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 agreement.
Under the Employment Relations Act 2000, every New Zealand employee must have a written employment agreement that sets out the terms and conditions of employment.
Depending on the circumstances, an employee will either be covered by a collective employment agreement (negotiated between the employer and the union representing employees) or have an individual employment agreement (negotiated between employer and employee).
Having a robust, well-written employment agreement helps ensure that both employer and employee clearly understand what their rights and obligations are, what is expected of them, and what they can expect from the other party.
So let’s have a good look at employment agreements, with a focus on the individual agreement, 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 agreement?
An employment agreement is a legal agreement formed when an employer offers a person a job and the person accepts it.
The agreement documents the relationship between the two parties, with the employee working 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 agreement must contain certain clauses (e.g. a description of the work to be done) and adhere to certain legal minimum rights and entitlements, such as minimum wage rates, paid annual and public holidays, paid rest and unpaid meal breaks.
Regardless of whether they have signed an employment agreement or their agreement provides less than the legal minimums, all employees are covered by the entitlements and protections in our employment laws.
Employment agreements were known as employment contracts before the Employment Relations Act took effect.
Do all workers need an employment agreement?
Yes. It’s a legal requirement to have a written employment agreement for every employee, including casual and part-time workers.
If a Labour Inspector finds you don't have one for each of your employees, no matter when they started, you could be fined $1,000 per employee.
Why should we have employment agreements?
Quite apart from the legal obligation to have an employment agreement for every employee, the agreement 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 well-written agreement 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 notice period provisions.
- Legal risks for the business if an employee raises a personal grievance claim.
Are there different types of employment agreements?
Yes. As mentioned, there are collective and individual employment agreements.
Collective employment agreements are negotiated between registered unions (representing union members) and employers. Employees must be on the collective agreement if they:
- are union members, and
- covered by the collective agreement coverage clause.
Additional terms and conditions can be agreed between the employer and employee, and should be set out in writing and signed by both parties.
Note too, that if a collective agreement covers your workplace, any new employee must get the same (or better) terms as the collective agreement for the first 30 days they’re employed. After 30 days, if the person hasn’t joined the union, you can both agree to make changes or sign a new individual agreement.
Individual employment agreements are negotiated by an employer and an employee and should be signed by both parties.
Does an independent contractor need an employment agreement?
No. Independent contractors are self-employed and deliver outcomes to their clients. They invoice the client for their work and are responsible for their own tax and Kiwisaver payments.
This means the relationship is a commercial relationship, rather than being an employment relationship, and is covered by commercial laws instead of employment laws.
If your business engages contractors, you need to make sure the arrangement is legitimate, i.e. it is a genuine contracting situation rather than 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 agreement contain?
Every individual employment agreement must contain a number of legally-required clauses:
- The names of the employer and the employee.
- A description of the work to be performed.
- An indication of the place of work.
- 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.
- The wage rate or salary payable and how it will be paid.
- A statement that the employee will get (at least) time-and-a-half payment for working on a public holiday.
- 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).
- 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.
- The nature of the employment - for example, if the employment is fixed-term or permanent.
Other things - e.g. the minimum wage and 4 weeks’ annual leave - do not need to be in the employment agreement but, by law, you must still provide them to your employee.
The list of legally required clauses is short, and we recommend adding best-practice clauses into agreements to ensure you are covering your risk and being clear with employees. Some examples of this include: privacy & confidentiality, mobile devices, and intellectual property.
Other agreed arrangements, such as a 90-day trial or probationary period, a certain number of working hours, a roster, on-call availability, procedure for shift changes, specific notice period requirements, or annual closedown provisions, should be clearly set out in clauses in the agreement.
Remember, an employment agreement can provide more generous terms and conditions than the minimum legal rights and entitlements, but it can’t leave an employee worse off. Employees are entitled to these minimums even if they agree to lesser terms and conditions in the employment agreement.
What things should an agreement not contain?
