Employment contracts can be a useful tool for some businesses, but aren’t always necessary – Martin Carrick takes us through what is involved with such agreements, for who and when they’re relevant, and new considerations under WorkChoices
Employers sometimes ask whether it’s necessary to have a written employment contract with each employee. More recently, this question has been asked in the context of the recent implementation of WorkChoices, part of the Workplace Relations Act (WRA) amendments that came into action in March 2006.
The employment relationship is a contractual one. However, for many employees, a written contract is not usual and may not be necessary. This is because, over many years, industrial instruments have determined the minimum terms of conditions of employment for most employees. While an employment contract may bind an employer to terms that are in excess of those set by industrial instruments, it is not enforceable to the extent that it purports to reduce them.
Consequently, a formal contract would be important for recording and enforcing an employment agreement with management and specialist employees, which we’ll discuss later.
Before the commencement of WorkChoices, industrial instruments were called federal or state awards and certified (or enterprise) agreements. Post WorkChoices they are called awards, pre-reform certified agreements, notional agreement preserving State awards, preserved collective State agreements, and preserved individual State agreements. New instruments are called collective agreements or Australian Workplace Agreements (AWAs).
It is not the aim of this article to examine the detail and complexity of WorkChoices. However, because WorkChoices regulates the employment relationship, it is necessary to consider its effect when discussing employment contracts.
While the Federal Government refers to WorkChoices as ‘simplified’, nothing could be further from the truth. Without attempting here to deal exhaustively with the extensive provisions in the WRA that affect employment terms, the following provides a brief overview. Note that the WRA (and therefore WorkChoices) applies to constitutional corporations and employers in Victoria and the Territories. The vast majority of incorporated businesses are constitutional corporations.
Minimum entitlements are now set by the Australian Fair Pay and Conditions Standard (AFPCS), and there are five minimum conditions: rates of pay (determined by the Australian Pay and Classification Scale or the Federal Minimum Wage), maximum ordinary hours of work, annual leave, personal/carers leave and parental leave. However, in general terms, the entitlements in pre-reform industrial instruments may continue to apply.
The entitlements in notional agreements preserving State awards survive, but for only three years. Preserved State agreements and pre-reform certified agreements continue to apply, until terminated according to the relevant provisions. However, anything that is ‘prohibited content’ is removed from these instruments. Further, a number of entitlements are ‘protected preserved conditions’ which may continue to apply, in certain circumstances, after the agreement or award no longer applies.
In a pre-reform award, ‘prohibited content’ and any entitlement that is not an ‘allowable award matter’ is removed by WorkChoices, except if it is a ‘preserved award term’. Take, for example, an award provision for personal/carers leave. This leave is not an allowable award matter but is a preserved award term. However, the personal/carers leave term in the award only has effect if it is ‘more generous’ than the AFPCS, as determined by the WRA regulations.
WorkChoices has introduced a new regime for the making of both collective workplace agreements (of various types) and individual workplace agreements (AWAs).
An AWA is not an employment contract in the sense they are discussed here. In some circumstances an AWA may be used to set aside existing minimum entitlements (apart from the AFPCS). In the current political environment, however, there must be a question about the continued existence of AWAs. In these circumstances, it may not be advisable for employers to invest resources into pursuing AWAs.
A formal written employment contract is therefore not necessary for many ordinary employees because their minimum entitlements are determined by industrial instruments. These entitlements cannot be overcome by an employment contract. A contract may bind the employer to more generous terms, but is not enforceable to the extent it provides for lesser terms.
Often an ordinary employee’s employment arrangements are recorded in a simple letter to the employee. This letter usually notes the start date, position, salary and hours.
Sometimes such a letter refers to the employer’s written policies, which will apply to the employment (for example, on performance appraisal or workplace harassment). While requiring the employee to adhere to the policy, the reference to the policy in the letter may also incorporate the policy into the contract of employment. The policy may then also be enforceable by the employee. For example, an employer may be in breach if it did not apply the investigation process detailed in its policy about managing employee complaints.
Previously it was prudent to record in a letter whether an employee was on probation at the commencement of employment and the period of the probation. The changes to unfair dismissal laws made by WorkChoices mean this is usually not necessary.
While a letter recording the basic details of the employment contract is common, it is not essential. After all, the reality is that some, if not all, of the original terms of employment will change over time without the original letter being amended.
A further reason why an employment contract is not essential for many employees is that, under the WRA regulations, employers are required to keep very detailed employment records. These records include more information than would often be found in an employment contract for an ordinary employee. The information which the employer must record includes:
• the employer’s name;
• the employee’s name and date of birth;
• the name of each instrument under which the employee derives entitlements;
• the classification of the employee under each instrument;
• whether the employee is full-time or part-time;
• the number of hours to be worked each week;
• whether the employee is permanent, temporary or casual;
• the date of the employee’s commencement;
• the employee’s daily starting and finishing times, and if overtime is to be paid;
• the total number of hours worked each day (if the employee earns over $55,000, indexed);
• a copy of any agreement about the averaging of hours;
• details of the employee’s pay, including the basis on which it was determined, the hourly rate, details of bonuses, penalty rates etc;
• details of annual leave accrued, taken and the balance;
• details personal leave accrued, taken and the balance;
• details of any other leave entitlement;
• details of superannuation contributions;
• details of the termination of the employment.
Employers are required to make these records available to employees on request. Many issues about employment terms and conditions are likely to be resolved by access to the employment records.
So Who Needs a Contract?
Senior employees, management or specialist employees are often in a different situation than the employees discussed above, and a more formal and detailed employment contract document is often appropriate for them.
They are likely to be earning significantly in excess of the minimums set by industrial instruments and more than the $55,000 below which a record of hours must be kept. Consistent with this, it is unlikely they will have entitlements to such things as overtime.
This type of employee is likely to expect to be provided
with a detailed contract, as a formal record of the terms and conditions to which he or she has agreed. The employer may also require contractual protection with respect to such things as trade secrets and future competition from the employee. The employer or the employee may also want to agree on contractual benchmarks for such things as performance requirements and appraisals, salary reviews, notice periods, behavioural standards and redundancy provisions.
There is no limit to the potential content of an employment contract. The aim is that the contract should reflect the agreement between the employee and the employer. Ideally, an employment contract will be drafted or checked by a lawyer to ensure it reflects the agreement in a way that is enforceable.
WorkChoices is unlikely to impact significantly on the drafting of a senior employee’s contract. However, under WorkChoices an employment contract may not include an ‘objectionable provision’. An objectionable provision is one which directly or indirectly requires a person to encourage or discourage another person to become or remain a member of an industrial association, indicates support or opposition to such membership, or requires or permits pay of a bargaining fee to an industrial association.
Before WorkChoices, industrial laws in New South Wales and Queensland included provisions that allowed employment contracts to be varied by the State’s Industrial Relations Commission if the contract was found to be unfair. For example, the provisions were used to vary the contracts of senior employees to provide redundancy entitlements. WorkChoices prevents these ‘unfair contract’ provisions being used.
When developing employment contracts and agreements, it’s important to seek the advice of a legal professional.
* Martin Carrick is a senior associate at Slater & Gordon lawyers. He can be contacted by emailing email@example.com