Employment Contracts and Your Business

Posted on May 17, 2017 By

It is common practice for employers to enter into agreements with their employees to commence an employer and employee relationship. Agreements are commonly put into writing by the employer incorporating terms, which both the employer and employee mutually agree with at the outset as a standard form or negotiated terms between the parties. Surprisingly there are many employers who enter into verbal agreements with employees and do not finalise the terms of employment into written form, or an employment contract.

Over time a business’ operations and employee’s responsibilities may change, however these changes fail to be incorporated into verbal or written contracts. This often leaves employers and employees exposed to uncertainty and potentially legal exposure.

Written employment contracts allow for the terms of employment to be clear and unambiguous to ensure both parties are aware and understand their responsibilities, duties and obligations under the agreement from the commencement of employment until it is either amended or terminated. These contracts are known as common law employment contracts.

Common law employment contracts are not “industrial instruments” unlike Australian Workplace Agreements (AWAs), Awards and Notional Agreements Preserving State Awards (NAPSAs).

A common law employment contract can operate simultaneously with an AWA, however employers need to bear in mind that common law contracts cannot undercut the terms of an industrial instrument.

If you use common law contracts in your business it is imperative that you ensure all the terms or any relevant industrial instrument are carefully observed.

A restraint of trade clause seeks to impose limitations or restrictions on an employees’ conduct after they leave employment. Restraints of trade clauses are intended to protect an employer’s legitimate business interests and goodwill. There will always be two competing interests, an employees’ freedom to earn a living against the need of an employer to protect its legitimate business interest.

Employers need to bear in mind that restraint of trade clauses will only be valid if they are reasonable under relevant Restraints of Trade Legislation in each state and territory. In New South Wales; what is reasonable under the Restraints of Trade Legislation 1976 (NSW) will depend on factors including:

The subject matter of the restraint.
The time and area of its operation.
The nature of the employer’s business and the industry in which the employer operates.
The relationship of the employee to the employer’s clients and customers.
The nature of the work performed by the employee.

A properly drafted restraint of trade clause in an employment contract for an employee is an effective tool to protect an employer’s legitimate interests and is capable of enforcement where it can be established that an employee deliberately copied customer lists or business records before leaving employment and did so with the intent to compete against their employer. An employee can be restrained from continuing to engage in conduct in breach of their obligations under an employment contract and damages may be awarded to the employer in particular circumstances.

Restraint clauses can be a useful means of protecting legitimate business interests however employers should consider that determining the correct scope and application of valid restraint clauses is often complex and difficult and legal advice should be sought.

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