Maurice Blackburn

Employment contract law is complex and confusing.

What is an employment contract?

An employment contract is a legally binding agreement between employer and employee. An employment contract can be in writing, verbal or a combination of both. It contains the employees' rights and responsibilities in employment and the employer's obligations towards the employee.

It has never been more important for employees to understand and have proper advice on employment contracts - what they are, how they work, what rights, obligations and entitlements they bestow and how to ensure that employment rights are not discarded.

We can provide you with advice in all areas of employment contract law, including:

• formation and content of employment contracts
• breach of employment contracts
• independent contractors
• restraint of trade
• confidentiality clauses
• termination of employment
• redundancy and redundancy pay
• statutory individual contracts
• issues for IT contractors
• unfair contracts
• employment issues for executives
• sports contracts
• salary packaging
• employer obligations, and
• reasonable notice of termination

Employment contract negotiation

Our employment contract lawyers can provide strategic advice about negotiating your contract of employment. With your rights impacted by federal workplace legislation it is important that you understand how your contract of employment will operate in the new environment.

Contract of employment

Every employee has an employment contract. There is no legal requirement that an employment contract be in writing.  An employment contract may be written, oral, or partly written and partly oral.  An employment contract might consist of a detailed written document or be as simple as an exchange of e-mails or a letter of appointment.

Even where a worker and their employer have simply agreed that certain work will be performed for certain wages, an employment contract will come into existence.

Employment contracts are usually either fixed-term contracts, which expire on a set date or on the happening of a particular event (such as the completion of a project) or indefinite contracts which continue until one party elects to terminate the contract.

Terms of an employment contract

The terms of an employment contract may be express or implied.

Express terms

Express terms are those terms to which the parties turned their minds and explicitly reached agreement.  In a written employment contract, the express terms will be the written terms. In a contract that is partly oral and partly written, the express terms will include both the written terms and any terms agreed verbally.

Where no written contract exists, it may be necessary to examine all of the surrounding circumstances to determine what the express terms are.  This may include reviewing telephone conversations, facsimiles and e-mails to determine what agreement was reached by the parties.

Implied terms

Employment contracts often cover only the key elements of the employment relationship, such as position, wage rates, superannuation and work location.  In order to make the contract effective, the law may imply a range of other terms into the contract to ensure it can operate effectively.

Implied terms are terms that the parties have not agreed to, but which nonetheless form part of the contract.  Implied terms may arise from the operation of the law, from custom and practice or by statute.  In addition, terms may be implied where it is clear that the parties would have included the term if they had turned their minds to it.

A common implied term arises where an employment contract does not state how it can be terminated.  In such cases, the law will imply a term that the employment contract can be terminated on 'reasonable notice'.

Where the parties have reduced the employment contract to writing, there is less scope for terms to be implied.  This is particularly the case where the parties have detailed written contracts.  Generally, the more detailed the contract, the less willing the courts will be to imply additional terms.

Contracts sometimes contain 'entire contract' clauses.  These clauses generally state that the written terms of the contract are the entire agreement between the parties.  In some circumstances additional terms can be implied into these contracts, notwithstanding the 'entire agreement' clause.

Varying an employment contract

An employment contract can be varied by agreement between the parties, subject to an express right conferred on the employer to make unilateral amendments.  In the absence of such a right, an employer cannot unilaterally vary the terms and conditions of employment.

If an employer tries to vary the terms of a contract without agreement, this may constitute a repudiation of the contract and allow the employee to terminate the contract and sue for damages.

Terminating an employment contract

An employment contract may terminate in a number of ways, including

• expiry of a fixed term
• completion of a specified task
• unilateral termination (such as dismissal or resignation)
• mutual agreement
• abandonment by the employee.

An employment contract may also come to an end by operation of law.

Breach of employment contract

Either party may bring an employment contract to an immediate end if the other party commits a serious or fundamental breach of the employment contract.  If a fundamental breach of contract has occurred, it may allow an employer to terminate the contract without paying the employee any notice or allow the employee to resign without any notice.

Fixed term contracts

Generally, a fixed term contract cannot be terminated before the end of the fixed term period unless a provision of the contract expressly provides otherwise.  If a fixed term contract does not contain a term providing for termination before the end of the term, it can only be terminated:

• if one party has breached an essential term, or
• by allowing the fixed term to expire.

If an employer wants to end a fixed-term contract early, it may have to pay out the balance of the contract.

A fixed term contract will automatically come to an end on the expiry of the fixed term without either party having to terminate the contract.  If an employer continues to accept an employee's labour after this date, the contract may be deemed to have been converted to an indefinite contract.  If this occurs, the employer will then only be able to terminate the contract (without other cause) by paying reasonable notice.  For this reason, if you have a fixed term contract, or an oral contract, it is very important that you seek legal advice before signing a new contract - you may be losing valuable rights.

Reasonable notice

An employment contract that does not have a fixed expiry date can only be terminated in accordance with its terms.

If the contract does not have a clause providing for how it can be terminated there is a common misconception that the employer can simply terminate the contract without notice.   However, in these cases the law will imply a term that the contract can only be terminated on 'reasonable notice' or payment in lieu.

What is 'reasonable notice' depends on the circumstances of each contract.  However, relevant factors include:

• seniority of position
• length of service
• salary
• age
• anticipated length of employment
• any detriment the employee suffered in order to take-up the position.

Reasonable notice can in some cases be as much as 12 months notice or payment in lieu.  It is therefore important that you seek advice about your reasonable notice entitlement.

More often, the contract will provide for termination on notice.  The Fair Work Act 2009 (Cth) prescribes minimum periods of notice that an employer must give an employee.  The notice provided for in the contract must be no less than that provided for under the legislation.

It is also common for contracts to give an employer the right to terminate the contract without notice if the employee has committed serious misconduct (such a fraud, theft or violence).

Payment in lieu of notice

Employment contracts can include a term that allows an employer to make payment in lieu of giving notice.  This means that the employer can pay to the employee an amount equal to what they would have earned had they worked during their notice period and bring the contract to an immediate end.

For employees covered by the Fair Work Act 2009 (Cth) payment in lieu of notice must be calculated at the employee's full rate of pay, including allowances, penalty rate, bonuses and superannuation contributions.

If there is no provision in the contract that allows an employer to make payment in lieu of notice, an employer must allow the employee to work out their notice period.  This can be important in circumstances where, for example, an employee's visa depends on them remaining in employment.

'Gardening leave'

An alternative to payment in lieu of notice is to place an employee on 'gardening leave'.  This term describes the situation where the employee remains employed and continues to draw a salary during their notice period, but is not required to attend or perform work.

There is no common law right to place an employee on 'gardening leave'.   This option is only available to an employer if the employee's contract of employment specifically provides for it.

In certain cases, 'gardening leave' may constitute a repudiation of the contract of employment.  This may be the case where continuing to perform work is an essential part of the employee's position.  For example, it may be repudiation in an industry where it is essential that the employee continue to exercise skill and judgment in order to maintain their employability, such as the medical profession.

Want to know more?

If you'd like more information about your employment or your rights as a contractor, freecall 1800 810 856 and a member of the employment team will assist with your enquiry.