It may seem paradoxical to call the employment contract the cornerstone document of the employment relationship, given that there is no legal requirement in Australia for employers to have a contract with employees and many of the important terms and conditions of employment are set out in the National Employment Standards (NES) and/or applicable modern awards or registered agreements. But an employment contract details all the terms and conditions in writing, so both employer and employee clearly understand what their rights and obligations are, what they have agreed to, what they can expect from the other party, and what is expected of them.
Not having a clear contract can create uncertainty, and leave the employment relationship open to misinterpretation, dispute, and potential legal wrangles. So let’s have a good look at employment contracts, including what they are, what they should and shouldn’t contain, the process for drawing them up, why you need to get them right, and some common mistakes employers make.
In the eyes of the law, an employment contract is a legal relationship that is formed when an employer offers a person a job and the person accepts it.
The contract is an agreement between the employer and employee that the employee will work for the employer under agreed terms and conditions, e.g. for a specified number of hours and rate of pay. It sets out the rights and responsibilities of both parties and that both parties have agreed to be bound by them. As a baseline, an employment contract must adhere to the national industrial relations system and cannot undercut any legal minimum entitlements provided by the National Employment Standards (NES) and/or any modern award or registered agreement that may apply to the organisation or employee.
Regardless of whether they have an employment contract, all employees are covered by these minimums.
A contract can be either verbal or written, but we always recommend putting it in writing, having both parties sign it, and then storing it securely.
As we said, a written employment contract with an employee is not a legal obligation in Australia and some businesses are happy to employ people without creating a formal contract, because it might initially save time or expense when hiring.
However, an employment contract is an essential tool for defining and guiding the employment relationship, and provides evidence of what has been agreed between the employer and employee about important terms such as pay, hours, leave entitlements, as well as the expectations of the role.
An employment contract helps protect the organisation and ensures employees get all their lawful minimum entitlements.
The two main types of employment contracts are permanent or fixed-term contracts.
Permanent employees are employed on an ongoing basis until either the employer or employee terminates the relationship.
Fixed-term employees perform a role for a specific period of time, e.g. for 6 months, or length of a specific task or project, e.g the development of a piece of software.
Most fixed-term employees are entitled to the same wages, penalties, and leave as permanent employees, though an award or registered agreement may provide them extra terms and conditions.
Note that from 6 December 2023, the use of fixed-term contracts will be limited to 2 years (including renewals) or 2 consecutive contracts, whichever is shorter. There are some exceptions to these limits, in cases that are genuinely necessary and appropriate.
Within these two main forms of employment contracts there are full-time, part-time, or casual employees. Each person’s employment contract needs to match the type of work they do, the hours and frequency of their work, and other terms and conditions.
Independent contractors don’t need employment contracts.
Independent contractors work for themselves and deliver outcomes to their clients. They invoice the client for their work and are responsible for their own tax payments. This means the relationship is a commercial one rather than being employment. If your business engages contractors, you need to make sure the arrangement is legitimate, i.e. it is a genuine contracting situation rather than actual employment.
Always set the arrangement out in writing, clearly defining the terms of the agreement as that of a principal (the business) and the contractor.
Exactly what an employment contract should contain will depend on your business needs, the demands of the role, and federal and state legislation relevant to the position and workplace.
Remember, an employment contract can provide more generous terms and conditions than the minimum legal entitlements stipulated in the NES or the relevant award or registered agreement, but it can’t leave an employee worse off.
Even if employees agree to lesser terms and conditions in their employment contract, they are still entitled to these minimums. On the following page is an outline of the main elements an employment contract should contain.
Name and details of employer and employee.
Position title.
Type of contract: permanent or fixed-term.
Commencement date and, if a fixed-term contract, end date of employment.
Employment status, e.g. full-time, part-time, or casual.
Name of the applicable award or agreement.
Date of birth of employee (if under 21 years of age).
Rate of pay, overtime arrangements, and penalty rates.
Payment method and schedule.
Hours of work, rosters, flexible work, shift-work, and meal break arrangements.
Leave entitlements, e.g. annual leave, sick leave.
Allowances, e.g. travel allowance.
Termination, severance, redundancy, and notice period requirements.
Reporting lines.
Relevant performance measures or standards, if appropriate, e.g. for sales-based roles where the employee earns commission.
The process for updating the employment contract, e.g. if the person’s role changes or they move locations.
Confidentiality (note that pay secrecy terms are no longer allowed), intellectual property rights, and post-employment restraints, e.g. restraint of trade or non-disclosure clauses.
Commitment to workplace policies and rules, e.g. workplace health and safety, use of company property, internet and email usage, expense claims procedure, customer service standards.
When drawing up an employment contract, keep in mind that changing anything in the contract later on will require consultation and agreement from both parties.
Because of this, we advise employers to keep out things that will need to be regularly reviewed or updated (e.g. the position description, performance measures, regularly changing commissions or bonuses), or that apply to everyone in the organisation (e.g. code of conduct, work health and safety).
Instead, it is better to issue these as stand-alone documents or company policies or procedures, so you can change them when needed. Remember, too, that employment contracts must always comply with the latest workplace and industrial relations legislation. For example, as of 7 December 2022, employers cannot include any pay secrecy terms in a new employment contract, including requirements that employees not share information about their pay or the terms and conditions that would be needed to work out their pay
An employment contract is formed when an employer makes an offer of employment, either verbally or in writing, and the employee accepts it.
To be legally binding, three things need to happen: an offer is made, considered, and accepted. Without these 3 elements, the contract will not be legally enforceable.
Draw up a contract with your new employee (using the terms and conditions of the NES and/or applicable award or agreement as the nucleus) and give it to them when you offer them the role.
Give the person a couple of days to consider the contents of the contract, before they accept or reject it. They may have questions or want to negotiate different terms and conditions, e.g. the salary or wage.
