhaustive statement of the duties and obligations of the parties. More detailed provisions may be considered for more senior employees and professionals.

Rob Stevenson is the Principal of Australian Workplace Lawyers and a QLS Senior Counsellor.

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