At some point you will want to employ a senior person who can bring significant skills to the table. You might be concerned that your usual employment agreement will not be sufficient, and you are probably right.
After all, this person might be leaving a highly paid position to come to your business and there are some differences in employing someone of that seniority.
Having a Good Contract
Your standard contract will probably not be suitable because:
- Senior executives cost you lot of money; and
- You will give this person significant responsibility and make them privy to much of the specific information about how your business is run, including information you believe is confidential.
By “executives” I am talking about an individuals with management authority, right up to the role of a CEO.
The agreement you do execute is vital because;
- It conveys the specific terms and conditions of the employment relationship;
- It provides real clarity about the rights and the obligations of both parties;
- It sets out the terms that might be otherwise implied by law, but this won’t protect you as widely as you will need to be protected;
- It facilitates the executive’s high legal performance to justify the expense of the appointment; and
- It protects the legal interests of both parties, but particularly the rights of the employer upon termination.
As far managing your risk, this is substantial if you get the employment agreement wrong, as if the honeymoon ends badly, it can lead to expensive employment litigation which is often played out in the media.
Terms and Conditions
A failure to comprehensively set out the terms and conditions you expect can provide a gap in the expectations between the parties.
An example is an executive who is entitled to a performance bonus scheme which is calculated from time to time and motivates his or her performance. Is there certainty about whether a bonus is still to be paid upon the executive leaving the business mid-way through a bonus calculation period?
If the language used is not sufficiently clear, and particularly in relation to your restraint of trade clause, it has the potential to cost your business millions of dollars.
Legal Duties Already Existing
As an employer you may know that you already have legal duties to your employees before you consider the contractual ones, such as;
- The duty to take reasonable care for their health and safety; and
- The duty to pay remuneration which is not less than the minimum wage.
There is a common law right to protect your confidential information, but this is not sufficient to protect you and your clients from your executive leaving your business and starting up next door, after telephoning all of your clients to induce them to become clients.
Where to Start When Drafting an Agreement?
The National Employment Standards apply to every employee regardless of their level and prescribes:
- Maximum hours of work;
- Flexibility in the workplace;
- Types of leave that are entitlements; and
- Minimum notice periods for termination and for redundancy.
While you don’t really need to repeat all these entitlements in the body of the contract, it is customary to refer to them and to decide if further additional benefits might be available over and above the minimum specified.
What Legal Terms and Benefits Might Already Apply?
Is the employee covered by a modern Award or an Enterprise Agreement. These documents which we call “Industrial Instruments” impose minimum wages and conditions that bind you.
Of the registered 122 awards, it is true that most executives are not covered, but an Enterprise Agreement can be worded very widely in certain sectors such as in education or in a hospital workplace.
If your executive is covered by an Industrial Instrument, then you may not know that they have a right to claim unfair dismissal regardless of whether their remuneration is over the specified amount. A contract cannot derogate from an Award or EA, so best to be clear in the first place if one applies.
Was it Signed?
It is not unusual for businesses to employ someone without any written terms and conditions, but mostly the error is made administratively when the employee strategically fails to sign the agreement. This failure to follow the agreement up is not unusual, as people are generally not as vigilant as they may be with a commercial contract.
The employment contract is the most important source of regulation between executive and employer and it is the only way to get certainty.
Whether or not the contract is written, you still have an employment relationship. It can be oral but this is certainly not recommended.
Important Clauses
Boilerplate clauses are important and prudent to include, however there are 4 types of clauses that might present an obstacle;
- Termination following a written notice of a specified period.
As an employed executive, you probably want a longer period of notice to enable you to receive a significant sum of money if you are asked to leave immediately. - Probation: this is almost always not agreeable to the senior executive, so the termination clause in 1 above (if it doesn’t work out) is crucial to get right;
- Remuneration clause; and
- Restraint of Trade clause.
Be sensible and obtain proper advice before trying to craft your own employment agreement.
We will examine each of the important clauses that should be included in the next newsletter.
Bruce Havilah
