As an employer have you ever wondered what 5 essential clauses must be in your employment contracts?
We have been asked this question a lot and given that we have lots of experience with contracts we are pretty confident that we know the answer. Keep reading to find out more.
The Main Aim is to Protect your Business
The 5 things that every business should include in their employment contracts (set out below) are mentioned on the basis that as a business owner you are trying to protect:
- your business
- the risk that you could be sued by a disgruntled ex-employee
- your future workflow
- your customer lists
- your confidential information
- your data, and
- any intellectual property that your employee has created whilst working for you.
So now that you understand what we are trying to achieve let’s go through the 5 clauses that every business should include in their employment contracts.
Five things that should be included in every Employment Contract
Ok, I’ve got my skinny lactose free extra hot flat white and am ready to go. Some free advice – go grab a scotch and some panadol – it will take the edge off.
No one wants to think about parting ways, especially when the employment contract has just commenced, however nothing lasts forever. Just ask Brad and Angelina. They know what I am talking about.
You should bear this in mind when creating your employment contract as the number one thing that should be included in any employment contract is the right to terminate the agreement.
Forms of termination
There are a number of ways in which an employment relationship can be terminated. These are:
- the passing of time (this occurs when an employment relationship is for a fixed period of time and that fixed period of time has elapsed, e.g. where a contract is for a fixed period of 1 year, after the expiry of that 1 year period the contract will come to an end);
- the employee tenders their resignation to the employer by giving notice;
- the employer terminates the employment relationship by giving notice to the employee;
- the employer terminates the relationship alleging underperformance on the part of the employee; or
- the employer terminates the relationship on the basis that the employee’s position becomes redundant.
Termination by Notice
The most common way in which an employment relationship is terminated is by the giving of notice, either by the employer or the employee.
Notice is the act of informing the other party of the intention to end the contract of employment at the expiration of the notice period. This means that in most instances, the employment agreement will not come to an end until the period of notice has expired.
Generally, it is expected that unless the employment agreement is for a fixed term, notice must be given when terminating the employment relationship. For a fixed term contract the contract will simply expire when the fixed term, or fixed period of time, runs out. No surprise there.
In the absence of a provision in the contract that states otherwise, notice must actually be received by the person to whom it is directed. Further, the notice must specify the termination date or, make it possible for it to be ascertained.
Where notice requirements in an employment agreement clash with those found under statute or an applicable award, the contractually agreed notice will only prevail if it is more beneficial to the employee. Where notice provisions in an employment agreement are manifestly inadequate, a contract of employment may be challenged on the basis that it is unfair.
Therefore, contracts of employment usually contain express provisions for determining the length of notice required by either side. The length of notice should be specified in the contract, and this may differ according to whether notice is to be given by the employer or the employee. In the case of notice by the employer, there should be a provision allowing for the payment of wages in lieu of notice.
So you need to make sure that your employment contract:
- has a clear termination clause setting out all the ways the contract can be terminated (see the dot points above); and the contract
- must also include an ability for either party to terminate the contract by giving the correct amount of notice.
Ok, let’s move on to the second most important item a business would want in any employment contract.
A restraint is a clause that stops an ex-employee from doing things once they leave your employment. Think of a restraint as a pre-nup. You sign a prenup to protect your assets if and when your marriage or de facto relationship breaks down.
This is the same concept with a restraint. A restraint clause is designed to protect your business ‘assets’ when an employee leaves. Read on to find what ‘assets’ are usually protected by a restraint.
It is smart to think about this at the very start of any employment relationship (and therefore include it in any employment contract).
Restraints are usually broken down into 2 types of clauses: non-compete and a non-solicitation.
A non-compete clause is a clause that is designed to stop your ex-employee working for a business that is in competition with your business for a certain period of time in a certain area.
The Employee must not, for a period of 6 months, within 5 km of our business, be engaged in, or work for, any business that competes with our business.
We have watered this example clause down a bit (bit like when you add water to scotch) as the full clause might be a bit hard to stomach (like too much scotch). But you get the idea.
Having such a clause helps protect your business by stopping one of your competitors getting an advantage by hiring your ex-employee, in essence that business would get access to all the knowledge that your ex-employee has about your business, your customers, your profit margins etc (but note that we will talk about protecting your confidential information below).
