When designing an employment contract, make sure you protect your business from potential future risk by including these fundamental clauses.

If you were looking for the perfect example of how not to write an employment contract, I’ve got one for you. Earlier this year a Sydney local shared this shocking example with me.

It’s an extreme example, but it highlights why employment contracts (and their detailed clauses) are essential. In addition to being a protection tool, employment contracts detail the basic standards and performance requirements for a new employee.

If you’re starting a business, investing in proper employment contracts may be down on your priority list. However, it’s essential they are in place.

It’s important that your employment contracts are reviewed regularly to ensure they’re up-to-date and don’t inadvertently breach the law or a modern award. 

Regular reviews also allow businesses to make appropriate amendments to reflect the changing business landscape, such as changes to your flexible work arrangements.

Six key employment contract clauses

In addition to the standard position description and specific pay and bonuses clauses, I recommend including the following six clauses in any employment contract.

1. Confidentiality

For employers with employees who have access to sensitive and confidential information, trade secrets and processes, a confidentiality clause is a must have.  

Why?

A confidentiality clause gives an employer the ability to contractually protect information, including content that is:

• Leaked to competitors
• Misused by an employee
• Breached in relation to privacy laws and other information legislation
• Utilised by an employee adversely for their own personal profit or gain 
• Used to damage the reputation of the business.

It’s recommended the confidentiality clause also covers post-employment conduct too, such as with a gardening leave provision.

Read HRM’s article on how to protect your company’s intellectual property.

2. Restraint of trade

Restraint of trade provisions or non-compete clauses are generally difficult to enforce against employees. Whether a restraint of trade clause is enforceable is ultimately a decision for a court or tribunal.

However, without one, it’s difficult to enforce a restraint on an employee. Whether that is starting their own business, poaching existing employees, stealing clients and customers or even utilising contact details obtained by the company. If there is no restraint of trade clause in place, the laws of equity and potentially the Corporations Legislation are the only avenues employers can take (and they are limited).

A restraint of trade clause is the minimum required to pursue a non-compete position and they require a cascading clause of various geography and components of time periods.

A cascading clause (which provides multiple combinations) is integral because if one combination is found to be unenforceable and unreasonable, another combination might be found to be very reasonable and therefore enforceable. 

3. Award coverage

An employer must determine which award covers the employee. If there is no award that covers the employee, then the employer must also come to a clear conclusion that the employee is award free.

Award coverage will dictate the base minimum wage as well as other conditions, including:

• Minimum engagement time
• Offer of permanent employment (or casual conversion)
• Overtime rates
• Allowances
• Consultation for major change requirements
• Permitted deductions.

It’s also important that once an award coverage is established, the employer keeps themselves updated about any specific industry changes to the award.

Read HRM’s article on an employer’s legal obligation to consult employees about major workplace changes.

4. Off-set clause

For salaried employees an off-set clause is one of the key employment contract clauses that will allow a company to offset any payments made above the minimum requirements of an award against any alleged underpayment of wages.

In any event, an off-set clause usually only becomes applicable if an employee disputes their pay entitlements. An off-set clause may need pairing with an Individual Flexibility Agreement (IFA) to be useful. The off-set clause is particularly helpful when you pay an employee well above the award rate.

5. Warranties

Several warranties should be set out in an employment contract, including the employee warrants to have honestly represented their skills and experience.

If the employer subsequently learns an employee has misrepresented their skills or qualifications, the employee will be in breach of the contract, which may allow the termination of their employment.

6. Probationary period

A probationary period is typically three to six months, during which the employer will have time to assess the employee’s performance.

A probationary period is separate and distinct from the ‘minimum employment period’ under the Fair Work Act 2009 (Cth) which partly determines an employee’s eligibility to commence an unfair dismissal application in the event of termination of employment.

The ‘minimum employment period’ under the Fair Work Act 2009 (FWA) is either six or twelve months, depending on whether the company is a small business employer under the FWA (a small business employer engages less than 15 employees across all of their businesses).

Once an employee meets the minimum employment period under the FWA they are able to make an unfair dismissal application to challenge their termination of employment.

A probationary period clause is useful and sets out expectations.  However, terminating an employee during their probationary period is not necessarily a risk-free method of ending their employment. 

They may, for example, seek to argue their dismissal was motivated by discriminatory reasons or was in breach of their rights under the Fair Work Act 2009 (Cth). Legal advice should always be sought in these circumstances.

Read HRM’s guide on firing an employee during their probation period.

By having a robust employment contract in place, not only are you stipulating clear expectations and guidelines for employees, you’re also protecting your business from future risk. While it might be tempting to scribble down some basic details on a piece of paper and call it a day, putting time into creating a solid contract alongside a legal expert is time worth investing.

Jonathan Mamaril is a Director with NB Employment Law and leads the Employment Law team.