HR basics: Employment contracts

In our ongoing series of articles on fundamental HR and people management practices, we take a look at the cornerstone document of the employment relationship: the employment contract.

This may seem incongruous given that there’s no legal requirement in Australia to have a contract of employment with your employees. However, an employment contract sets out the terms and conditions of employment, so both employer and employee clearly understand what their rights and obligations are, what’s expected of them, and what they can expect from the other party.

Not having a clear contract can create uncertainty, and leave the employment relationship open to misinterpretation, dispute, and potential legal wrangles.

So let’s have a good look at employment contracts, including what they are, what they should and shouldn’t contain, the process for drawing them up, and why you need to get them right.

What is an employment contract?

In the eyes of the law, an employment contract is a legal relationship that is formed when an employer offers a person a job and the person accepts it.

The contract is an agreement between the employer and employee that the employee will work for the employer under agreed terms and conditions, e.g. for a specified number of hours and rate of pay. It sets out the rights and responsibilities of both parties and that both parties have agreed to be bound by them.

As a baseline, an employment contract must adhere to the national industrial relations system and cannot undercut any legal minimum entitlements provided by the National Employment Standards (NES) and/or any modern award or registered agreement that may apply to the organisation or employee.

Regardless of whether they have an employment contract, all employees are covered by these minimums. A contract can be either verbal or written, but we always recommend putting it in writing, having both parties sign it, and then storing it securely.

Do all workers need a contract?

A written employment contract with an employee is not a legal obligation in Australia, but a contract formalises the employment relationship and documents what has been agreed between the employer and employee about important terms such as pay, hours, leave entitlements, as well as the expectations of the role.

An employment contract helps protect the organisation and ensures employees get all their lawful minimum entitlements.

Why should we have employment contracts?

Some businesses are happy to employ people without creating a formal contract, because it might initially save time or expense when hiring.

However, an employment contract is an essential tool for defining and guiding the employment relationship, and provides evidence of the agreed terms and conditions of employment. Not having a written contract can create numerous issues, such as:

• Potential confusion around the role, responsibilities, and rights (especially as the working relationship develops over time).
• Difficulty proving what both parties agreed to if there is any disagreement, e.g. around duties or the provisions for termination or redundancy.
• Legal risks for the business if a dispute around entitlements or general protections is taken to the Fair Work Ombudsman or the Fair Work Commission.

Are there different types of employment contracts?

The 2 main types of employment contracts are permanent or fixed-term contracts.

Permanent employees are employed on an ongoing basis until either the employer or employee terminates the relationship.

Fixed-term employees perform a role for a specific period of time, e.g. for 6 months, or length of a specific task or project, e.g the development of a piece of software. Most fixed-term employees are entitled to the same wages, penalties, and leave as permanent employees, though an award or registered agreement may provide them extra terms and conditions.

Note that from 6 December 2023, the use of fixed-term contracts will be limited to 2 years (including renewals) or 2 consecutive contracts; whichever is shorter. There are some exceptions to these limits, in cases that are genuinely necessary and appropriate.

Within these 2 main forms of employment contracts there are full-time, part-time, or casual employees.

Does an independent contractor need an employment contract?

No. Independent contractors work for themselves and deliver outcomes to their clients. They invoice the client for their work and are responsible for their own tax payments, which means the relationship is a commercial one rather than being employment.

If your business engages contractors, you need to make sure the arrangement is legitimate, i.e. it is a genuine contracting situation rather than actual employment. Always set the arrangement out in writing, clearly defining the terms of the agreement as that of a principal (the business) and the contractor.

Find out more about the differences between contractors and employees

What things should an employment contract contain?

Exactly what an employment contract should contain will depend on your business needs, the demands of the role, and federal and state legislation relevant to the position and workplace.

Remember, an employment contract can provide more generous terms and conditions than the minimum legal entitlements stipulated in the NES or the relevant award or registered agreement, but it can’t leave an employee worse off.

Even if employees agree to lesser terms and conditions in their employment contract, they are still entitled to these minimums.

This is an outline of the main elements an employment contract should contain:

Basic information

• Name and details of employer and employee.
• Position title.
• Type of contract: permanent or fixed-term.
• Commencement date and, if a fixed-term contract, end date of employment.
• Employment status, e.g. full-time, part-time, or casual.
• Name of the applicable award or agreement.
• Date of birth of employee (if under 21 years of age).

Employment conditions

• Rate of pay, overtime arrangements, and penalty rates.
• Payment method and schedule.
• Hours of work, rosters, flexible work, shift-work, and meal break arrangements.
• Leave entitlements, e.g. annual leave, sick leave.
• Allowances, e.g. travel allowance.
• Termination, severance, redundancy, and notice period requirements.

