Do Your Employment Contracts Contain These Five Essential Clauses?

Employment contracts are legally binding agreements that set out the terms of the relationship between employer and employee. If a dispute arises, both parties will usually turn to the contract to discern the terms of the employment relationship. Despite this, many employers are so concerned about choosing the right person and getting them started as soon as possible that the written agreement becomes more of a formality than an essential element of the relationship. This is of course until something goes wrong.

Unfortunately, it’s impractical for small to medium sized businesses to have employment contracts uniquely drafted for every new employee. Therefore, many businesses rely on recycling standard form employment contracts.

If you’re an employer who uses standard form employment contracts for your staff, it’s important to make sure your contracts contain the essentials. While each employment relationship is different, and there is no magic formula for the perfect contract, we’ve provided an explanation of five important clauses we believe every employment contract should include.

1. Clear job description

While this one seems obvious, many employers don’t realise just how essential it is to ensure each employee’s job is sufficiently described and performance expectations are clearly defined.

These clauses become fundamental when faced with an employee who isn’t performing. If you want to dismiss an employee for poor performance without opening yourself up to unfair dismissal proceedings, then you will need to clearly demonstrate that the employee has persistently failed to perform their duties. This becomes increasingly difficult where the employment contract doesn’t clearly define the employee’s role and duties.

While defining the employee’s role and duties is important, its also necessary to stipulate that these duties may change from time to time and evolve over time. Its also useful to ensure the contract allows for regular review of the employee’s tasks and duties.

2. Confidentiality

Its imperative that employment contracts clearly state that employees are obliged to keep information confidential. During the employment relationship, employees will likely become privy to sensitive business information that needs to be protected from competitors. On top of this, there is nothing more dangerous and damaging than an employee running their mouth about client’s personal information. Sometimes businesses will even elect to have a separate confidentiality agreement to ensure that private and sensitive information is adequately protected. If you would like to learn more about confidentiality agreements, read our article on three steps to take when faced with a breach of confidentiality.

3. Post-employment restraints

It may be the case that, during their employment, one of your employee decides that they could run your business better than you. This may prompt them to go out on their own and start a competing business. This can get messy. Often employees develop trust relationships with your clients during their employment, particularly when they are the main point of contact. If they go off and start their own venture, there is a risk they could take a dangerous chunk of your hard-earned clientele. This is often made worse when the ex-employee decides to seriously undercut you.

You can prevent this happening by having a well drafted restraint of trade or non-compete clause. Its essential that these clauses clearly spell out what post-employment activities are prohibited, the geographic area in which the restraint operates, the period the restraint will last for and the consequences of a breach.

4. Intellectual property

Ordinarily, if someone creates an original work, they automatically have copyright to the work. This is problematic where employees create original work in the course of their employment. Luckily, the Copyright Act 1968 (Cth) provides an exception to automatic copyright in employment circumstances. Section 35(6) states that where “a work is made by the author in pursuance of the terms of his or her employment by another person under a contract of service that other person is the owner”.

Thus, it’s imperative that employment contracts clearly, fully and irrevocably state that employees waive their right to any work they create for your business during the course of their employment.

If you would like to learn more about intellectual property, read our article on protecting your intellectual property.

5. Entire agreement clause

This little clause can have a big impact on employment disputes. When a written contract is in place, courts won’t look past what is contained in that agreement unless one party can demonstrate that the written agreement doesn’t constitute the entire agreement between the parties.

If the employment contract doesn’t state that it constitutes the entire agreement between the parties, there is risk an employee could attempt to rely on verbal statements, or other written material that you didn’t envision forming part of the agreement.

Key lessons for employers:

1. Make sure your employment contracts are your first thought, not an afterthought as they will dictate the relationship you have with your employees for the duration of the relationship and after.
2. Ensure that you are protected from breaches of confidentiality and ensure any new intellectual property is properly attributed to you.
3. Be aware of the little clauses that make a big difference. In this article, we have highlighted the importance of entire agreement clauses, which are often no more than one sentence and can be easily overlooked. However, its important to be aware that there is a myriad of other small, seemingly insignificant clauses that could have a big impact on your relationship with your employees. Its unrealistic expect every employer to have a detailed understanding of employment and contract law, therefore we highly recommend engaging a skilled lawyer to draft your standard contracts for you. A little bit of effort at the beginning will go a long way should a misunderstanding or dispute arise down the track.

Want to know more about Employment Law? Looking for an experienced solicitor in Newcastle, Sydney or the Hunter to assist you with your Employment Law matter? Call us on (02) 4929 7002, email us or complete an enquiry form.