Many employers make the mistake of hiring employees without a written employment contract. In this blog, we explore three reasons why having an employment contract can save your business thousands.
The offsetting clause
It is becoming increasingly common for employers to pay employees a set salary or hourly rate that is intended to cover all amounts owing to an employee. This of course avoids the need to calculate entitlements such as overtime, penalty rates and allowances owing to employees each and every pay period.
However, without a written employment contract confirming this arrangement, there is a risk that the employee will argue that the set salary or hourly rate only covered the employee’s base wages. If the Court accepts this argument, the employer may then be liable for thousands of dollars in overtime, penalty rates and allowances in addition to the wages already paid to the employee.
Even more worrying is the fact that the contract, even though it is not in writing, cannot be varied without the consent of the employee. Accordingly, the employer’s liability to pay entitlements in addition to the agreed salary or hourly rate could continue for a long time.
When business is booming, an employer may decide to share some of the profits with its employees in the form of bonuses or commissions. Unfortunately, without an employment contract, this may impose ongoing obligations that the employer did not expect.
If an employer continues to pay a bonus or commission for a few years in a row, there is a risk that such payment will form part of the employment contract (even where there is no written contract). When this happens, the employer may be required to pay the bonus or commission even when the business is less profitable. In those circumstances, a failure to pay the bonus or commission could be considered a breach of the employment contract.
To avoid this scenario, it is important to have a written contract confirming that any bonuses or commission paid by the employer are entirely discretionary and can be withdrawn at any time.
Notice period for termination of employment
The National Employment Standards prescribe the minimum periods of notice required to be given by an employer when terminating an employee’s employment.
However, for employees not covered by an award, the employer will also need to provide the minimum periods of notice required by the employee’s employment contract. Contracts of employment that do not stipulate a notice period will automatically contain an implied term that the employer will give the employee “reasonable notice” prior to terminating their employment, unless the employer has summarily dismissed the employee for serious misconduct.
What is considered “reasonable notice” will vary depending on the circumstances. For senior employees, a reasonable notice period may be six months or more.
In circumstances where an employer is paying the employee in lieu of the required notice period, instead of allowing the employee to work out the notice period, the imposition of “reasonable notice” can result in a hefty termination payment.
Regardless of whether the employee is covered by an award or not, it is best to have a written employment contract that expressly provides the period of notice required to be given by the employer.