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There’s been some confusion since WorkChoices about employers’ rights and responsibilities when setting up contracts for their workers – At the minimum, employment contracts should at least meet legal requirements and be clear to both parties – Mark Dunphy and Alison Baker examine the crucial clauses and explain what a court may deem to be ‘reasonable’ in the event of a dispute.

The employment contract is used as the mechanism to determine the relationship between the employer and the employee. As such, it is essential that it clarifies the rights and obligations of both parties.

Generally, this can be achieved if the employment contract expressly states the rights and obligations of the employer and the employee during the employment relationship, on the termination of the employment relationship, and after the employment relationship has ceased.

When deciding what rights and obligations to include in an employment contract, the minimum terms and conditions of employment that arise under statute and those that are implied at common law should be considered together with any applicable award.

Active ImageUnder Statute

Since the 2006 introduction of the Federal Government’s WorkChoices laws, all employees within Victoria and the territories and all other Australian employees employed by constitutional corporations have derived their minimum terms and conditions of employment from the Workplace Relations Act 1996 (the WR Act). This article focuses on the employment of employees under the federal system.

The WorkChoices amendments to the WR Act introduced the Australian Fair Pay and Conditions Standard. The standard is made up of five minimum terms and conditions:

1. A guaranteed right to payment at the applicable minimum rate of pay for each hour worked.

2. Maximum ordinary hours per week of 38 ordinary hours plus reasonable additional hours.

3. A guaranteed four weeks’ annual leave per year.

4. Personal/carer’s leave made up of 10 days’ paid personal/carer’s leave per year; two days’ unpaid carer’s leave per occasion required where paid carer’s leave entitlements are exhausted; and two days’ paid compassionate leave per occasion required.

5. Up to 12 months unpaid parental leave.

In addition to the standard, there are other minimum terms and conditions of employment that must be provided to employees, including minimum notice requirements for the termination of an employment contract based on years of service, and unpaid meal breaks, and a qualified entitlement to public holidays.

Minimum terms and conditions of employment can also be found in other pieces of legislation. At the federal level, employers are required under statute to make minimum superannuation contributions, currently 9 percent of an employee’s salary. At the state level, employers derive entitlements to a number of matters not covered by the WR Act, including workers’ compensation, occupational health and safety, and long service leave.


In addition to minimum legislative entitlements at both federal and state level, where an employee is covered by an award or industrial agreement, the award or industrial agreement may also provide further minimum terms and conditions that must be complied with. Such additional terms and conditions are likely to include, among others, annual leave loading, penalty rates, overtime rates, and allowances.

With all this in mind, to be compliant with statute and any industrial instruments that apply, employment contracts should provide terms and conditions of employment that include the following:

Remuneration: The employment contract should include a remuneration clause stating a rate of pay for each hour worked, including reasonable additional hours, that is at least equal to the statutory minimum rate of pay applicable to the employee.

The applicable statutory minimum rate of pay is dependent on whether the employee is employed under a federal, state or Common Rule Award (an award employee) or only by minimum statutory requirements and the common law (a non-award employee). The minimum rate of pay for an award employee is set out in an Australian Pay and Classification Scale derived from an applicable award, whereas the minimum rate of pay for a non-award employee defaults to the federal minimum wage.

In some circumstances, an employment contract may be used to pay an all-inclusive rate of pay for all hours worked to an award employee, and they will not receive award entitlements such as penalty rates, overtime rates, and annual leave loading. This is typically done through a ‘set-off’ clause.

A set-off clause attempts to exclude the operation of an award by providing that all entitlements that the employee would otherwise be entitled to under the applicable award are included in and set-off against the employee’s stated remuneration. However, while there may be scope to use set-off clauses to override entitlements under an award, the law on the enforceability of such clauses is uncertain, particularly where the remuneration paid to the employee is less than what they would receive in total under the applicable award.

Active ImageThe only way to totally exclude the application of an applicable award is for the employer and the employee to enter into an industrial workplace agreement such as an Australian Workplace Agreement (AWA). AWAs displace any awards that would otherwise apply. However, AWAs must pass a fairness test to be effective. AWAs do this by adequately compensating employees for giving up certain award conditions.

Hours of work: An hours of work clause will typically specify the hours to be worked by the employee during a set period of time. To comply with the standard, this clause should state hours of work that do not exceed an average of 38 ordinary hours per week plus reasonable additional hours.

