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How important are employment agreements?

15 April 2021 | Brad McDonald
How important are employment agreements

How important are employment agreements?

Employment agreements are the foundation of the relationship between an employer and employee.

The law has been in place for twenty years that says all employees need a written employment agreement, and yet at Godfreys Law, we still have employers and employees coming to us with disputes and they don’t have a written employment agreement in place.

For employers, there is more to it than simply having an employment agreement in place. You need to make sure it is tailored for your business, and will actually do the job you need it to. You can listen to the full conversation with Godfreys Law Partner and employment lawyer Brad McDonald, or you can keep reading to find the answer you’re looking for.

What must be in an employment agreement?

The Employment Relations Act sets out the bare minimum of what must be in an employment agreement.

  • The names of the parties. Employer and employee;
  • A description of the work that needs to be done;
  • Where the work needs to be done. Is it a specific location or is travelling expected?
  • An idea of how many hours a day the employee will need to work;
  • Remuneration. How much the employee will be paid;
  • Finally, a plain language explanation for how to raise a personal grievance.

“That’s right. In an employment agreement you must tell your employees how to sue you,” says Brad McDonald. Those are the key clauses that must be in an employment agreement, but there are many more that can be included covering non-competing, intellectual property, media statements and confidentiality.

What are the most common mistakes in employment agreements?

“Business owners are busy. On any given day we can be pulled in sixteen different ways at once,” says Brad. “Most of the time, business owners are relieved to have found someone after going through the hiring process and want to get them trained up and started as soon as possible. When you’re that busy, some business owners just skip the step of giving a candidate an employment agreement, or just have them start and say they’ll get to the agreement later.”

There are some pretty fundamental mistakes that are regularly made.

First, the names at the top of the employment agreement. An employer needs to make sure they’re naming the correct business entity. A number of businesses have different companies within their structure. Some businesses place all of their assets within a holding company, so you wouldn’t want to be signing an employee up within one of those holding companies. If there is a personal grievance down the line, any claim is looking at the company where the assets are being held instead of the trading company.

Another common mistake is for company directors to put their name at the top of an employment agreement instead of the company name. That means if there is a personal grievance, that director might be personally liable instead of their limited liability company.

What about 90 Day Trial Periods?

Employers with fewer than 20 employees can use a 90 Day Trial Period to make sure the new employee is a good fit within the company. There are some very strict rules around how the 90 Day Trial Period must be written and implemented to be valid.

“First and foremost, there must be a 90 Day Trial Period clause in the employment agreement, and you need to say in your offer of employment that there will be a trial period,” says Brad. “I’ve had some employers think it was a given that they could dismiss an employee within the first 90 days, and not had any mention of a trial period in the contract. Big mistake.”

Again, for a 90 Day Trial period to be legally enforceable, that employee can not set foot in the workplace until they have signed and returned their employment agreement. If you take the approach of starting their induction and sorting out the paperwork later, that 90 Day Trial Period is null and void and legally unenforceable.

If an employee brings a personal grievance against you alleging unjustified dismissal, and you realise with horror after hanging up the phone with your friendly employment lawyer that you’re in trouble, the consequences can be serious. You could be liable for north of $10,000 in compensation, plus up to 3 months in lost wages if that employee hasn’t been able to find a job in the meantime, and of course you’ll have to cover both yours and the employees’ legal costs. Costs could be in the ballpark of $20,000 and beyond.

Can an employment agreement resolve disputes?

“When an employer comes to me and asks me to draft an employment agreement, I’ll ask them what’s unique about their business and the way they operate,” says Brad McDonald. “What are the things you’re concerned about as an employer? What are the biggest risks that your employees may or may not get up to?”

You almost have to take your mind down everything that may go wrong and come up with an answer. But of course, even if you have a 50 page long employment agreement, you can almost put money on the fact that someone will create an issue that’s not covered.

If it gets to the stage where you are looking to your employment agreement to either back you up or enforce an issue, and those clauses you need are either missing or not worded properly, it’s too late to make any changes.

A good employment agreement sets out the obligations very clearly. An agreement is a two way street, so obligations go for how both employers should treat employees and vice versa. If there are issues in the workplace, where either an employee acts out or they bring a personal grievance against you, the issue can be related back to the obligations in the employment agreement. You can both have a discussion around what the agreed expectations are and work on a remedy moving forward. Having clear obligations makes it easier to have those conversations.

Employment agreements should be living documents

“Finally, you must remember to keep updating your employment agreements over time. Any changes in the working relationship must be documented in writing - a simple one page variation signed by both parties, and attached to the employment agreement,” says Brad McDonald.

The critical piece here is that employers cannot unilaterally amend an employment agreement or an employee’s terms of employment without their consent. It requires consultation, mutual agreement and good faith.

Increases to the minimum wage, changes in salary, hours, responsibilities, job description or job titles are all reasons to add an amendment to an employment agreement.

As an employer, you must keep a copy of all of your employment agreements on file. An employee can ask to see a copy of their employment agreement at any time, and if you can’t produce one, there will be serious issues.

Godfreys Law can help with your employment issues

Do you have a tailored employment agreement, or are you still using the template from the MBIE website? Have you realised that there are steps you need to take to protect your business? If you have questions about your employment agreement or an employment law issue, contact Brad McDonald and the employment team at Godfreys Law.

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Article by:

Brad McDonald


Determined to do the best job for his clients, Brad works tirelessly to ensure best outcomes are achieved.

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