When drawing up an employment agreement, keep in mind that changing anything in the document later on requires a genuine reason for the change and consultation between both parties.
Because of this, we advise employers that aside from the provisions you are legally obliged to include, only add those that you’re sure you want to bind your workers to and that you want to be bound by.
Things that may need to be regularly reviewed or updated (e.g. performance measures, discretionary bonuses), or that apply to everyone in the organisation (e.g. code of conduct, workplace policies) are better issued as stand-alone documents or company policies or procedures, so you can alter them when needed.
Remember, too, that employment agreements must always comply with the latest employment and other relevant legislation, so review your agreements regularly and update them as appropriate. They’re a living document, and shouldn’t be left to languish in a filing cupboard or digital folder.
What is the process for drawing up an employment agreement?
Legally, the employment relationship starts when an employer makes an offer of employment and the employee accepts it. This can be over the phone, if you’ve made a verbal offer to a candidate, or in writing, if you’ve emailed or texted them saying they’ve got the job.
That means you should draw up an individual agreement with your new employee and give it to them as part of the job offer.
Give the person time to consider the terms and conditions of employment, before they accept or reject it. They may have questions or want to negotiate different terms and conditions, e.g. the salary / wage or flexible work arrangements.
Once you are both happy with the agreement’s contents and the person accepts the job offer, get them to sign the agreement, give them a copy, and store a copy for future reference (having a specialised digital system will make the process much easier).
Should I rely on a verbal agreement with my employee?
No. The law clearly states that every employee In NZ must have a written employment agreement. Case law has also established that once a person accepts a job offer from an employer, even if it’s verbal, the employment relationship has started and the employee is entitled to all legal minimum entitlements and protections.
Relying on a verbal agreement of employment is risky for both employer and employee.
What if the employee disagrees with the terms in the employment agreement?
Ideally, the process of negotiating and drawing up the employment agreement will raise any issues either party has with the terms and conditions 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 agreement sets up and governs the employment relationship, so be thorough and transparent from the outset. Including something in the employment agreement that the employee didn’t agree to may make it unenforceable.
Find out more about mistakes MyHR commonly sees with employment agreements.
What happens if either party fails to meet the terms in the agreement?
This requires both parties to act in good faith, and follow the dispute resolution process that is documented in the agreement itself.
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 agreement. 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 personal grievance claims may require mediation or legal resolution, e.g. by the Employment Relations Authority.
Learn more about effectively managing employee issues.
Can I change an employment agreement once it’s signed?
The process for changing an existing employment agreement depends on the reason for the changes and their scale.
If the change will materially affect the employee (e.g. you need to reduce their hours of work, or you want their tasks and responsibilities to change), in most circumstances you’ll need to consult with the employee, and update their employment documentation once you’ve reached an outcome.
In the case of minor or temporary changes, a letter of variation might be a better option than redrafting the whole agreement.
Any amendment to employment legislation automatically overrides what an agreement contains and, depending on the nature of the change, you may have to issue a new agreement or you will only need to include the new provision in new agreements going forward.
Otherwise, if the changes are coming from the employer, then an employee is not obliged to accept any changes to the terms and conditions of their employment agreement “just because”.
Sometimes, you’ll be able to manage these changes informally, e.g. if it’s a small change, or doesn’t materially affect the employee. Most of the time, however, in order to change your employees terms and conditions, you have to consult with them by providing them with the proposed changes, seeking their feedback, hearing what they have to say, and then making a decision about the proposal.
Terminating an employment agreement
An employment agreement can be terminated by either the employee (i.e. by resigning) or the employer.
Regardless of what triggered the termination, the correct procedure must be followed 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. unused annual leave.
Do I need a lawyer to check the employment contract?
Employment agreements can be complex and you need to ensure they are clear and legally valid.
MyHR can help you create robust individual employment agreements that cover all the lawful minimums and the specific requirements of your organisation and every role within it.
