Employment contracts: practical review points for Australian employers

An employment contract records the terms on which a particular employer and a particular employee have agreed to the employment, whether those terms were negotiated between them or presented by the employer and accepted. It is one part of a larger framework, and it is the part the employer usually drafts. That makes it useful — and makes an inaccurate contract a durable problem, because it is the document produced when a dispute arises.

A review is easier once the parts of the framework are kept distinct:

• the contract — the terms agreed between the parties, written, oral or implied
• the National Employment Standards, which under s 61 of the Fair Work Act 2009 (Cth) are minimum standards applying to national system employees
• a modern award, where one covers and applies to the employer and the employee
• an enterprise agreement, where one applies
• other legislation and regulatory obligations, including superannuation, work health and safety (WHS/OHS, depending on the jurisdiction), anti-discrimination, privacy and record-keeping requirements
• the organisation’s policies and procedures

A contract cannot provide less than the entitlements the applicable statutory and industrial instruments require. Contravening the National Employment Standards, a modern award or an enterprise agreement is separately prohibited under ss 44, 45 and 50 of the Fair Work Act, and s 55 governs how the Standards interact with an award or agreement. A signed document does not cure non-compliance, and consent does not make a deficient term effective.

An award or enterprise agreement is also not part of the contract merely because it applies. It operates on the employment relationship in its own right. Whether any of its terms are also picked up as contractual promises depends on what the contract actually says, and deliberately incorporating an instrument into the contract carries consequences that should be considered before it is done.

Nor does a clause discharge a compliance obligation. A term stating that superannuation will be paid, that records will be kept or that hours will be reasonable does not relieve the employer of the underlying statutory duty; it only adds a contractual promise alongside it.

A contract review that begins with the document tends to reproduce the document’s assumptions. Begin instead with what is true of the employment, and test the paperwork against it. For each cohort, and for individually negotiated roles, establish:

• the legal employing entity, and whether it is the entity named in the contract and on the pay slip
• the employee’s identity, commencement date and continuity of service, including prior service that carries over
• employment status — full-time, part-time, casual, fixed-term or maximum-term
• the duties actually performed and the reporting line as it now operates
• work location, any mobility expectation, and remote or hybrid arrangements in practice
• ordinary hours, rostering patterns and any expectation of availability outside them
• whether a modern award covers the work, or an enterprise agreement applies
• the classification level, tested against the duties performed rather than the job title
• the remuneration structure, including any annualised or all-inclusive arrangement, allowances, incentives and superannuation treatment

What the parties call the arrangement does not determine casual status, engagement as an independent contractor, award coverage or classification. Each of those is assessed on its own statutory test and on the substance of the arrangement. For the employee and independent contractor distinction, which test applies depends on the employing or engaging business. For a constitutionally covered business, the whole-of-relationship test in s 15AA of the Fair Work Act generally applies from 26 August 2024, directing attention to the real substance, practical reality and true nature of the relationship considered as a whole rather than to the contractual terms alone; a worker engaged by such a business who is above the contractor high income threshold may, in the limited circumstances provided for in ss 15AB to 15AD, give a written opt-out notice so that the earlier approach continues to apply until the notice is revoked. For a business that is a national system employer only through a state referral, the start-of-relationship test continues to apply. Where the answer is uncertain, resolve it before the contract is reviewed, because the wrong answer propagates through classification, pay, leave and termination.

That analysis is set out elsewhere in this Information Centre and is not repeated here: see the guidance on casual status and employee-choice notices, on distinguishing employees from independent contractors, on award coverage and classification, and on the limitations that apply to fixed-term contracts under Division 5 of Part 2-9 of the Fair Work Act.

The question for each term is not whether it reads well but whether it is accurate, lawful and workable. Points to test include:

