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Causes for clauses: Fundamentals of the employment contract

18 May 2016


Causes for clauses: Fundamentals of the employment contract

James Zeng, Senior Associate

Many employers have template contracts of employment which are used when employees initially commence employment and when employees are promoted into new positions or change positions.

However, sometimes the person completing the template contract of employment does not always understand why a particular clause should be included as part of an employee’s contract of employment. This article looks at the key clauses found in standard contracts of employment and reasons why such clauses should be included.

1.  Termination

One of the most crucial clauses in a contract of employment is the termination of employment clause. Where the employment is for an indefinite period (that is permanent or ongoing) contracts of employment should clearly outline the circumstances when the employment may be terminated by one or both parties and how the termination of the employment can be carried out by either party. Employers should consider including an express right to make payment in lieu of notice and/or to direct the employee to perform some or none of their duties during the notice period. Employers should also consider types of conduct by the employee or certain events that might automatically trigger the immediate termination of the employment. While misconduct is perhaps the most obvious example, others may include the employee losing a requisite qualification or being charged with certain criminal offences.

The failure to have a proper termination of employment clause means that the employee might be entitled to reasonable notice implied by law. What is reasonable notice in the circumstances will then depend on a number of factors including but not limited to length of service, age of the employee, seniority and the likely period it might take for the employee to find a comparable role in the industry. Reasonable notice has been held by Courts to be up to 12 months in some circumstances. Therefore, it is important that an appropriately drafted termination of employment clause is included in all contracts of employment.

2.  Entire Agreement 

An often overlooked clause is the entire agreement clause. When interpreting contracts of employment, Courts will not consider evidence outside of the contract unless it can be shown that the written contract of employment was not intended by the parties to capture the entire agreement between them.

The failure to include an entire agreement clause in contracts of employment means that verbal representations, written policies and procedures and other non-contractual terms might be considered to form part of the terms and conditions of an employee’s employment. This is not an ideal situation for employers. The purpose of the entire agreement clause is to ensure that terms, whether written or unwritten, outside of the contract of employment are not incorporated into or form part of the written contract of employment.

Employers should be vigilant to ensure that their conduct both during the recruitment process and in the course of the employment relationship is consistent with the entire agreement clause and that all agreed terms are captured in the contract of employment as a stand-alone document.

3.  Policies and procedures

The effect of a clause dealing with policies and procedures under a contract of employment is to:

  • inform the employee that the employer has written policies and procedures;
  • impose a requirement (which also constitutes a lawful and reasonable direction) on the employee to comply with all of the employer’s written policies and procedures at all times in the course of employment; and
  • document a clear intention and agreement between the parties that the employer’s written policies and procedures do not form part of the contract of employment nor do such documents give rise to any contractual rights on the part of the employee.

Serious legal ramifications may arise where the contract does not make the non-contractual effect of polices and procedures clear. For example, the failure by the company to abide by its policies and procedures might give rise to a claim for damages by the employee for breach of the contract of employment or could hamper any disciplinary process an employer may wish to take against the employee for breach of policies and procedures.

4.  Confidentiality 

Contracts of employment will often include a clause requiring the employee to protect and keep secret the employer’s confidential information. A confidentiality clause, while not necessary in all circumstances or types of employment, will be important in situations where the employee deals with or has access to the employer’s confidential information.

5.  Intellectual property 

Intellectual property clauses provide a clear outline of the obligations of the parties under relevant legislation dealing with intellectual property rights and confirm that that the work performed by an employee in the course of employment belongs to the employer. Employers should ensure that intellectual property clauses deal with inventions and designs, copyright and moral rights. This is especially important in the software development and information technology industry.

Employers should also consider provisions dealing with an employee’s misuse of intellectual property belonging to the employer.

6.  Variations 

A contract of employment should include a clearly drafted variation clause that specifies how the contract of employment may be varied by the parties. This helps to reinforce the entire agreement clause (discussed above) and avoid situations where, because of the way the parties have conducted themselves, the parties are taken to have agreed to vary the existing contract of employment.

Often, the nature of an employee’s employment will vary over the term of the employment relationship. Therefore, employers should include a provision (within the variation clause) outlining that the contract of employment continues to apply notwithstanding any change to an employee’s position, remuneration or location. This avoids any potential argument that the employee’s original contract of employment no longer applies because of a change in the employment, or that the notice period is no longer adequate and that a reasonable notice requirement should be imposed.

7.  Absorption 

Absorption clauses are important for employees covered by an industrial instrument such as a modern award or an enterprise agreement. An absorption clause properly drafted will allow the employer to off-set amounts paid to the employee above the minimum required by the industrial instrument against other monetary amounts owed to the employee. Such a clause helps to protect employers against claims by employees for additional entitlements under an industrial instrument, or claims that a payment has not been made in accordance with the industrial instrument.

8.  Workplace surveillance

In addition to any policies and procedures an employer may have on workplace surveillance, employers (especially those based in States with workplace surveillance legislation) should ensure that an appropriate clause is included as part of the employee’s contract of employment constituting notice of workplace surveillance and outlining the employer’s right to monitor and review internet browsing, computer usage and emails. The failure to give appropriate notice will not only result in the employer potentially being in breach of legislation but could also prevent the employer from relying on material obtained through workplace surveillance in any disciplinary process or employment related litigation.

Key Takeaways

  • By understanding the reasons for certain clauses in employment contracts, employers can help ensure that their employment contracts accurately reflect the terms and conditions of the employment relationship and sufficiently protect their interests.
  • Employment contracts should be reviewed and amended whenever there are material changes to an employee’s role, particularly when an employee is moved into a new position.
  • If in doubt as to the effectiveness of a clause, or how a particular clause works, an employer should obtain proper advice, and should certainly do so before making amendments.
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