10 reasons why businesses should have employment contracts

Clarity is perhaps the biggest – and most important – reason why having employment contracts in place is a necessity. They explicitly outline the terms and conditions of employment, mitigate the risk of potential dispute over obligations, and define legal entitlements and rights.

Here we share our top 10 reasons why every business should ensure all employees have a written – and signed – employment contract in place.

1. Employment type

Full-time, part-time, casual, fixed or maximum-term arrangements – there are many different types of employment. And if the type of employment isn’t made clear, problems can arise because each employment type attracts different entitlements including overtime, leave accrual, termination restrictions, and minimum pay rates. Clarifying an employee’s employment status from the get-go is essential not only to avoid risk but to also ensure a mutually beneficial employment relationship.

However, it’s not enough to just simply list the employment type in a contract and call it a day. Rather employers should ensure that the terms and conditions for every contract are consistent with their employment status, meaning that the practical employment arrangements must reflect the individual’s employment status. Failure to do this can result in an employee being considered as properly engaged on a different basis than what was initially intended – this is especially important when it comes to casual employees.

2. Notice periods

Notice periods for termination and redundancy, are outlined in the Fair Work Act 2009 (FW Act) and dictate an absolute maximum of five weeks’ notice. Alternatively, employers can agree upon their own higher notice periods which are specified in the employment contract.

3. Restraints

Clauses can be included in contracts to restrict employees’ activities after their employment with the company ceases. These clauses can restrict the post-termination activities of an individual based on distance, time, industry, or conduct. For a restraint clause to be enforceable, it must be reasonable. There’s no one definition for what is a ‘reasonable’ restraint and instead, the clause will be tested by the courts. Among other things, the court will consider whether the restraint genuinely protects legitimate business interests.

4. Award coverage and classification

Although all employees have entitlements under the FW Act and National Employment Standards (NES), some employees may be covered under relevant awards or enterprise agreements and therefore will have additional entitlements. Explicitly – and correctly – classifying an employee within an employment contract allows clarity on any additional entitlements given by a relevant award or enterprise agreement they may fall under.

5. Ordinary hours

Defining the ordinary hours of the business allows for a better understanding of entitlements payable outside of ordinary hours, such as overtime and penalties. Transparency surrounding the company’s ordinary hours of work mitigates the risk of underpayment and the potential for employees to pursue wage theft claims for entitlements unpaid. Ordinary hours are usually defined in the relevant award or enterprise agreement relating to the business.

6. Annualised salary

Annualised salaries can be a confusing concept for employers. The key difference employers need to remember about annualised salaries is that it’s a fixed amount paid regularly to the employee for the year, whereas an hourly rate, can constantly change depending on hours worked, days of work, public holidays, and penalty rates.

A salary should be calculated to compensate the employee for all relevant award or enterprise agreement entitlements. Instead of receiving extra payment for overtime or weekend shift penalties, the employer should calculate the possibility and frequency of an employee’s working hours that attract such penalties, and then incorporate them into the calculation.

Once an annualised salary is finalised, the way it’s been calculated should be listed in the employment contract. Calculating this correctly should ensure there’s no potential risk of an underpayment, as the salary compensates the employee for all such penalties. The contract must include what we call a set-off clause, that allows an employer to include these entitlements in the annualised salary figure. It’s important to remember that if the figure doesn’t compensate the employee appropriately, an underpayment claim can still be lodged.

7. Policies

Policies are an essential ingredient of any successful business, and good ones will establish a clear understanding of expectations and standards, while also protecting the rights of employers. Including information about implemented policies within employment contracts:

• allows transparency in the employment relationship;
• ensures that compliance with them is a term of employment; and
• gives the employer grounds for disciplinary action if there’s ever a breach.

It’s also important to note that issuing company policies separately from employment contracts makes them much easier to refresh and update when the time comes.

8. Duties and expectations

Employment contracts set standards and expectations of employees and give employers a benchmark for what conduct warrants disciplinary and counselling processes, or even termination. Without defining and setting expectations, it can be incredibly difficult to counsel employees when they fail to reach them.

9. Termination

Clauses specifically outlining the procedure for and obligations surrounding termination is a key aspect of employment contracts. Especially with fixed-term employment, in the absence of termination clauses, ceasing the employment relationship without attracting risk can be delicate.

10. Risk mitigation and control

Perhaps the most important reason to implement employment contracts is to set legally binding obligations, terms and conditions, and expectations of employees to the company. Failing to do this leaves the company vulnerable to potentially costly claims ranging from general protections to unfair dismissal.

Employment contracts are invaluable to all companies, regardless of size, and provide indispensable clarity surrounding the employment relationship. A properly drafted employment contract enables an employer to undertake effective and efficient employment relations processes where required.

Citation HR Software is fully equipped with employment contract templates, as well as other documents and policies, making it easy to manage this process. For further information or advice regarding employment contracts or any HR issue, please contact Citation HR’s HR Advice Line.

About our author

Zaynab Aly is a Senior Workplace Relations Consultant at Citation HR. She has a particular interest in the retail industry and regularly provides advice on workplace matters to find solutions for clients.