10 common employment agreement mistakes

In New Zealand, an employment agreement is the fundamental legal document between an employer and an employee.

Employment agreements set out the terms and conditions that govern the employment relationship, and under the Employment Relations Act 2000, every employee must have a signed, written employment agreement.

Whether the employment agreement is an individual one (negotiated between the employer and the employee) or a collective one (negotiated between the employer and a union representing workers), it’s essential to get it right.

You don't want to face an employment dispute, a fine from the Labour Inspectorate, or wind up in the Employment Court because there are issues with the employment agreement.

They're not difficult to get right, but there are some common errors that every employer wants to avoid.

Not having a written agreement at all

In the eyes of the law, the workplace isn't the Wild West and while it may be tempting to think you can get someone to work at your company without drawing up an individual employment agreement (EA) that you both sign, don't give in to temptation.

The employment agreement forms the legal basis for employment, and if a Labour Inspector finds you don't have a written agreement for every single employee, no matter when they started, you are liable for a $1,000 fine per employee (as well as any other penalties and costs for damages that might be awarded).

Even if the employee hasn’t signed an agreement, you must still keep a copy of an 'intended agreement'.

So if you are in the process of hiring a new team member, or have staff that have been with you for a long time, you should absolutely guarantee you have a written employment agreement for each of your employees.

That includes your casual and part-time workers.

Not getting the type of agreement right

Under employment law, there are three types of employees: permanent, fixed-term, or casual, and each person's employment agreement must match the type of work they do, the hours and frequency of their work, and other terms and conditions.

From the outset, it is crucial to get each employee on the right type of employment agreement. This may seem reasonably straightforward, but there are some mistakes that businesses commonly make:

• Using a casual employment agreement for part-time workers. As soon as a person is required to work regular hours, no matter how few, they are not a casual.
• Using fixed-terms to try people out. Fixed-term employment must be for genuine commercial reasons, e.g. the work is seasonal, for a short-term project, or cover for parental leave. If you want to safely assess a new hire, use a 90-day trial (or probationary) period.
• Hiring contractors who are actually employees. Contractors are self-employed and aren’t covered by most employment-related laws. Read our article on the differences between contractors and employees.

Having an employee on a type of agreement that does not match the reality of their work could mean you face an employment dispute or other costs, including outstanding wages, holiday pay, or PAYE tax.

So before you hire someone, it's essential to consider what work needs to be done, how often, and for how long. That will make it easier to choose whether a permanent, fixed-term, or casual employee is the best fit.

Not complying with employment legislation

At its most basic, every employment agreement must have a number of clauses that are legally required. These are:

1. The names of the employer and the employee.
2. A description of the work to be performed.
3. An indication of the place of work.
4. The agreed hours (or an indication of the hours), including the number of hours, start and finish times, and/or the days of the week the employee will work.
5. The wage rate or salary payable and how it will be paid.
6. A statement that the employee will get (at least) time-and-a-half payment for working on a public holiday.
7. A plain explanation of how to help resolve employment relationship problems (including statements on the time an employee has to raise a personal grievance, i.e. within 90 days for most personal grievances or 12 months for sexual harassment grievances).
8. An employment protection provision that applies (for certain employees) if the employer’s business is sold or transferred, or if the employee’s work is contracted out.
9. The nature of the employment - for example, if the employment is fixed-term or permanent.
10. Any other matters agreed on, e.g. trial or probationary periods, availability provisions, notice period requirements.

As you can see, the mandatory clauses aren’t extensive and it's reasonably easy to ensure your employment agreements comply with the law. Because of this, Labour Inspectors can get pretty frustrated with businesses whose agreements don't meet the basic requirements.

Also, if you ever find yourself in an employment dispute, an agreement without all the mandatory clauses may not provide your business with the necessary legal protection.

Trying to shortchange workers’ rights

Every Kiwi employee enjoys the protection of minimum entitlements, such as minimum wage rates, paid annual and public holidays, and paid rest and unpaid meal breaks.

These minimum entitlements are the responsibility of the employer and, by law, all employment agreements must provide them to all employees.

As an employer, you can't ask your people to agree to less than these entitlements (of course, nothing is stopping you providing your workers with more leave or breaks than the legal requirement!). An employee could make a claim for disadvantage, breach of good faith, or unfair bargaining if they believe they were significantly disadvantaged during negotiations or during their employment.

Even if you don't include these minimums in an employment agreement, or if you have terms in the agreement that don't comply with the law, or even if the employee agreed to less than minimum entitlements (e.g. being paid $10/hour to get work experience), these entitlements are still legally binding and if a Labour Inspector finds you have breached them, you could owe your employee(s) unpaid wages or back pay for leave. You could also be fined.

Remember, the employment agreement is the basis of the relationship between you and your employee. Having a watertight agreement will get you off to a good start and provide an honest foundation to build on.

Find out more about minimum rights of employees at Employment NZ.

Reusing old templates

While the good old DIY approach might save time, taking an old template and applying it to all new employees can be risky.