Leave entitlements: To meet the minimum requirements set by the standard, clauses specifying leave entitlements should include the minimum entitlements to annual leave, personal/carer’s leave, and parental leave. In addition, reference should be made in the employment contract to the employee’s minimum long service leave entitlements arising from the applicable state long service leave legislation.

Termination of employment: To comply with the WR Act, a termination clause should be included in an employment contract specifying at least the minimum notice requirements to be given by the employer when terminating the employee’s employment.

Probationary period: For an employer to be able to terminate an employee during the initial stages of employment without providing at least the minimum statutory notice period, it is essential that the employment contract contains a probationary period.

While probationary periods used to be included in employment contracts so that employers could terminate employees during the initial stages of their employment without exposure to unfair dismissal laws, since the introduction of WorkChoices the use of probationary periods for this reason has lesser importance. This is because unfair dismissal laws do not apply to employers who employ 100 employees or less; and even if unfair dismissal laws do apply to an employer the qualifying period under the WR Act for an employee to bring an unfair dismissal claim is now six months.


Under Common Law

At common law, both the employer and the employee are owed duties to the other that are implied into the employment relationship thereby existing whether expressly stated or not. For example, an employee has a duty to their employer to be faithful and avoid conflicts of interest and to maintain confidentiality, and an employer has a duty to their employee to remunerate them for their service.

However, a written employment contract can be used to set out and expand on these implied obligations, particularly with regard to an employee’s duties to protect the employer’s rights and interests and to give certainty as
to the notice to be provided on termination.

Active ImageClauses focusing on protecting the employer’s proprietary interests that are typically included in employment contracts include:

1. Clauses prohibiting the unauthorised use and disclosure of confidential information.

2. Clauses confirming the employer’s ownership of intellectual property rights.

3. Restraint of trade clauses preventing the employee from soliciting the former employer’s clients and employees and competing with the former employer after employment.

How to ensure that such clauses are enforceable requires careful consideration. This is because they are likely to be closely scrutinised by a court if a dispute arises. With this in mind, these types of clauses should go no further than what is ‘reasonable’. This is particularly so for restraint of trade clauses.

A court will only enforce post-employment restraint clauses if they are deemed to be reasonable in all the circumstances. Employers’ interests are usually best protected by drafting the clause in a cascading style by reference to geography, time, and scope. This enables the clause to be read down to the level of restraint that a court considers necessary to protect the employer’s legitimate interests.

To minimise the potential for disputes and litigation following the termination of the employment contract, it is essential that the contract contains a clause specifying how the employment contract is to be terminated.

In the absence of a termination of employment provision, the common law and applicable legislation will apply. Common law requires ‘reasonable notice’ of termination to be provided by either party. When determining what constitutes reasonable notice, courts consider a number of factors including how long it will take the employee to find similar employment and the employee’s age and length of service.

Generally speaking, reasonable notice can range from one to 12 months or more depending on the circumstances. However, the requirement to provide reasonable notice can be avoided by including notice period requirements in the employment contract. As discussed above, the notice period must at least satisfy minimum notice requirements under the WR Act.

Contract Disputes

There are a number of avenues available to the parties in dispute over terms of an employment contract. What those avenues are depends on whether the terms and conditions in dispute are enforceable under statute or at common law.

Under statute, in the event that an employer does not comply with its obligations to provide an employee with minimum statutory entitlements at the federal level, the employee is able to claim these entitlements through the federal court system either in their own capacity, through an organisation representing them such as a union, or through the Workplace Ombudsman which is a statutory body set up to protect employee entitlements.

A successful claim in such circumstances can result in compensation for loss suffered as well as penalties of up to $33,000 imposed on the employer. Similar systems are set up at the state level in the event that an employer does not provide minimum statutory entitlements required under state legislation.

Under common law, any breach of a term agreed to in an employment contract is actionable at common law providing that any term relating to post-employment obligations must be reasonable.

In some circumstances the courts have shown a willingness to order injunctions to prevent a party from continuing to breach the employment contract–for example, to stop a former employee using their former employer’s confidential information or soliciting their clients.

Where a party can demonstrate loss suffered as a result of a breach of the employment contract, the courts will generally compensate the aggrieved party by way of damages.

* Mark Dunphy is partner at Hall & Wilcox (mark.dunphy@hallandwilcox.com.au), and Alison Baker is a senior associate (alison.baker@hallandwilcox.com.au).

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