Once you have agreed on the contract and the person accepts the job offer, get them to sign the contract, give them a copy, and store a copy for future reference (having a digital system will make the whole process much easier).
The process for changing an existing contract depends on the reason for the changes. Any amendment to employment legislation automatically overrides what a contract contains and in some cases, new contracts may need to be issued. Otherwise, an employee is not obliged to accept any changes to the terms and conditions of their employment and their contract can only be changed by mutual agreement. So, you have to consult with the employee by first proposing the changes, seeking their feedback, and then coming to an agreement on the final shape of the changes.
Note: If a person on a full- or part-time contract is mutually changed to casual employment, the law views this as the same as ending employment. The employee must be given notice, and be paid any outstanding pay, leave, and other entitlements before they start as a casual.
An employment contract can be terminated by either the employee (i.e. by resigning) or the employer. Regardless of what triggered the termination, you must follow the correct procedure to ensure the process is fair and reasonable. Depending on the circumstances, if an employee is dismissed or resigns, they may be entitled to be paid notice, and must be given their final payment, including any entitlements owed to them e.g. untaken annual leave.
While it may be tempting to think you can get someone to work at your company without drawing up an employment contract that you both sign, doing so will leave you exposed if things go wrong. They’re not difficult to get right, but there are some common errors that every business should avoid.
It is crucial to get each employee on the right type of employment contract so it matches the nature of their employment. This may seem reasonably straightforward, but there are some mistakes that businesses commonly make:
Using a casual employment contract for part-time workers. As soon as a person is required to work regular hours, no matter how few, they are not a casual.
Hiring contractors who are actually employees. Contractors are self employed and aren’t covered by most employment-related laws.
Having an employee on a type of contract that does not match the reality of their work could mean you face an employment dispute or other costs, including outstanding wages, holiday pay, or PAYG tax. So before you hire someone, it’s essential to consider what work needs to be done, how often, and for how long. That will make it easier to choose whether a full-time, part time, or casual employee is the best fit.
As an employer, you can’t ask your employees to agree to less than the minimum entitlements and protections under the NES and/or a relevant enterprise agreement or modern award. Even if you don’t include them in an employment contract or have terms in the contract that don’t comply with the law, the minimum entitlements are still legally binding, and if a Fair Work Inspector finds you have breached them or if a dispute is taken to the Fair Work Ombudsman or the Fair Work Commission, you could owe your employee(s) unpaid wages or back pay for leave. You could also be fined.
While the good old DIY approach might save time, taking an old template and applying it to all new employees can be risky. Sure, most individual employment contracts are broadly the same for all employees, but failing to tailor your contracts to the demands of each role may mean you miss important terms and conditions. You don’t want to end up in an employment dispute and find the contract doesn’t comply with employment regulations or isn’t binding. An administrative error because you recycled an old template is no defence. Personalising the employment contract will not only safeguard you from unnecessary risk, it will ensure it is specific to the position, the person, and the needs and goals of your business.
An employment contract is based on mutual understanding and everything in it should be clearly understood by both parties. Any ambiguity in the contract could mean that your employee does not know what the business expects of them, and what their obligations and duties are. If you agree to a probation period, a certain number of working hours, a roster, on-call availability, or procedure for shift changes, these things should be clearly set out in clauses in the contract. Ensuring the terms and provisions are all clearly defined and match the reality of the job the person needs to do will ensure the employment contract is robust, and will greatly reduce the likelihood of problems or disputes down the track. As in all relationships, honesty and transparency are always the best policy.
Being clear is the overarching rule, but there are some areas where being too specific in the employment contract could be a disadvantage. A good rule of thumb is, aside from the provisions you are legally obliged to include, only add those that you are confident you want to bind your workers to and that you want to be bound by. Employment contracts can be changed, but only if there is a genuine reason and both parties agree. Going back to tweak them over and over so they match the reality of the job could be laborious and may strain the relationship you have with your team members.
So you’ve worked through the key clauses and added any others that ensure your employee (and you) know exactly what’s expected of them. At this point, you might be tempted to include policies and procedures you want to be part of the business culture. But before you do, think about whether you want to give the rules the permanence and legal weight of a clause in the contract. It may be better to create non-contractual policies and procedures you want workers to follow. Doing that will give you the flexibility to alter them if things in the business or wider industry change, rather than having to go through the process of changing the employment contract. Any policies and procedures that are contractually relevant, however, should be explicitly referenced in the contract so a new employee knows they exist and that it’s part of their job to know and follow them, e.g. use of the company vehicle. If you keep the clauses short and simple, they will be easier to understand and abide by.
Once you’ve created an employment contract and you and your employee have signed it, you both must follow the obligations within it. It may be tempting to take shortcuts in the workplace - for disciplinary reasons or if you feel your team should be more productive - but it’s not good practice. One of the guiding principles of the Fair Work Act is that the employer and the employee must act in good faith. Failure to adhere to the provisions of an employment contract or failure to act in good faith could mean an employee could successfully challenge you in a dispute. It’s much better to see the contract as a foundation for quality employment relationships, and a building block for a workplace culture of cooperation, trust, and success.
Once the signed employment contract is stored, it may sit to gather dust (or its digital equivalent), but it is much better to regularly review your contracts to ensure they stay compliant with all laws and regulations, e.g. the Fair Work Commission’s annual review of minimum wage rates. Also, be sure to update the contract if there are changes to the nature or terms of the job, e.g. if the hours of work change (this includes guaranteed hours, days of work, or start/finish times). Remember, there must be a genuine reason for any contract changes and any amendments must be discussed with the employee and be made in writing. Having the oversight of a qualified HR or employment expert will help ensure your contracts are fit for purpose and comply with all current legislation.