• employing entity and commencement — correct entity, correct date, and prior service dealt with expressly
• role, duties and reporting — described at a level that reflects the work without freezing the role, with the position description’s status made clear
• place of work, travel and mobility — a stated location, and any change or travel expectation expressed as something the parties have actually agreed
• ordinary hours and additional hours — the pattern of ordinary hours, and any expectation of reasonable additional hours consistent with s 62 of the Fair Work Act and any applicable instrument
• remuneration and superannuation — the components, how each is calculated, and what the total is said to cover
• leave and notice — drafted so that they do not sit below the National Employment Standards or an applicable instrument, including the notice requirements in s 117
• probation — a contractual review period agreed between the parties; it is not the minimum employment period in s 383 of the Fair Work Act, which governs access to unfair dismissal and cannot be lengthened or shortened by agreement, and a probationary period does not reduce the notice required by the National Employment Standards under s 117 or by an applicable award or enterprise agreement
• flexibility, remote and hybrid arrangements — whether the arrangement is contractual, an approved variation, or an arrangement that can be reviewed, and on what basis
• after-hours contact and availability — expressed so it does not conflict with the employee right to disconnect
• confidentiality, intellectual property and return of property — scoped to what the role and the business genuinely require
• policies, codes of conduct and lawful and reasonable directions — a deliberate statement of how policies operate
• governing law and jurisdiction — where the employment or the entity has a cross-border element

Not every clause suits every employee. Restraints, extensive intellectual-property assignments, broad mobility terms and complex incentive provisions may be appropriate for some roles and disproportionate or ineffective in others. A template that applies the same terms across the workforce produces provisions that are unused, unenforceable or inconsistent with how the role is performed. Availability expectations should be reviewed against the employee right to disconnect in the Fair Work Act, which is examined in the briefing on after-hours contact.

Where an award or enterprise agreement applies, the instrument’s entitlements continue to operate whatever the contract says about salary. A contractual rate does not remove overtime, penalty, allowance or loading obligations; it may, depending on how it is drafted and on the facts, be capable of satisfying some of them.

Set-off wording is both legally and factually sensitive. Its effect depends on what the contract says the payment is for, whether the entitlements it is said to absorb are identified, and whether the amount paid in the relevant period actually met them. It is not a substitute for identifying entitlements and testing payments, and it does not repair a shortfall. Where an applicable award or agreement contains an annualised wage arrangement term made under s 139 of the Fair Work Act, that term imposes its own requirements, which may include specified records, notification and reconciliation steps.

Practical consequences follow. Time and payroll records may need to be maintained for salaried employees as well as hourly-paid employees, both because record-keeping obligations under ss 535 and 536 apply and because reconciliation cannot be performed without the data. Deductions require a proper legal basis under ss 324 to 326; a contractual mention does not make a deduction permitted, particularly where it is for the employer’s benefit and is unreasonable. Complex remuneration arrangements — set-off, annualisation, incentive schemes with clawback, or salary packaging — warrant specialist advice rather than template language.

Testing whether payments in fact met entitlements is a separate exercise, described in the guidance on conducting a wage compliance review.

Some provisions carry risk out of proportion to their length, and inherited template wording is where that risk accumulates:

• pay secrecy — an employee has a workplace right under s 333B of the Fair Work Act to disclose, or not disclose, their remuneration and related terms; s 333C provides that a pay secrecy term has no effect, and s 333D prohibits entering into a contract containing one. Transitional treatment differs by date: for a contract of employment or other written agreement made before 7 December 2022, an existing pay secrecy term may continue to have effect until the contract or agreement is varied, while a term in an instrument made or varied on or after that date has no effect. The prohibition in s 333D, which carries a civil penalty, applies to entering into contracts from 7 June 2023. Because the position depends on when the particular contract was made and whether it has since been varied, the treatment of an inherited term should be confirmed contract by contract rather than assumed
• availability expectations — wording that assumes unlimited or unqualified availability sits poorly with s 62 and with the right to disconnect
• deductions and repayment clauses — including training-cost recovery, relocation repayment and overpayment recovery, each of which needs a proper basis rather than a signature
• unilateral variation clauses — a term permitting the employer to vary terms at will may be read narrowly, and reliance on it can itself generate a dispute
• policy incorporation — describing policies as non-contractual is a drafting choice, not a complete answer; the surrounding wording and how the policies are used in practice both matter
• confidentiality — scoped so that it does not purport to prevent disclosures the law protects, including to a regulator, or disclosures about remuneration
• intellectual property — assignment and moral-rights wording that reflects the role, and any interaction with material created outside the employment
• restraints — enforceability is fact-specific and jurisdiction-sensitive, including the distinct position in New South Wales under the Restraints of Trade Act 1976 (NSW); a restraint is neither generally enforceable nor generally void
• surveillance, monitoring, privacy and use of systems — obligations differ between jurisdictions and may require notice or consent independent of the contract
• suspension and garden leave — the source of any right to direct an employee not to attend work, and how pay and entitlements are treated during it
• termination provisions — notice, payment in lieu and summary termination wording that does not fall below the statutory or instrument position, and that reflects the process the organisation would actually follow

