What every business should know about common law employment contracts

Tuesday, 07 August 2007 14:03 Noric Dilanchian

The signal to noise ratio in Australian employment law is currently poor. Useful information is being lost in under-informed, false or irrelevant data. There are also too few messages about how to maintain good employment relationships.

1. Why is there a poor signal to noise ratio?

Politics is part of the problem. Leaving it aside, here are other causes within the legal arena.

First, the nature of employment law adds to the complexity of data. More than most other fields where contracts are used, to interpret an employment contract you have to look to many sources of law. On its own a contract does not contain all the rights and obligations of employers and employees. Instead, in employment law in each case a broad review is needed. This can involve job descriptions, employer policy and procedure manuals, collateral contracts (eg employee share plans or share options), and a raft of employment and non-employment law legislation.

Second, specialist employment lawyers can add to the noise when they offer services framed solely by legal concerns. Such myopia distorts signals to employers and employees as to how to - in both technical and practical terms - establish, develop and promote good employment relationships and maintain employee engagement.

Third, something more than merely legal advice is needed. It is common sense to integrate knowledge from law, management, psychology and other disciplines. Use the language of the law by all means. But recognise that employment law, like all business law, has limited functionality. For example there are challenges for the legal concept of "workplace". It does not seem to fit naturally for the purposes of an enterprise linking a geographically distributed workforce, operating in real time, in several jurisdictions, over the Internet.

Fourth, too often commentary is framed by contemporary hot topics, debates or controversy, eg comparing Work Choices options to alternatives. An example, is this July 2007 contribution by the Australian Chamber of Commerce and Industry. We argue that a broader framework makes more sense.

2. What message is lost in the noise?

Work Choices was the name the Federal Government gave to the Workplaces Relations Act 1996 (Cth) as amended by the Workplace Relations Amendment (Work Choices) Act 2005 (Cth). The amended Act substantially commenced on 27 March 2006.

Employment law experts have described Work Choices as the most radical change in over a century of Australian employment law. It is estimated to apply to 85% of employees in Australia.

One simple message is lost in the static following the announcement of Work Choices. It is that a great deal of employment law remains unchanged for common law contracts. Further, Australian Workplace Agreements (AWAs) or collective agreements are not appropriate for all employers.

Despite the poor signal to noise ratio, some recommendation can be made with certainty:

• do a broad review of circumstances before settling legal and managerial arrangements;
• check record-keeping systems for compliance with law and to avoid potential fines; and
• put employment contracts in writing.

3. When are common law contracts suitable?

Common law contracts have the two benefits of familiarity and flexibility. Common law contracts suit:

• executives and managers in award-free sectors;
• employers with very few employees;
• sole traders, partnerships and state public services; and
• employers requiring various customised arrangements or employees for special projects.

The source of law for common law contracts is the centuries-old judge-made common law of contracts. It is not statutory law as is the case with AWAs (a creation of Work Choices) or collective agreements.

4. What risks or fines exist for non-compliance?

Even for common law contracts Work Choices legislation has changed many requirements. Therefore common law contracts written before Work Choices need updating. For example, contracts must be consistent with mandatory pay, leave and record keeping requirements imposed by Work Choices.

There are many ways to fall foul of law relevant to employment contracts, eg:

• Australian Stock Exchange listing rules impose restrictions on the content of executive employment contracts.
• Fines for non-compliance apply, for example for:
  • Attempts to agree to modify or exclude parts of any applicable industrial award. (Common law contracts cannot undercut statutory and relevant award entitlements. In contrast, AWAs or collective agreements can exclude or vary awards. They can vary or simplify pay rates to remove penalty rates, roll annual leave loading and shift work arrangements.)
  • Failure to maintain require employee records.
  • Failure to pay minimum wage rates set by the Australian Fair Pay and Conditions Standard (eg for casual employees a 20% loading is guaranteed).
  • Failure by a constitutional corporation employer to provide at least the statutory minimum entitlements to annual leave and personal/carer's leave.
  • Failure by any employer to provide parental leave.
  • Statements which mislead employment applicants. Section 53B of the Trade Practices Act 1974 (Cth) provides: "A corporation shall not, in relation to employment that is to be, or may be, offered by the corporation or by another person, engage in conduct that is liable to mislead persons seeking the employment as to the availability, nature, terms or conditions of, or any other matter relating to, the employment." [Emphasis added]

5. Why is legal advice not enough?

Legal advice is not enough for proper management of human resources.

A myopic focus on law leads to poor employment relationships.

Law helps achieve "management by hierarchy" as illustrated. "Management with networks" needs more than law alone.

6. Is there a framework for employment contracts and documents?

Documentation is essential for legal compliance as well as to achieve higher-level organisational objectives.

Due to the lack of a universally accepted framework for HR legal and management documents, over the years our firm has organically grown a framework in projects for clients in various sectors. In preparing it we considered the Australian Business Excellence Framework. Contact the author for a one page graphic overviewing our framework.

In our framework (see table below) we have a Foundational first set of contracts and documents. In essence they cover the recruitment stage in the employment life cycle, the stage which often frames the future relationship. Onto that base we can build client-specific Advanced and Best Practice documents and advice as client needs require and finances permit.

Ours human resource management system is a big picture framework. It takes in both legal and management considerations. Both are necessary. This is so not only for legal compliance but also to achieve management objectives such as higher staff retention rates and improved employee engagement.

7. Conclusion

In a nutshell, consider common law contracts as an option or in combination with AWAs or collective agreements and integrate legal requirements with non-legal needs. Whether you're a start-up seeking a path to scale up, or an established enterprise seeking to improve HR compliance and management, in both cases the above three indicative sets of integrated contracts, documents and advice contain options to consider.

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Further articles and posts on employment law:

• Employment records and pay slips law Q&A Employers have record keeping and pay slip records obligations. This Q&A sets out when, what, for who and how long such records must be kept. See also:
• Remove fuss and fuzz from employment leave entitlements
• Dazzle the competition with records
• How to improve employment relationships [PDF] A detailed article for all types of people contracts.
• Coping with complexity in business structuring Covers the exemption against unfair dismissal claims for constitutional corporation employers of less than 100 employees.
• Three specifically for human resources in innovation and IP businesses:
• "People and IP are our greatest assets" Hints for capturing intellectual property.
• Garage culture puts fun to work If encouraging innovation is part of your company's core objective, legal advice must be mixed with multi-disciplinary know-how.
• Is your team a great group? [PDF] A HR diagnostic with a practical set of questions.

Service descriptions and brochures

• Human Resources: (Employees & Contractors) and Brochure [PDF]
• Deal Making & Contracting and Brochure [PDF]
• Enterprise Structuring

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