Australia: How to create an effective employment contract

In brief - Employment contracts need to be aligned with the aims of your business

Taking on a new employee means starting a new relationship. Having an effective employment contract is key to putting that relationship on a solid footing. This article gives you some tips to help you navigate the complexities of employment law.

Human resources role often performed as a sideline

HR professionals work within a rigorous discipline and are obliged to operate in a complex legal environment.

There is further difficulty when the HR official, typically in a small business, has taken on the role by default. An in house counsel, company secretary, chief financial officer, general manager or even an office manager may have this function in addition to other duties.

Often HR is looked after by someone in a part time capacity and this adds to the stress and difficulty of executing the functions of the role properly.

Employment laws are complex

The labour law instruments that affect the workplace are deeply complex, despite the simplification that has occurred as a result of the Work Choices legislation and the current primary statute being the Fair Work Act, 2009 (Cth) (FWA) .

We no longer have a landscape where there are seven industrial relations systems. Largely we are reliant upon the FWA alone. In fact, 85% of all employees are covered by the FWA, including people employed by corporations.

Although the current scenario is simpler than it was, it is still complex.

The diagram below sets out the conceptual structure in which the workplace operates:

Effective employment contracts

This article looks at the pinnacle of the diagram above. If you need to roll out employment contracts from time to time, following these guidelines will help you to avoid common problems down the track.

Don't use multiple templates

Contract templates used should not be mixed. In other words, stick to one precedent and do not cut and paste between them.

The contract template that you use should be apt for the position. For example, do you really want to have post employment restraints imposed upon a receptionist?

A simpler pro forma could be used for a junior employee. More serious thought should be given to more senior roles.

Aim for a congenial tone

Try to use a template that expresses the employment arrangement warmly. After all, you are starting a new relationship and you want to start on a good footing.

Employee duties or position statement

Carefully consider the duties or the position statement of the employee. Consider whether you want to have the employee commit to some flexibility with alternative duties. If so, are the alternative duties that may be required to be performed within that employee's skill set?

Hours of work

Under the National Employment Standards (NES), an employee is not obliged to work more than 38 hours per week, plus reasonable additional hours. Resist the temptation to say that the employment is on a 40 hour per week basis. There are ways of ensuring that employees work the required number of hours.

Employee remuneration

This should be carefully worded. Errors are often created and problems emerge when the rate of pay or a bonus that is expected to be earned is poorly drafted. Confusion will reign and disappointment will triumph.

Also be aware that a review of an employee's performance during the course of the year does not automatically qualify for a pay increase. Avoid expressions that suggest that upon a performance review, an employee can expect an automatic pay increase.

Bonuses, commissions and incentives

Often terms are used to describe these with an employer retaining a discretion as to whether to pay the extra earnings or not.

An employer can retain some discretion, but the discretion has to be exercised in good faith (see Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234).

Accordingly, if a discretion is going to be exercised and a bonus or an incentive is not going to be paid, then reasons why need to be considered. Not only that, but the consideration itself needs to be proved and demonstrated.

Our suggestion is that a dialogue be entered into with the employee as to why the incentive payment should not be paid. The employee should be invited to comment.

Then, if the incentive payment is not going to be paid, a decision with reasons needs to be given to the employee with an invitation to respond. At least some sort of paper trail needs to be demonstrated, lest the employee complain about a breach of contract. If a discretion is to be exercised, then how it was exercised will be a relevant matter for a court review if there is a dispute later.

Expenses that have not been met

Ordinarily, an employee's remuneration on termination cannot be offset against expenses that have not been met. A statutory entitlement to accrued annual leave is always payable to an employee.

However, if the contract of employment provides that money payable to the employer on termination can be offset against payments that are due to the employee, then that may work. There are no reported decisions on this, but the clause may be persuasive in getting an employee to abandon the idea of complaining about an offset.

National Employment Standards

HR officials need to be familiar with the National Employment Standards. These are contained in the Fair Work Act and relate to the following:

  • notice of termination and redundancy pay
  • request for flexible work arrangements
  • parental leave
  • annual leave
  • personal / carer's leave and compassionate leave
  • community service leave
  • maximum hours of work
  • public holidays
  • long service leave
  • information statements to employees

Cashing out annual leave

The cashing out of annual leave is a common question which can arise. There is a conception that annual leave can be paid out. However, the NES provides that the cashing out can only be allowed if a Modern Award or an enterprise agreement provide that it can be cashed out. At the moment we are not aware of any Modern Awards or enterprise agreements which allow for it.

Directing employees to take annual leave

There is also no provision in the Fair Work Act with respect to directions that can be given by employers to employees to take large amounts of leave that have been accrued. However, there is authority to suggest that an employer can give an employee notice to take annual leave.

Probably a good guide was what the previous legislation allowed, which was that an employee could be directed to take one quarter of any accrued leave if more than 40 days had been accrued.

Protecting confidential information

It is best to express that the confidential information relating to an employer's business needs to be respected by an employee even after they have completed their service. However, it would assist in any issue of dispute if there is some attempt to identify the sort of confidential information that the employer seeks to protect.

Some thought should be given by the HR manager to defining what aspects of the employer's business are confidential (and not in the public domain) and need to be respected by the employee at all times, even after the employment relationship has ended.

Termination of employment

The termination of an employee's employment should be defined. If the termination period is to be in accordance with the National Standard, then reference to section 117 of the Fair Work Act should be made.

A longer period may also be given - say, one month's notice.

Consideration should also be given by the HR official as to whether the following clauses should be included here:

  • Should the employer retain discretion to send the employee home and perform any work during the notice period? (This is known as "gardening leave" or "garden leave".)
  • Should the employer have a right to suspend pending any investigation of the employee, if necessary?

Executing the employment contract

Trite as it might sound, the contract should be executed. Controversies emerge when it is not signed, as allegations can be made that no agreement was reached.

Take care when creating employment contracts for new employees

HR professionals should exercise care when rolling out contracts for employees. The use of a template is only the first step - it is not the only step in the proper engagement of an employee.

In fact, it is a document that should be properly aligned with the operational and commercial aims of the business in which the employee will be working. It is a part of the induction of a new employee and should be consistent with that process.

For more information on workplace relations, please see the website of Colin Biggers & Paisley or contact Sam Ingui at

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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