Contracts age quietly. A document that was accurate on the first day may bear little resemblance to the role three years later. Events that warrant a review include promotion or a substantial change in duties, a remuneration restructure, a change of location or work pattern, a change in hours or availability expectations, a variation to an applicable award or enterprise agreement, an organisational restructure, a transfer between employing entities, a change or conversion of employment status, the introduction of remote or hybrid work, and the plain discovery that the written contract no longer matches what is happening.

Updating a template is not the same as varying an existing employee’s contract. A new template governs future hires; it does not change the terms of an employee already engaged. Proposed variations require an assessment of the existing contract, the applicable industrial framework, any consultation obligation in an award or agreement, whether agreement is required and how it is to be obtained, and how the change will be implemented and recorded. The mechanism that is appropriate — a variation agreement, a fresh contract, a letter recording an agreed change, or an individual flexibility arrangement under the applicable instrument — depends on the change and the framework, and advice should be obtained where the position is unclear or contested.

Two practices should be avoided. The first is backdating, or presenting a document as though it had been made earlier. The second is using a new contract to paper over an earlier problem: reissuing terms does not resolve a historical underpayment, a misclassification or a status issue, and it can make the earlier position harder to explain.

Whether policies form part of the contract should be a deliberate decision, taken once and applied consistently, rather than an accident of drafting. The practical points are:

• avoid language in policies that reads as a promise the organisation does not intend to make contractual
• keep contracts, policies and actual practice consistent — a policy that is not followed undermines both
• meet any notification or consultation obligation before a change takes effect
• maintain version control, so the version in force at a relevant time can be identified
• distinguish an acknowledgement of receipt from agreement to a change in terms
• rely on the direction framework — lawful and reasonable directions — for operational matters, rather than embedding operational detail in the contract
• keep procedural detail in the controlled document where it can be updated properly

Changing a policy is not a way of changing contractual entitlements, and a policy change that does affect terms needs to be handled as a variation. The notice, consultation and consent questions are examined in the briefing on updating workplace policies.

Contract quality is a governance question. An organisation that can answer who owns the templates, which version an employee received, and what has been agreed since will manage almost any contract issue more calmly than one that cannot. A workable model covers:

• an approved template for each employment cohort, rather than one document adapted informally
• a named owner for each template, and a nominated approver for departures from it
• periodic legal and current-law review of the templates, recorded with a date and scope
• a controlled source for optional or role-specific wording, so variants do not proliferate
• records of issue and acceptance, including what was sent, when, and what was returned
• the signed or accepted final version retained, not only the draft that was prepared
• variation records held with the original contract, so the current position can be reconstructed
• links between the contract and the classification, coverage and remuneration decisions that support it
• a risk-based review cycle, supplemented by defined event triggers rather than a fixed universal interval
• retention of superseded versions, so the terms in force at an earlier time can be established
• restricted access and privacy controls appropriate to the personal information held
• an exception register recording approved departures and the reason for each
• periodic sampling to confirm that files match the approved position

Advice is not required for every review, and much of this work can be done internally. Situations that warrant specialist input include uncertain award or enterprise-agreement coverage; complex salary, set-off or annualised arrangements; senior appointments and material restraints; transfers between employing entities; proposed unilateral or contested changes; fixed-term limitations and exceptions; concerns about casual or contractor classification; cross-border or multi-jurisdiction arrangements; intellectual-property ownership; privacy, monitoring or surveillance issues; a suspected underpayment; and circumstances where termination or a dispute is reasonably foreseeable. Where termination is in prospect, the process matters as much as the contract, as set out in the guidance on managing termination risk.

AWS works with employers on employment framework reviews, award and agreement coverage, classification and remuneration governance, and the documentation and record-keeping that supports them, through its workplace advisory and compliance practice. Reviews are scoped to the organisation’s cohorts, instruments and risk profile, and are designed so the outcome is a maintainable contract suite rather than a one-off document refresh.

This article is general information about workplace practice in Australia. It is not legal advice, does not take account of any organisation’s circumstances or jurisdiction, and should be confirmed against the law, industrial instruments and regulator guidance applying to the organisation.