A non-solicitation clause has the effect of stopping an ex-employee from poaching your current staff and your current clients. A well drafted non-solicitation clause will stop an ex-employee for ‘soliciting’ (basically ‘stealing’) your current and past clients, suppliers or contractors and it will also stop an ex-employee from trying to steal current employees.
Generally these clauses only operate for a period of time, generally between 3 months out to about 2 years.
On that basis it is generally wise to always include a restraint in any employment contract (ie both a non-compete and a non-solicitation clause).
However just remember that such a clause is generally not required for junior or less skilled staff, because:
- junior or less skilled staff are unlikely to be able to negatively impact your business; and
- it can be viewed as unfair to unreasonably hinder the ability for junior or less skilled staff to find alternative employment.
On that basis you will want the restraint to be longer for those employees that are more senior and where they have knowledge that could be more useful to your competitors.
So as an example if you hired a chief financial officer or a chief executive officer you would look to restrain them from working for your competitors for a period of 12 months after the end of their employment contract. However if you were to engage someone in middle management, like a senior salesperson, then potentially a 3 month restraint would suffice.
One thing to bear in mind is that the longer a restraint is the less likely it is to be enforceable. For example there have been cases that have indicated that an 18 month restraint period for a chief executive officer was too long. So don’t go overboard.
A good lawyer will look to cover this eventuality by drafting what is known as a cascading restraint clause. In short a cascading restraint clause includes a whole lot of options (e.g. 2 years, 1 year, 6 months, 3 months (for the time periods) and then Australia, NSW, 50km from Sydney, 20km from Sydney (etc – as an example) – for the geographical restraint area.
The benefit of this is that if the employment contract is ever sued upon, or litigated, a cascading restraint clause allows the judge the discretion to put together any combination of the clause as the applicable restraint.
So using the example above a judge may decide that the combination of ‘2 years’ for all of ‘Australia’ to be too harsh but ‘6 months’, ‘within 50 km’ of Sydney is a more appropriate restraint.
3. Confidential Information
The next thing that should be in every employment contract is a confidentiality clause.
What is a confidentiality clause?
In short a confidentiality clause will do 2 things:
- first it will define what information your business has which it classifies as being confidential in nature (for example retail margin percentage amounts, certain data, other pricing information, business processes, unique ways a business may have of generating clients etc): and
- secondly the relevant clause will then prohibit an employee or ex-employee from ever disclosing that information (unless the Employer consents).
That way no one should ever know your business’s confidential information.
There are a couple of circumstances where an employee or ex-employee will be allowed to disclose confidential information (e.g. to a judge in court proceedings) but otherwise the clause will stop the disclosure of your confidential information.
This is the best way to ensure that any confidential information that your business has is fully protected from being disclosed by an exiting employee after they have left the employ of the business.
So as they say, “ don’t leave home without one!” Every contract needs a confidential information clause.
What can be considered to be ‘confidential?’
If you think that what you have is not sufficiently important to be classified as being “confidential”… think again. The bar is quite low to classify information as ‘confidential’.
4. Intellectual Property
The next thing that should be in every employment contract is a clause that deals with intellectual property (IP).
In every employment agreement you will want to make it clear that any IP your employee creates during their employment is owned by the business. That way your business can continue to use, or look to exploit, that IP because it is owned by the business and not by the employee.
Don’t try and own every bit of IP that an employee creates
You will need to be careful to ensure that this clause is not drafted too widely, because an employer can, in general terms, only put its hand up to own IP that is created by an employee during the course of their employment.
So if your employee is hired to help develop websites for clients and that employee develops a mobile app after hours and not using company resources and that mobile app has absolutely nothing to do with the employee’s employment, then the employee would still own all intellectual property rights in that mobile app. Which is fair, as you as an employer are not paying them to develop mobile apps, but rather you are paying them to develop websites.
The water would get murky pretty quickly though if that employee was developing websites after hours on a work computer. In those circumstances the employer might have a strong case that they own that IP that was created after hours.
