As part of the compliance audit we perform for all new HR Essentials and HR Partner clients, we review businesses’ current employment contracts for compliance issues and risks to the company. In this article we set out some of the common issues we come across.
Employment Contracts: the basics
An employment contract is a vital tool for setting out the terms and conditions on which an employee is employed. An employment contract can provide for more beneficial (but not less beneficial) terms than any enterprise agreement or modern award that applies to an employee. Similarly, an employment contract cannot override the basic entitlements set out in the National Employment Standards (to leave, notice, redundancy pay, etc).
As a minimum, a contract should specify the type of employment (i.e. full-time, part-time or casual), hours of work, salary, notice, leave entitlements, and commencement date. Depending on the role, it might also be useful to have clauses dealing with matters such as the location of work, confidential information, intellectual property, conflicts of interest, bonuses, and post-employment restraints (preventing an employee from stealing clients, working for competitors, etc).
A position description setting out clear KPIs is also often a good idea, particularly when it comes to managing performance issues in the future. Care should be taken to make clear that the position description can be amended at the employer’s initiative.
Verbal contracts – not worth the paper they’re written on?
Arguably, the biggest compliance red flag is where there is no written employment contract at all. Whilst verbal contracts can exist and be valid, without a written contract in place there can be uncertainty about the exact conditions and agreement that exists. A written contract is particularly important to protect the business where action may need to be taken against an employee or where an employee makes a claim against the business.
If there is disagreement about the terms of a verbal contract, resolution of such conflict can become a complex and lengthy process that may damage the employment relationship and cause tension within the workplace.
Contract does not state modern award coverage or classification level
The first notable red flag often found when reviewing employment contracts is where an employee is covered by a modern award and this is not explicitly stated in their contract. For any employees covered by a modern award, it is a requirement in most, if not all, modern awards that employees are informed which modern award applies to them and their level of classification under the award. The most convenient place to do this is in the employment contract.
The Clerks Private Sector Award, for example, states in clause 12.3: “Employers must notify employees in writing of their classification and of any change to it.”
Similarly, awards also mandate that employees must have access to a copy of the award and the National Employment Standards (NES) listed in the Fair Work Act 2009 (Cth). In the Clerks Award this obligation is found at clause 3.3: “The employer must ensure that copies of this award and of the NES are available to all employees to whom they apply, either on a notice board conveniently located at or near the workplace or through accessible electronic means.” A convenient way to meet this obligation is to provide links to these documents in the employment contract.
An employee should be aware of which award they are covered by, so they understand the additional provisions and entitlements that apply to them on top of their employment contract. Providing clarity on which award applies in an employment contract reduces any uncertainty around obligations of both parties as well as ensuring any claims against the business can be assessed against the correct provisions.
The contract does not specify exact days and hours of work for part-time employees
Another common issue is where a contract for a part-time employee does not include the details about their pattern of work, as required by a modern award.
Most modern awards do not allow for a part-time employee to simply be engaged to work a certain number of hours per week (eg 20 hours per week), but rather they require there to be an agreement as to the days of the week they will work and their start and finish times. Depending on the award, any additional hours may have to be paid as overtime.
The Clerks Award, for example, states:
10.2 At the time of engaging a part-time employee, the employer and employee must agree in writing on all of the following:
(a) the number of hours to be worked each day; and
(b) the days of the week on which the employee will work; and
(c) the times at which the employee will start and finish work each day.
Additional hours worked must be paid as overtime.
The contract does not include an offset clause
It is usual for employers to want to pay employees an annual salary (or a flat hourly rate) which is designed to cover all entitlements that might arise (eg entitlements to overtime, penalty rates, allowances and annual leave loading).
Without a specific clause stating that the salary or wage paid to employees can be “offset” or “set off” against any entitlement that arises, an employer may find themselves liable to pay extra amounts to an employee if they can argue that they understood their salary/wage was only designed to cover their ordinary hours of work, but not any extra entitlements.
This issue can arise for even very highly paid staff.
The contract does not include a valid notice period
Many contracts we review do not provide for the mandatory minimum notice periods for when a permanent employee’s employment is terminated.
