Australia: Contracts of employment - Part 1

The employment contract governs one of the most significant relationships in people's lives being that between the employee and employer. When well drafted, the employment contract is beneficial for both the employer and the employee as, amongst other things, it provides clarity regarding the obligations of both parties.

This newsletter will set out:

  • the purpose of having a written contract of employment for your employees; - some of the express terms that should be included; - the key terms that are implied by law; and - how express and implied terms interrelate.

Next month, in part 2 of our newsletter, we will address how the written contract of employment interrelates with other industrial instruments, and discuss how other terms can be incorporated into a contract and the various dangers of allowing this to occur.

What is a Contract?

A contract is a legally binding agreement between two or more people. It can be verbal or written. The terms of the agreement can be expressly agreed (Express Terms) or they can be implied by aspects of the circumstance (Implied Terms). Sometimes, other terms can be incorporated into the contract, such as representations made before the agreement, or by the parties referring to other documents during the agreement process (the Incorporation of Terms).

Broadly, there are two types of contractual terms. 'Essential Terms' are those terms of the contract without which the continuation of the contract would not be possible. For example, in an employment contract, the remuneration or the hours of work, are both Essential Terms. 'Non-Essential' terms, on the other hand, are still legally binding on the parties, but a breach of those terms will generally not allow a party to bring the contract to an end. A breach of these terms will more often lead to some other type of remedy for the offended party.

Any contract, whether written or verbal, will contain a combination of both Essential and Non-Essential terms, which can be both Express or Implied.

What is the Role of Written Contract in an Employment Relationship?

An employment relationship is a contractual relationship. It is not possible for employment to occur without there being a contract of some sort between the parties. It is not necessary for the contract to be in a written form or signed by the parties. Once an employee is engaged on certain terms, and carries out work for the employer, there is legal contract between the parties, whether this is in a written form or not.

The role of the written contract in employment law is to formalise the relationship, and to set out some of the obligations and expectations between the employer and employee. A written contract will set out the Essential Terms such as the payment of wages, the hours of work, and the duties the employee is expected to perform. It will generally also set out the provision of leave and minimum notice period for termination. A written contract may also give the employer an opportunity to set out the obligations for an employee to maintain confidentiality during and after the working relationship, and any restraints to be imposed on them after the employment ends.

A written contract will not displace or change the minimum standards that employees are entitled to under the Fair Work Act 2009 (Cth) (the FW Act) or other industrial instrument such as a Modern Award or Enterprise Agreement. (The relationship between these are discussed in detail next month). However, the written contract of employment is still essential for:

  1. Setting out any of the additional obligations under the agreement which are not contemplated by the FW Act or relevant industrial instrument; 2. If there are any Implied Terms that apply by operation of law to the relationship, which the employer does not want to incorporate, in some cases these can be excluded by the use of Express Terms; 3. A practical way of setting out the employer's expectations to the employee; and 4. Providing clarity and certainty in the event of a dispute about the working relationship, expectations and/or entitlements.

What are the Key Express Terms of Employment Contracts?

Employers may face additional risks if their contracts of employment do not contain certain key Express Terms. Set out below are some key Express Terms which should be included in every employment contract.

Notice of termination: This is perhaps one of the most important Express Terms that should be included in every employment contract. Without an express term regarding termination, the law may imply a term of 'reasonable notice' which can be as much as 12 months' notice for senior, long serving employees. An express term regarding notice of termination should not be less than the minimum notice periods prescribed in section 117 of the FW Act.

Hours of work: An Express Term in relation to hours of work clearly sets out the obligation on employees regarding their weekly hours. The National Employment Standards (NES) sets out that the maximum weekly hours of work are 38 hours for a full-time employee unless additional hours are reasonable. For this reason, an Express Term regarding hours of work will also often allow for additional hours where they are reasonable, with the employee agreeing they are reasonable given the nature of their position and their remuneration.

Set off: Rather than calculate overtime, penalty rates and allowances, it is often simpler from an administrative perspective for employers to pay their employees above what is required by an industrial instrument and then include a set-off clause in the employment contract. It is essential that the set-off clause clearly outlines the award entitlements (commonly overtime, penalty rates, allowances, leave loading, etc) that are being 'set off' against the annual salary which is well above the minimum required by the award.

Type of employment: It is imperative to include the type of employment (such as casual, part-time, full-time or fixed term) as an Express Term as different types of employees have different entitlements under the FW Act and industrial instruments. For example, part-time and full-time employees are entitled to paid annual leave and paid personal/carer's leave whereas casual employees are not. Whilst not always completely determinative, what the parties have agreed is the type of employment is an important consideration if a court or tribunal is ever required to determine the matter.

Remuneration: This one might seem obvious, but it is essential to set out exactly what an employee's salary will be as well as any other employment entitlements (such as a phone or car) that make up their remuneration package. Entire agreement: An entire agreement clause clearly states that the agreement between the employer and employee is only what is stated in the written contract. This is an important Express Term as it can prevent any reliance on statements that were made during the negotiation phase or any oral promises.

Position description: A position description should always be included as it provides the expectations of what is required from the employee and the responsibilities they are expected to fulfil in their role.

Place of work: A well-drafted employment contract will contain an Express Term regarding the location the employee will work. Such clauses will also often allow the employer to direct the employee to work elsewhere. This is a key term to be included as it provides an expectation of the location of work in an era where remote work, workplace flexibility and alternative arrangements are common.

Restraint of trade: A well-drafted restraint of trade clause can be extremely important in preventing or limiting an employee from conduct that is adverse or inconsistent with the employer's interests after the employment has ceased. For example, a non-compete clause will prevent an employee from working for a competitor for a specified period of time, in a certain geographic area.

Other Express Terms may be essential depending on the nature of an employer's business and specific circumstances.

Implied Terms

There are also certain employer and employee duties in the contract of employment that are implied, even if they are not referenced in an express term. Implied terms are not included in the contract as a clause and are only implied as a duty when it is absolutely necessary, often to preserve the power balance between employers and employees. Terms can be implied by law, fact or industry custom and practice.

It should be noted that some implied terms (such as reasonable notice) will only come into effect in the absence of an Express Term. Further, it is sometimes possible for express terms to exclude certain implied terms, if this is done with clear words. However, there are certain implied terms that cannot be excluded.

Implied by law

A term will be implied by law where courts have previously held that those terms apply to all contracts of that type.

For employees, duties implied by law include:

  • the duty to obey lawful and reasonable orders and direction; and the duty of fidelity and good faith (ie to be faithful and loyal to the employer during employment).

For employers, duties implied by law include:

  • the duty to provide wages; and - the duty to provide a safe workplace.

Implied by fact

A term implied by fact relates only to the specific contract in question. This will occur only when it is necessary for the effective operation of a contract of that nature in the circumstances of the case. It is not enough that it be reasonable to imply the term, rather, it must be absolutely necessary in order to make the agreement work.

For example, the Federal Court held recently that there was a term implied by fact in an employment contract which allowed an employer to suspend an employee whilst undertaking a workplace investigation.

Implied by custom and practice

Certain industry customs or common practices are so well known and acquiesced that the parties making a contract in that situation can reasonably be presumed to have imported that term into the contract. In such circumstances, these customs or common practices may be implied as a term in the employment contract.

If there is custom that is widely practiced in an employer's industry as the norm, this could be an implied obligation even if it is not explicitly mentioned in the contract. However, a term will not be implied by custom if it is contrary to an express term of the contract.

Next month:

In part 2, we look at the relationship between your contracts of employments and the other relevant industrial instruments, as well as the law around incorporation terms, and the dangers for employers.

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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