For this reason it’s important that an employee’s job role or job description is 100% clear so that there is no doubt about their role and what IP (if any) they are meant to be creating as part of their role (and therefore what IP the business will own).
You will also want to ensure that your IP clause deals with moral rights. In Australia under the Copyright Act every author of a work has certain ‘moral rights’.
What are Moral Rights?
In general terms these rights are:
- the right to be named as the author of the work – this means you must give credit to the person that created the work;
- the right for someone else not to be named as the author of the work – this means that you must not say a person is the author of a work when they are not; and
- the right for the work not to be subject to derogatory treatment – this means you must not do something with the work (such as change or add to it) in a way that would have a negative impact on the author’s reputation.
So in any employment agreement what you should look to do is have the employee consent to their moral rights being infringed. In layman’s terms this means that you don’t have to worry about their moral rights and you can do what you like with the work they have created for you (i.e. you don’t have to worry about a to c listed above).
We recently provided advice to a client, a photographer, about an employment agreement they were about to sign with a news service.
Under the terms of that employment agreement the employee consented to their moral rights being infringed.
Practically this meant that any photos the employee took for the employer as part of their job did not need to note the photographer as the owner of the copyright in the photo, but rather the news service could say that it was the photographer (or owned the copyright in the photograph).
Not great for the photographer, but a condition of employment. C’est la vie.
5. Inclusion of Business Policies
All businesses should have workplace policies. Some of the policies that a business could look to put in place include the following:
- a Code of Conduct
- a Leave policy
- a Disciplinary policy
- an Anti-Discrimination policy
- a Harassment and Bullying policy
- an Acceptable use of IT policy
- a Social Media policy
Policies separate to the Contract of Employment
It is best to have policies as separate stand alone documents. Structuring policies in this way, in other words having them as separate documents and not part of the contract of employment, allows the employment contract to be kept short and concise. It also allows a business to apply policies consistently across the organisation by having policies that apply consistently to all employees.
So following this through, a new employee receives their contract of employment. One clause of which will state that the employee must comply with the employer’s policies as they exist from time to time. Usually, the employee is also given a copy of the relevant policies at the same time that they received the letter of offer. (In fact they must be given the chance to read and review the policies before the employee can be bound by them.)
Therefore, it is important that:
- in any employment contract you refer to the fact that your business has these other policies; and
- the employee must comply with those policies whilst being employed with you; and
- the employee is given a chance to read or review these policies before they can be bound by them.
Obviously, it is also important to ensure that your business policies are up to date, fair and reasonable and also applied consistently to all employees across your business.
Other things to think about – Probationary Periods
Whilst we have covered our top 5 items we thought it was worth mentioning the issue of probationary periods in employment contracts.
This is what you need to know:
- the Fair Work Act sets out minimum probationary periods;
- for a business that employs less than 15 people – an employee can not make a claim for unfair dismissal if they worked for that employer for less than 12 months (this in essence means that every small business, which employs less than 15 people automatically has a 12 month minimum employment period (‘probationary period’) in every employment contract);
- for a business that employs more than 15 people – an employee can not make a claim for unfair dismissal if they have worked for that employer for less than 6 months (this in essence means that every business which employs more than 15 people effectively has a probationary period of 6 months in each of its employment contracts).
So what does this mean?
It means that even if your contract has a probationary period in it, under the Fair Works Act, an employer can still terminate an employee’s employment for any reason within a ‘minimum employment period’ without unfair dismissal laws applying.
The minimum employment period is either:
- for an employer that employs less than 15 employees – the period is 12 months; and
- for an employer that employs 15 or more employees – the period is 6 months.
So using an example – if you have a probationary period in a contract of 6 months and your business is a business that employs 10 people, then under the legislation you actually have a window of 12 months from when the new employee started with your business until you have any exposure for unfair dismissal.
What this means is that if you took an action against the employee outside the probationary period (say in the 9th month after they had started work with you) then you as an employer can not be liable for unfair dismissal (if for example you dismissed the employee in the 9th month).
Those are our top 5 things that every business should include in their Employment Contracts.
Employment Contracts can be tough. Make sure you get yours drafted or reviewed by the contract specialists at the Contract Company.
If you have any questions please get in touch on 1800 355 455.