8 key reasons to update employment contracts before EOFY

Case law in Australia consistently demonstrates that employers frequently neglect the importance of updating written contracts of employment. The employment relationship is fluid and changes over time. The employment contract is a living document that should be updated on a regular basis as the common law adapts to workplace standards and conditions. It is a good idea to review employment contracts in the lead up to end of financial year performance reviews or salary increases.

Here are eight key reasons why employers should consider updating employment contracts this financial year:

1. Legislative change

From time to time, there are legislative changes or common law developments which will impact the effect of contractual terms. Mostly recently, the Fair Work Act 2009 (Cth) has been amended to prohibit pay secrecy clauses (in a staged manner), meaning clauses which restrain employees from disclosing their remuneration. Later this year there will also be amendments to the use of fixed term contracts. Any clause in a contract of employment prohibiting pay disclosure (including in confidentiality clauses) should be reviewed and removed.

2. Recognise change

The employment relationship is fluid. If an employee’s duties, position or level of responsibility has changed profoundly over time, the original contract may have been replaced by subsequent changes (see, Quinn v Jack Chia [1992] 1 VR 567). This means notice of termination provisions in the old contract may be unenforceable giving rise to reasonable notice claims. Issue new contracts if there have been profound changes to an employee’s terms and conditions of employment.

3. Workplace policies

A number of infamous employment law decisions from the past have held that where a contract imposes obligations on employees to comply with policies and procedures, those policies and procedures may be incorporated by reference into the contract, unless the employer's reciprocal obligation to comply is expressly excluded (see, Riverwood International Australia Pty Ltd v McCormick (2000) 177 ALR 193 and Nikolich v Goldman Sachs JB Were Services Pty Ltd [2007] FCAFC 120).

In one particular case, an employer issued a letter of engagement which said “…all…Policies are to be observed at all times” (see, Romero v Farstad Shipping (Indian Pacific) Pty Ltd [2014] FCAFC 177). The Court held that this wording, as well the surrounding circumstances, meant a policy relating to the conduct of an investigation was incorporated into the employment contract. The employer did not follow the policy when conducting the investigation and therefore breached the employment contract.

Clauses relating to workplace policies should drafted with these decisions in mind.

4. Post-employment restraints

Post employment restrictions are notoriously difficult to enforce and impossible if poorly drafted. Consideration should be given to the type of position the employee occupies. Someone who is considered to be the “face of the business” or has access to genuinely confidential information should be the subject of carefully drafted post employment restraints. Such restraints may be successful in restraining senior employees for significant amounts of time.

In one recent case, Employsure, a provider of human resources services, was successful in restraining a senior manager for working for a competitor for 9 months (3 month notice period plus a 6 month restraint) in recognition of the confidential information (including the business’ overall business strategy and plan) held by the manager and the risk that it could be used to the detriment of the employer (McMurchy v Employsure Pty Ltd; Kumaran v Employsure Pty Ltd [2022] NSWCA 201).

Updating contracts to recognise a promotion or at salary review time is also an opportunity to ensure restraints are carefully tailored for the particular employee’s circumstances, as well as ensuring the restraint is reasonable in scope and duration, to improve the prospects of enforcement.

5. Suspension

Unions frequently dispute the ability of employers to suspend an employee on pay to undertake a workplace investigation into alleged misconduct. While there is some case law indicating suspension is an implied right of the employer (see, Avenia v Railway & Transport Health Fund Ltd [2017] FCA 859), an express clause setting out an employer’s right of suspension to investigate, or make inquiries into, alleged misconduct is preferable to avoid disputes.

6. Notice of termination

To avoid a "reasonable notice" claim in which a court may imply a lengthy period of notice into the contract well in excess of statutory minimums, the contract must include an express notice of termination provision. By way of example, in Daigle v SCT Operations Pty Ltd [2022] NSWDC 364, the NSW District Court held that a senior engineer was contractually entitled to 8 months’ reasonable notice of termination and payment of the final instalment of his performance bonus after being made redundant. The Court held nothing in section 117 of the Fair Work Act 2009 (Cth), which relates to minimum notice periods on termination of employment, affects the common law position that the law will imply a term into an employment contract that the contract can be terminated by either party upon giving reasonable notice.

7. Gardening leave

In most cases, employers cannot lawfully place employees on “gardening leave” where there is no such express term in the written contract. “Gardening leave” is generally where an employee is directed to perform no work, and not to contact colleagues or clients, for their notice period. A decision in Grace Worldwide Pt Ltd v Steve Alves [2017] NSWSC 1296 indicated that there was an implied right to place a senior employee on gardening leave in limited circumstances, but those circumstances were largely particular to the facts of that case and the reasoning has been distinguished in some subsequent cases. To avoid allegations of repudiating the contract of employment (which will allow the employee to bring the employment relationship to an end), employers are strongly encouraged to include express clauses relating to gardening leave in employment contracts, particularly for senior employees.

8. Offset clauses

Employers often pay employees in the form of an annual salary, as opposed to the employee being paid the relevant entitlements for each hour worked. Such arrangements should be carefully reflected in writing by way of an offset clause such that the annual salary can be relied upon to offset other relevant entitlements (for example, overtime, penalty rates and allowances). Poorly drafted off-set clauses will not prevent claims for overtime, allowances or penalty rates otherwise owed under an applicable award or enterprise agreement.

Further information

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This article was first published by Dentons Australia?here .?