The National Employment Standards provide for a sliding scale of notice periods, depending on the employee’s length of service, of between one and four weeks. Many employers miss an additional obligation that the employee must be given an extra week’s notice where they have been employed for at least two years and are 45 years of age or older.
For an employee who is over 45 years of age and has been employed for at least five years, this means that they are entitled to a minimum of five weeks’ notice. Whilst it is commonplace for an employment contract to provide for a month’s notice, this wouldn’t be sufficient for such an employee.
Another common compliance issue is providing that permanent employee can be terminated with no notice period during their probationary period, whilst the entitlement under the National Employment Standards is one weeks’ notice in the first year of employment (except in cases of serious misconduct).
Furthermore, some modern awards provide for more beneficial notice entitlements. For example, the Professional Employees Award which applies to certain employees working in IT, engineering, and medical research, states that all employees must be given at least one month’s notice, even during the first year of employment.
Providing no notice period at all is also a common error. Where a contract is silent on the notice period an employee may be able to argue that they would be entitled to a “reasonable” notice period, which in some cases a court will determine is a significant amount of time.
The contract states deductions can be made from wages
Another common misconception is that where an employee may “owe” the business money (for example, overpayments or property damage costs) a contract can provide that the business can withhold payment or deduct wages from an employee.
Generally speaking, any such deductions are only allowed where an employee gives specific written authority for a deduction, including stating the specific amount to be deducted. The Fair Work Act also states that such authority can be withdrawn by the employee at any time.
Unfortunately, a signed employment contract would not be sufficient as a form of ‘written agreement’ when it comes to covering the business for such deductions – what is needed is a written agreement that clearly states a dollar figure of the amount to be deducted. This will usually mean that the written agreement will need to be made at the time the deduction occurs. If a business unilaterally deducts from an employee’s wages, there runs the risk of underpayment claims being made through the courts. Recovering money owed by employees will usually require an application to court if there is no agreement that can be reached.
There are some deductions that can be made without the employee’s express written consent, such as where this is permitted by a modern award. It is common for awards to provide that if the correct notice is not provided on resignation the business may deduct up to a week’s wages (or other amount depending on the award).
It is important that any clauses that deal with deductions are phrased so that they do not give employers wider powers than are permitted under the legislation. This can be achieved by including a phrase such as “to the extent permitted by law.”
The casual contract does not contain the new double-dipping provisions
With the recent changes to the law regarding casual employees, if a contract does not explicitly state that a casual employee receives a separately identifiable casual loading (in lieu of entitlements that permanent employees receive) and the casual is later found (in reality) to be a permanent employee, the business may be required to pay backdated entitlements such as paid leave or notice of termination, on top of already having paid the loading amount.
However, employers now have the ability to take advantage of the new “double-dipping” provisions in legislation. These assist in protecting the business where a casual employee may attempt to claim that they are owed additional entitlements associated with permanent employment, despite having been paid a casual loading. In order to take advantage of these provisions, the contract should specify the amount of casual loading as a separate amount (as opposed to just stating their wage as an “all in” figure including the loading) as well as stating that the loading is paid instead of specific entitlements including paid annual leave, paid personal/carer’s leave, redundancy pay, a notice of termination, etc.
Applying changes to a contract
When adjusting any clause or provision set out in an employment contract, a business will not be able to unilaterally apply these changes. Any variation to an employment contract must be made with mutual agreement and consent from the employee, ideally in writing. If the business needs to issue a contract variation or an entirely new contract that supersedes any previous agreement that exists, the employer should consult with the employee on what the changes mean and the impacts that the changes will have on their employment.
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About Employment Innovations
Employment Innovations is one of Australia’s leading providers of employment services designed to increase productivity and ensure compliance. Its services and solutions include all the tools that every Australian small to medium-sized employer needs – including workplace advice, legal services, payroll solutions, migration, human resource management, and HR software.
These red flags are only a few of the compliance red flags which can exist in employment contracts. If you require any additional support with assessing your employment contracts, please get in touch with Employment Innovations to discuss how we can help.
The information provided in these blog articles is general in nature and is not intended to substitute for professional advice. If you are unsure about how this information applies to your specific situation we recommend you contact Employment Innovations for advice.