Employment Contract Mistakes

Having a clearly defined and unambiguous employment contract is important as this sets out the relationship between an employer and an employee. Although it is a typically straightforward process, employers do make mistakes with their standard contracts which is then compounded across several employees. These mistakes may cause future liability issues in the event of a dispute, such as an underpayment claim.

1. Expressing 40 Ordinary Working Hours – Weekly
One common mistake an employer can make is setting out 40 ordinary working hours in a week for full time employees. The National Employment Standards limits this to 38 hours a week, with the additional 2 hours needing to be paid at overtime rates. Some Modern Awards, for example the Electrical Award, allows for an averaging system to be used, but not exceeding 152 hours in a 28-day work cycle. However, the Hospitality Industry Award allows greater flexibility when calculating the 38-hour average for example having 4 days of 9.5 hours a day or 76 hours over a 2-week period with a minimum 4 days off in that cycle or a 19-day month of 8 hours a day or a combination of the three. The General Retail Industry Award provides for even more averaging options than this to suit your operational requirements. Unless you have an RDO system in place, the additional hours beyond 38 are overtime hours. One way to get around this is to use an all-inclusive hourly rate, or an annualised salary arrangement that is inclusive of all reasonable additional hours. An employment contract can then state weekly ordinary hours to be 38, but with an expected additional 2 hours of overtime in a week, which is already included in an employee’s base pay rate. Some Awards such as the Clerks Award specifies how the annualised salary arrangement is to be set out.

2. Deductions
Permitted deductions from salary, will need to be identified in your relevant Award or Enterprise Agreement. An employment contract cannot have terms that displaces the relevant Award provisions, regardless of whether you are paying your employees above Award rates. A common deduction clause is for insurance excess payments from company motor vehicle accidents involving an employee. Unless this is allowed under an applicable Enterprise Agreement, such deductions would likely be unlawful unless the deduction was principally for the employee’s benefit. An example of a lawful deduction would be an employee’s written agreement for salary sacrifice arrangements. One common error is to have a clause that deducts a resigning employee’s pay to the full amount of notice not served. In the Electrical Award for example, this is restricted to a maximum of 1 weeks’ pay. This is the same with the Hospitality Industry Award and the General Retail Industry Award (there are far more allowable deductions in the General Retail Industry Award). Other deduction clauses to avoid (unless clearly stated in an applicable Enterprise Agreement) include forfeiting annual leave entitlements (or other entitlements) upon employee resignation or deducting previous training costs from an employee’s final pay.

3. Over Restrictive Post Employment Restraints
Many employment contracts contain post-employment restraints on employees which can take the form of non-compete or confidentiality provisions. An employer must ensure that such clauses are worded in a way that is reasonably necessary to protect your legitimate business interests, and not excessive. In the event of a post-employment dispute, such clauses may be held to be unenforceable, which may lead to additional costs for your company.

4. Appropriate contract
Another area of concern is using the proper contract type for the appropriate situation. For example, apprentices are usually employed under a fixed-term contract, which would automatically terminate upon successful completion of their training. You would then have the option to offer ongoing full-time employment after that. Employers often make the mistake of not using a written contract at all, or simply relying on the training contract, which can then cause issues at the time of completion (in terms of the expectation of ongoing full-time employment by either party). Another example would be where you have hired an employee for a fixed period because you only need them for a portion of a project. Be cautious on what you include in a fixed-term contract, especially in terms of the renewal of the period of employment. It has been held by courts that where a fixed term employee has had their contract continuously renewed then terminated, this may trigger obligations that a fixed term employee may not necessarily receive – such as redundancy, notice, etc.

The Workplace Relations Team at info@portal.businesssolutionshub.com.au or 1300 445 687, can assist you with reviewing your employment contracts and identifying possible areas of concern. We also offer comprehensive employment contract templates and relevant documentation which can be tailored to suit your operational needs.