Other terms and conditions

• Reporting lines.
• Relevant performance measures or standards, if appropriate, e.g. for sales-based roles where the employee earns commission.
• The process for updating the employment contract, e.g. if the person’s role changes or they move locations.
• Confidentiality (note that pay secrecy terms are no longer allowed), intellectual property rights, and post-employment restraints, e.g. restraint of trade or non-disclosure clauses.
• Commitment to workplace policies and rules, e.g. workplace health and safety, use of company property, internet and email usage, expense claims procedure, customer service standards.

What things should a contract not contain?

When drawing up an employment contract, keep in mind that changing anything in the contract later on will require consultation and agreement from both parties.

Because of this, we advise employers to keep out things that will need to be regularly reviewed or updated (e.g. the position description, performance measures, regularly changing commissions or bonuses), or that apply to everyone in the organisation (e.g. code of conduct, work health and safety). Instead, it is better to issue these as stand-alone documents or company policies or procedures, so you can change them when needed.

Remember, too, that employment contracts must always comply with the latest workplace and industrial relations legislation. For example, as of 7 December 2022, employers cannot include any pay secrecy terms in a new employment contract, including requirements that employees not share information about their pay or the terms and conditions that would be needed to work out their pay.

What is the process for drawing up an employment contract?

An employment contract is formed when an employer makes an offer of employment, either verbally or in writing, and the employee accepts it. To be legally binding, three things need to happen: an offer is made, considered, and accepted. Without these 3 elements, the contract will not be legally enforceable.

So, you should draw up a contract with your new employee (using the terms and conditions of the NES and/or applicable award or agreement as the nucleus) and give it to them when you offer them the role.

Give the person a couple of days to consider the contents of the contract, before they accept or reject it. They may have questions or want to negotiate different terms and conditions, e.g. the salary or wage or flexible work arrangements.

Once you have agreed on the contract and the person accepts the job offer, get them to sign the contract, give them a copy, and store a copy for future reference (having a digital system will make the whole process much easier).

Should I rely on a verbal contract?

No. If either you or the employee disagree on expectations, obligations or entitlements, it will be hard to prove what was agreed to if the contract was only verbal.

A written contract provides evidence of the agreed terms and conditions of employment. A digital version is the best way to store and reference the contract at any stage. 

What if the employee disagrees with the terms in the employment contract?

Ideally, the process of negotiating and drawing up the contract will raise any issues either party has with the terms and conditions of employment before the employee begins work.

We have seen businesses including terms and conditions that don’t comply with legal minimums or mistakenly overlooking important elements because they are in a hurry or don’t seek expert advice.

The employment contract sets up the employment relationship, so be thorough and transparent from the outset. Including something in the employment contract that the employee didn’t agree to may make the contract unenforceable.

Find out more about mistakes MyHR commonly sees with employment contracts.

What happens if either party fails to meet the terms in the contract?

Again, this requires consultation and the resolution process should be documented in the contract itself (or in company policy).

First, the employer or employee should raise the issue with the other party, providing detail(s) of the breach and reference to the agreed conditions in the employment contract. There should then be an opportunity to respond, followed by negotiation to find an acceptable solution.

The employer may be justified in taking disciplinary action, e.g. in the case of misconduct, or instigating performance management, if the employee is not meeting agreed objectives.

If the employment relationship is healthy, problems should be able to be flagged and remedied internally, but serious disagreements, noncompliance with minimum entitlements, or adverse action claims may require mediation or legal resolution, e.g. by the Fair Work Ombudsman.

Learn more about effectively managing employee issues.

Can I change an employment contract once it’s signed?

The process for changing an existing contract depends on the reason for the changes. Any amendment to employment legislation automatically overrides what a contract contains and in some cases, new contracts may need to be issued (e.g. any contracts that made salary confidential).

Otherwise, an employee is not obliged to accept any changes to the terms and conditions of their employment and their contract can only be changed by mutual agreement.

So, you have to consult with the employee by first proposing the changes, seeking their feedback, and then coming to an agreement on the final shape of the changes.

Note: If a person on a full- or part-time contract is mutually changed to casual employment, the law views this as the same as ending employment. The employee must be given notice, and be paid any outstanding pay, leave, and other entitlements before they start as a casual.

Terminating an employment contract

An employment contract can be terminated by either the employee (i.e.by resigning) or the employer.

Regardless of what triggered the termination, you must follow the correct procedure to ensure the process is fair and reasonable. Depending on the circumstances, if an employee is dismissed or resigns, they may be entitled to be paid notice, and must be given their final payment, including any entitlements owed to them e.g. untaken annual leave.

https://blog.myhr.works/en-au/how-to-get-terminating-employment-right

Do I need a lawyer to check the employment contract?

Business.gov.au has an Employment Contract Tool for building basic employment contracts for full-time, part-time, and casual employees who are covered by a modern award and get paid an hourly or weekly wage.

However, employment contracts can be complex and you need to ensure they are legally valid. MyHR can help you create robust contracts that cover all the lawful minimums and the specific requirements of your organisation.