25 May Why have employment contracts? Here’s 10 reasons
A lot of small to medium sized businesses don’t have written employment contracts in place. With more than 20 years’ experience in HR, we are aware of a lot of problems that businesses can encounter when they don’t have employment contracts in place or where they have poor employment contracts in place. A lot of these problems can be prevented.
Here are 10 reasons why it’s good practice to have employment contracts in place:
- There is less chance of a dispute over terms and conditions of employment. In the event of a dispute, an employee can claim that the employer had agreed to a whole range of things. Without a written contract to refer back to, it becomes the employer’s word against the employee’s.
- Employment contracts make pay rates clear and (can) make reference to the relevant Award or Enterprise Agreement. We have entered a period where pay rates have become a major issue, with an increasing number of businesses being prosecuted for underpayment of wages, as you can read about here. Public awareness of this issue is growing and workers are becoming increasingly suspicious about their pay rates.
- Employment contracts clarify the status of employment: casual, part-time, full-time, fixed term, or maximum term. Each of these has implications for pay rates, probation, and termination clauses.
- For permanent employees (part-time or full-time) contracts of employment clarify “ordinary hours” of work. The term “ordinary hours” is an important one in employment law. When ordinary hours are clear, then penalty rates, overtime rates, payment for sick leave, and annual leave, also become clear. Without this clarification, the employee may claim back pay for payments not received (e.g. for overtime that has been paid at ordinary rates, which is a common occurrence for part-time employees). This can occur after a number of years of employment, and be very costly for the employer.
- If you are paying a salary (which is a fixed amount of pay each week or fortnight), the contract clarifies what the above award component of the salary covers (e.g. overtime). Without that clarification, the employee can make a claim for unpaid overtime (after many years, which again can be costly).
- Employment contracts provide an opportunity to clarify expectations. The employer has obligations to the employee and the employee has obligations to the employer. For example, from experience, I now include a clause like this one in all my contracts “you must perform your work with reasonable levels of accuracy, care, and in a timely manner”. If you have a problem with an employee and you are required to take disciplinary action, and you work towards a termination (if their performance doesn’t improve), then it’s good to be clear about what aspect of the employment contract the employee has breached (or what policy they have breached). You can make reference to this in counselling notes or warning letters. This will help to ensure that you follow a fair process in the event that you are faced with an unfair dismissal claim.
- While it’s good to have separate HR policies to deal with the high risk HR areas (such as workplace bullying, sexual harassment, and discrimination), employment contracts can briefly outline some of the employer’s key policies (such as mobile phone usage, break times, punctuality, social media, and dress standards). These clauses can be really helpful if you experience problems in these areas. They make performance management, counselling, discipline, and termination processes easier.
- Employment contracts outline obligations of confidence and make it easy to deal with an employee who has breached confidentiality (e.g. passing on confidential information to competitors or clients, or using it for personal advantage – e.g. for the employee’s own business).
- Employment contracts can include restraint clauses (where it’s reasonable) to prevent an employee from going to work for a competitor and taking your clients with them.
- Employers that issue employees with contracts of employment are seen as more professional and ethical than those that don’t. Contracts of employment create goodwill with your employees and they communicate transparency – the employee is less likely to think that the employer is trying to hide something.
It’s not hard to put employment contracts in place and it’s not expensive. They can save you a lot of time and money in the long-term.