Employment Contracts – Useful Tips for Employers
As an employer there is a matrix of information one must be aware of when entering into employment contracts, the area of industrial relations law is severely complicated. This article attempts to clarify some of the important information all employers should know.
Do You Have a Contract for Employment?
The mechanism that initially identifies and regulates the employer/employee relationship is that of the employment contract.
Employment contracts can be written, oral, or a bit of both. Like all contracts there must be consideration given by both parties. Consideration is what each party will contribute to the contract. For example for an employer consideration given is the payment of remuneration to the employee. Also like other contracts there must be acceptance of the contract terms and all parties must intend for the contract to be legally binding, having legal consequences.
The first question any employer must ask and know the correct answer to is does an employer/employee relationship or a principal/contractor relationship exist? Depending on which it is the obligations owing can be significantly different.
Employee or Contractor?
When an agreement is made for work to be completed in exchange for payment, an employment contract will usually exist between an employer and employee. Generally someone who is hired for a specific service or purpose and paid for this specific service/purpose will be deemed to be a contractor rather than an employee. An agreement will exist between the principal and the contractor. This agreement will not be subject to the same legislation and implied terms as those within an employment contract.
Many factors must be taken into consideration to distinguish an employee from a contractor. The main factor to consider is that of control. A contractor will have more autonomy over their work than that of an employee.
The Australian Taxation Office (“ATO”) website (www.ato.gov.au) sets out factors to take into consideration when determining if one is an employee or a contractor.
- Is paid for the time that they work
- Receives paid leave
- Is not responsible for providing materials/equipment required
to do their job
- Must perform specific duties required of their position
- Agrees to provide their personal services
- Works hours set by an agreement or the appropriate award
- Is recognised as part of their employers business
- Takes no commercial risks, and cannot make a profit or loss
from the work that they perform
A contractor, on the other hand:
- Is paid for their individual job and the result achieved
- Generally provides most materials/equipment required to do
- Can delegate work to other entities as it sees fit
- Has control in the way the work is done
- Provides services to the general public and to other
- Can accept and refuse work
- Takes commercial risks, and is in a position to make a profit
An employer must pay close attention to the relationship that exists and ensure that if it is an employer/employee relationship then it is defined as that. The classic ‘Duck Test’ analogy used in the case of Re Porter (1989) states “The parties cannot create something which has every feature of a rooster, but call it a duck and insist that everyone else recognise it as a duck.” Therefore if it appears to be an employer/employee relationship it probably is and should be treated like one!
This distinction between employee and contractor is crucial as it determines just what rights and obligations will be owing to that employee or contractor.
Employees are covered by the National Employment Standards (“NES”) (which can be located at www.fairwork.gov.au), under the
Fair Work Act 2009. The NES standards apply to all employees and are seen as fundamental rights. These standards regulate provisions such as:
- Maximum hours of work per week
- Leave entitlements
- Public holidays
- Notice of termination
Employees will also be regulated through appropriate award/s, any enterprise agreements that may relate to their industry and implied contractual obligations. These and the NES are the minimum standards an employer must offer.
If one is deemed to be an employee then their employer is responsible to ensure that appropriate superannuation contributions are paid into the employee’s nominated superannuation fund. Currently an employer must contribute 9% into the nominated fund.
Generally a contractor will be responsible for their own superannuation contributions. Some contractors however may be eligible, even though they are not employees. In the situation where a contractor is contracted for the main purpose of labour, then under the act that regulates superannuation they may be seen as an employee. Therefore, in this situation they would be entitled to superannuation. According to the ATO an individual will be contracted for the main purpose of labour when 50% or more of the value of the contract is for the particular individual’s labour.
For more information about your superannuation obligations please see the helpful links at the end of this article.
The employer is responsible to ensure that the appropriate tax is withheld from the employee’s wages. Generally a contractor on the other hand, will be responsible for their own tax and GST.
Tax will be determined by the employees income.
The following table was taken from the ATO’s website:
Tax rates 2011-12
The following rates for 2011-12 apply from 1 July 2011.
|Taxable income||Tax on this income|
|0 – $6,000||Nil|
|$6,001 – $37,000||15c for each $1 over $6,000|
|$37,001 – $80,000||$4,650 plus 30c for each $1 over $37,000|
|$80,001 – $180,000||$17,550 plus 37c for each $1 over $80,000|
|$180,001 and over||$54,550 plus 45c for each $1 over $180,000|
Since the case of Quarman v Burnett (1840) it has been held that an employer will be vicariously liable for the wrongful acts of an employee, not for the acts of a contractor.
There are obligations on the employee to the employer as well. These are discussed further under the implied entitlements and obligations.
Types of Employment Contracts
While there are many types of employment contracts that exist, this article will focus on fixed term and ongoing contracts.
