The ins and outs of employment contracts – why they are more than just best practice

Employment contracts are more than just best practice. They also establish a set of rights and obligations that employers and employees agree to uphold. Clauses restricting an employee’s options when they leave a job, for example, are becoming more common. The aim is to protect companies’ intellectual property and ensure that employees do not share it with competitors.

In a recent case before the NSW Supreme Court, a judge upheld an employer’s request to enforce a twelve month restraint of trade provision, and the outcome relied on the employee’s most recent employment contract (in the form of a letter of offer).

The IT specialist’s former employer sought to enforce the restraint clause after he defected with two weeks’ notice to a competing consultancy to procure a higher-paid position within a state government department. The employee’s current and former employer both provided services to the department and used the same workforce management software system. The restraint of trade provision was contained in in the engineer’s most recent employment contract, which also moved him from a fixed-term contract to a continuing position and reduced his salary from $241,600 to $188,400.

The IT Specialist denied that a letter tendered by the company stipulated the terms of his contract because it was titled “letter of offer” and there was no record of him having signed it. The judge said, however: “by conduct, the [engineer] accepted the offer conveyed to him by the [company] in the letter… (and conducted the relationship “on the basis that the contract was governed by the letter…”. The judge advised that the proper construction of the parties’ contract was to prevent the defendant from working for the relevant area of this state government department for 12 months following termination of his employment with the plaintiff.

The judge noted that the 12-month term of the restraint provision appeared to be at the “outer limits” of what would be reasonable but accepted it was common within the industry. The existence of an employment contract (letter of offer in this instance) saved the original employer significant costs as the defendant was ordered to pay the plaintiff’s costs of proceedings.

The development of a written contract is industry best practice but is also recommended under the following conditions:
• In case parties subsequently need evidence of their understanding of the employment terms
• When the employee is not covered by an industrial instrument such as an award or enterprise agreement
• When providing an entitlement above the relevant award or agreement
• When an award entitlement is offset over and against award payment
• In case of representation and advocacy in tribunals, as required
• For advice and interpretation of applicable legislation
• Adherence to the Fair Work Act
• Adherence to good faith bargaining requirements and scope orders

When creating or negotiating a workplace contract, it is always important to ensure advice and representation is provided by an informed and experienced provider. iHR Australia offers a range of services in this area, including the review of existing contracts your organisation might have, and the development of new ones. iHR can provide expert advice on relevant awards and legislation when developing new contracts for your organisation.