Sure, most individual employment agreements are broadly the same for all employees, but failing to tailor your agreements to each employee means you may miss important things (such as all the mandatory clauses) and could put you in jeopardy of not complying with the Employment Relations Act or other employment legislation.

You don't want to end up in an employment dispute and find the agreement is missing important elements and is not legally binding. An administrative error because you recycled an old template is no defence.

Personalising the employment agreement will not only safeguard you from legal risk, it will ensure it is specific to the position, the person, and the needs and goals of your business.

Not being clear...

An employment agreement is based on mutual understanding – which is why it is an agreement rather than a contract – and everything in it should be clearly understood by both parties.

Any ambiguity in the agreement could mean that your employee does not know what the business expects of them, and what their obligations and duties are.

If you agree to a 90-day trial or probationary period, a certain number of working hours, a roster, on-call availability, or procedure for shift changes, these things should be clearly set out in clauses in the agreement.

Ensuring the terms and provisions are all clearly defined and match the reality of the job the person needs to do will ensure the employment agreement is legally robust, and will greatly reduce the likelihood of problems or disputes down the track.

The employment relationship will be a lot sturdier because you also know exactly what your employee expects of the business, for example, what allowances they may qualify for or how they can earn incentives such as bonuses, skill payments, or study entitlements.

As in all relationships, honesty and transparency are always the best policy.

...or being too specific

Being clear is the overarching rule, but there are some areas where being too specific in the employment agreement could be a disadvantage.

For example, if the agreement has stated times when your employee can take rest and meal breaks and this turns out to be difficult to achieve in the regular workday, it could be a breach of your employment agreement. Both parties would be better served if the agreement leaves room for flexibility or doesn't specify times at all.

A good rule of thumb is, aside from the provisions you are legally obliged to include, only add those that you are confident you want to bind your workers to and that you want to be bound by.

Individual employment agreements can be changed, but only if there is a genuine reason and either both parties agree or there is a consultation process regarding the changes. Going back to tweak them over and over so they match the reality of the job could be laborious and may strain the relationship you have with your team members.

Confusing the agreement with business house rules

So you’ve worked through the mandatory clauses and added any others that ensure your employee (and you) know exactly what’s expected of them. At this point, you might be tempted to include policies and procedures you want to be part of your day-to-day operations (commonly known as “house rules” or a company handbook).

But before you do, think about whether you want to give these rules the permanence and legal weight of a clause in the agreement. It may be better to create non-contractual policies and procedures you want workers to follow, in a separate document.

Doing that will give you the flexibility to alter them (within reason) if things in the business or wider market change, rather than having to go through the process of consulting with your employees and changing all of their employment agreements.

Any policies and procedures that are contractually relevant, however, should be explicitly referenced in the agreement so a new employee knows they exist and that it’s part of their job to know and follow them. For example, if the business provides a company car as part of an employee’s package, you should have a clause broadly outlining expectations of company vehicle use, with the nitty gritty specified in a separate company policy.

If you keep the clauses short and simple, they will be easier to understand and abide by.

Not following the provisions of the agreement

Once you’ve created an employment agreement and you and your employee have signed it, you both must follow the obligations within it.

It may be tempting to take shortcuts in the workplace - for disciplinary reasons or if you feel your team should be more productive - but it's not good practice and could get you into legal hot water.

One of the guiding principles of the Employment Relations Act is that the employer and the employee must act in good faith. That means if an employee comes to management with a concern, you must listen, investigate, and take any necessary action to resolve the issue.

Likewise, if you have a problem with an employee you must handle it promptly and fairly. A mandatory part of the employment agreement is an explanation of how to resolve problems in the employment relationship, and that process should be followed. If you've also included a disciplinary process, you must follow the steps that have been agreed to.

Failure to adhere to the provisions of an employment agreement and act in good faith could mean an employee could successfully challenge you with a grievance. Labour Inspectors may also fine you.

It's much better to see the agreement as a foundation for quality employment relationships, and a building block for a workplace culture of cooperation, trust, and success.

Not keeping it up-to-date

So you and your new employee have signed the employment agreement, and you’ve filed it somewhere safe and accessible. At this point, you could leave it to gather dust (or its digital equivalent).

However, going forward, it is much better to regularly review your employment agreements and update them if necessary.

For example, if there are changes to the nature or terms of the job, you should update the person’s agreement. Legally, you have to amend the agreement if the hours of work change (this includes guaranteed hours, days of work, or start/finish times). You can get into trouble if you don’t.

There must be a genuine reason for any changes and any amendments must be discussed with the employee and be made in writing. This doesn’t have to be too complex, even an email will do, but you must either agree the changes with the employee, or propose the change to them and give them time to consider and provide feedback on the proposal. You don’t have to agree with their feedback, but you do need to consider it, and (if relevant) explain why you disagree, before implementing the change.

Regularly reviewing your employment agreements will also mean you stay compliant with laws and regulations. There are often changes, e.g to the minimum wage or how holiday pay is calculated, and you don’t want to be caught out because you failed to update the employment agreement.