Check your Employment Contracts have these 5 clauses

Overview:

  • When drafting an employment contract you must cover your rights as well as those rights of the employee.

  • This article looks at the following 5 key clauses we recommend that you include in your employment contract: Probationary Period, Set-off for an award, Termination Periods, IP Ownership and Restraints.

  • For each key clause we cover what to look out for.

 

Probationary Period

A probationary period is an important time used by employers to assess if employees are suitable for the role and business and determine whether the employment relationship should continue.

There is no legal requirement to have a probationary period. There is also no legal requirement as to the length of the probationary period. What the legislation does provide for is the minimum period of employment in Australia which determines when an employee can make use of the unfair dismissal laws and systems.

The minimum period of employment in Australia is:

(a) Employed in a small business for at least 12 months. A small business is defined as any business with fewer than 15 employees, calculated on a headcount of all employees who are employed on a regular and systematic basis; and

(b) Employed in a larger business for at least six months.

The importance behind a probationary period is that it will most commonly fall before the minimum period of employment as specified above, and therefore, the employee is unable to bring a claim for unfair dismissal. We note however, that this does not mean that you may terminate the employment for any reason. The general protections under the Fair Work Act and contractual claims will still be available. Some general protections include:

(a) a discriminatory reason such as race, colour, sex, age, physical or mental disability, pregnancy, religion, political opinion or nationality;

(b) Because the employee has lodged a workplace complaint; or

(c) Because the employee has made an enquiry. Termination on this basis would breach the general protections regime.

When drafting a probationary period we recommend including the ability to extend the probationary period if the employee takes time off during that period.

It is important to note that employees are still entitles to the statutory minimum entitlements of employment during the probationary period. This includes the requirement to give notice to terminate and any accrued annual leave.

Set off for an award

Many employees are covered by a modern award which will apply to their occupation or industry. Modern awards are legal documents that outline the minimum pay rates and conditions of employment. To work out whether an award applies, visit https://www.fairwork.gov.au/awards-and-agreements/awards/find-my-award and follow the instructions on the website. Once you have found an agreement you think is appropriate read:

(a) the coverage clause (usually clause 4)

(b) the job classifications (usually in the pay clause or a schedule).

The ability to set off an employee’s salary against award entitlement, means that you as the employer do not need to pay for overtime or allowances. We note however, that in order to set off an employee’s salary against the award entitlement, the salary that you pay must adequately compensate the employee for those award entitlements.

Generally speaking (and absent dedicated alternative industrial arrangements), employers who fail to include an appropriately calibrated "set off" provision in their employment contracts, will be at an elevated risk of an underpayment claim, if an employee is not paid in accordance with applicable award requirements.

Termination

The termination of an employee is an important part of the employment contract. An employment can end for a number of different reasons including resignation or dismissal. When drafting the termination clause, you must follow the notice requirements under the Fair Work Act.

Note Requirements

When you terminate an employee, you need to give them notice or payment in lieu of notice.

The minimum notice periods when dismissing an employee are set out in the National Employment Standards as follows:

Period of continuous serviceMinimum notice period
1 year or less1 week
More than 1 year – 3 years2 weeks
More than 3 years – 5 years3 weeks
More than 5 years4 weeks

An employee has to get an extra week of notice if they’re over 45 years old and have worked for the employer for at least 2 years.

An award, employment contract, enterprise agreement or other registered agreement can set out longer minimum notice periods. However, under the Fair Work Act, notice is not required to be given to an employee whose employment is terminated because of serious misconduct. We therefore recommend including the right for you terminate immediately where the employee has engaged in conduct classified as serious misconduct under the Fair Work Act. Please note however, that you should still afford the employee procedural fairness so as not to be in contravention of the unfair dismissal protections.

If the employee has been terminated and wants to leave during the notice period they can resign. Legislation does not encapsulate resignation notice periods, however, an employee’s minimum notice period for resignation may be specified in an award, registered agreement or employment contract.

IP ownership

If you have employees that create intellectual property as part of their employment responsibilities than who owns that intellectual property?

As a general rule you should ensure that:

(a) You own the intellectual property created by your employees during the course of their employment;

(b) The employee must transfer any ownership of intellectual property created during the course of their employment;

(c) The employee provides you with an irrevocable, royalty free licence for the use of any of their existing materials.

(d) The employee must warrant that any intellectual property created does not infringe on any third parties.

Consideration needs to be given in all the circumstances as to what constitutes “during the course of the employment”. It is important that you make the scope of the employee’s duties, including the duties which may require the employee to create intellectual property, very clear in the employment contract. If intellectual property is created outside the duties of the employee under the employment contract it is likely that the Courts will find that the intellectual property was created outside the course of employment.

Restraints

Post-employment restraints are a common feature of employment contracts to help protect the interests of the business. A post-employment restraint clause is vital in ensuring that an employee does not take several of your clients, establish a competing business nearby or approach other employees of your company in an attempt to have them work with the employee. Post-employment restraints must be carefully drafted as an unreasonable restraint is void.

Enforcing a restraint clause

Post-employment restraints will be presumed to be unenforceable unless the employer seeking a restraint is able to show that it has a legitimate interest in imposing the restraint and the restraint was reasonable. Courts will commonly not like to restrict the ability of an individual to earn a living. Matters which are to be considered by a court in determining whether a restraint is reasonable include:

(a) The restraint period being too long or the scope too broad

(b) The interest or information protected by the restraint is not identified

(c) The interest or information protected by the restraint is not under threat


Generally, restraints on poaching employees and clients are enforceable. Difficulties may arise where an employer wants to stop an employee from conducting or working in a competing business.

How to increase the likelihood of enforcing a restraint

Whether a post-employment restraint is enforceable will depend on the circumstances. To increase the chances of the court enforcing a restraint you should identify the legitimate business interest that you wish to protect and tailor the restraint to that employee. You should consider what specific information the employee may know, the level of the role that the employee has in the business and in what way you wish to restrain them. The more senior the employee the more likely that they will have access to information that is a legitimate business interest that you wish to protect. For example, in the case of Fairfax Media Management Pty Limited v Harrison [2014] NSWSC 470 the judge indicated that a six month restraint against a senior executive who left to become CEO at a competitor was likely to be reasonable.

Restraints must also be reasonable in duration, geography and in the activities that they seek to restrain. We recommend that when drafting a restraint clause in your employment contracts, that you incorporate a number of combinations. For example, a time based restraint may be expressed as 3 months, 6 months or 12 months. This is commonly referred to as a cascading or ladder provision. A cascading or ladder provision enables the court to sever and delete the parts of the restraint which may otherwise be held unenforceable for being too wide or too long. If a court is satisfied with the remainder of the clause and it is reasonable the court may enforce what is left of the restraint.

Employer Conduct

It should also be noted that there is conduct which you may do that will hinder your ability to enforce a restraint provision. You must be careful not to engage in conduct which may amount to a repudiation of the contract.

Key takeaway messages

Your employment contract needs to be drafted to best fit the interests of your business. There can be large risks involved with employment contracts especially if you have issues with the employee and a properly drafted employment contract can help manage those risks.

Should you require any assistance in reviewing your employment contract please contact us today. Our contact information is available on the last page of this handbook.



Tori Cox