Fixed Term Contracts
Fixed term contracts are contracts that are established for a specified period of time and will be terminated at the end of that specified period of time. When an employee is kept on after the fixed period of time ends an ongoing employment contract is created.
Ongoing contracts continue until they are terminated as they have no set date for end of contract.
Labour Hire Arrangements
A labour hire arrangement will exist when an initial employer contracts with a labour hire company to employee staff for their company. The staff will ultimately be employed by the labour hire company.
The initial employer creates a commercial contract with the labour hire company and the labour hire company creates an employment contract with the staff member. This specific relationship occurs as even though staff will perform duties for the initial employer, they will be paid, directed and controlled by the labour hire company, establishing a relationship of employer/employee.
Express entitlements and obligations
Some of the contractual entitlements and obligations found within an employment contract will be express terms. This means that the terms will be in writing, or if the contract is oral then the terms will be have been verbally expressed.
Various express terms may regulate what work an employee is to do, how much they are to be paid for the work, conditions and other various matters. Express terms are read alongside the relevant legislation.
The contractual instrument and legislation is not the only material an employer needs to be aware of when determining the entitlements and obligations surrounding the relationship of employment. One must consider supportive material such as a workplace documents and manuals, even initial job descriptions, as these can impact and influence the clauses to an employment contract.
Implied entitlements and obligations
Some entitlements and obligations that exist in the employment relationship are implied. This means that they are not written down or stated, but they still exist.
Implied terms include:
- A relationship of mutual trust and confidence between employer
- If no provision for termination within the contract then
“reasonable notice” for termination must occur unless in
circumstances of “serious misconduct”
- An employee must exercise reasonable skill and care in their
performance of duties
- A general duty exists for an employee to obey all lawful and
reasonable directions by their employer
- There must be fidelity and confidentiality within the
Things for an Employer to Consider when Drafting Employment Contracts
Employee or Contractor
An employer must initially determine which relationship (employee or contractor) is most appropriate. Consideration can be given by the employer assessing the type of work to be done, establishing the level of control one will have over the work and then correctly labelling the relationship for what it is.
When drafting an employment contract an employer needs to ensure that clear and precise language is used, so there is little room for incorrect interpretation. When one uses ambiguous language, for example words such as “often”, “sometimes”, “frequently” or “frowned upon”, the true meaning may be misconceived. This can cause a misunderstanding and misunderstandings can escalate into legal argument, taking up valuable time and ultimately money.
When an employment contract is drafted it must be as original as possible. While pre drafted standard form contracts do exist and can be purchased, in situations where they are not being used one must be wary of taking work from another individual or company. An individual or company cannot “borrow” clauses found in a contract without permission, as this could be seen as plagiarism. Certain content can be covered by intellectual property laws.
Consideration must always be given to the appropriate laws that surround industrial relations. An employer must be familiar with the NES, any awards that exist, enterprise agreements and implied contractual conditions. An employer must ensure that they offer at least the minimum standards to an employee.
Making Changes to an Existing Contract
One must be careful when changing a contract that already exists. An employer must discuss the proposed changes with the employee and that employee needs to accept the particular change.
Any major changes to key clauses, such as those relating to hours or conditions, may be deemed to be a repudiation of the contract by the employer. If this can be argued then an unfair dismissal claim might be raised by the employee.
Ending a Contract
There are various ways a contract can end. Generally the most common will be the following:
- Agreement by employer and employee to end the contract
- A fixed term contract expires and the employee is not
- One party exercises their notice of termination provisions as
per the contractual conditions or labour law
- Summary dismissal/termination occurs (A serious
breach/repudiation of the contract occurs by one party therefore
the other party may end the contract immediately)
An employer must ensure that all entitlements owing to an employee are administered when a contract ceases to exist.
How We Can Help
Employment Law is very convoluted and complex. Front end legal advice can be sought when further explanation and clarification of employer obligations and current legislation is required. A solicitor may also be useful to assist in the drafting of employment contracts. For more information contact Lovegrove Solicitors on (03) 96001643.
Andrew Stewart, Stewart’s Guide to Employment Law, 2nd ed, Federation Press, Sydney, 2009
Commonwealth Government Discussion Paper ‘Sham Arrangements and the use of Labour Hire in the Building and Construction Industry’ December 2010
Jobwatch Article ‘Employment Contracts’ April 2010 (accessed at
www.jobwatch.org.au on 5
Jobwatch Article ‘Changes to Existing Contracts’ July 2009
(accessed at www.jobwatch.org.au on 5 August 2011)
Quarman v Burnett (1840) 6 M & W 499; 151 ER 509.
Re Porter (1989) 34 IR 179 at 184.