Employment contracts – reviewing for compliance and retention

03 April 2023

Why review?

The conflation of legislative amendments and labour market shortages as well as lessons learned during the COVID-19 pandemic and lockdown mean that it’s timely for employers to review their contracts of employment to ask:

  • Are they compliant with recent changes around pay secrecy and fixed terms?
  • Do they deliver the benefits necessary to attract and retain staff?
  • Has our business and what it requires of employees changed and should this be reflected in our employment contracts?

Legislative compliance

In our article published on 12 December 2022 (click here), we summarised the significant legislative changes wrought by the Fair Work Legislation Amendment (Secure Jobs, Better Pay) Act 2022 (Cth) (Act). At least two of these changes warrant immediate review of employment contracts and in certain circumstances immediate amendments.

Pay secrecy

As our earlier newsletter indicated, effective 7 December 2022, the Act introduces a workplace right for employees to disclose (or not disclose) information about their remuneration and ask any other employee (whether employed by the same or a different employer) about their remuneration. The Act invalidates any existing pay secrecy terms in contracts of employment.

The Act also prohibits employers from including any pay secrecy terms in a new contract of employment from this date or an amendment to a pre-7 December 2022 contract. Non-compliance may result in civil penalties.

Employers should take advantage of the six-month grace period currently in existence until 7 June 2023 after which breaches will attract civil penalties to ensure their contracts and amendments are compliant.

In our experience pay secrecy provisions are generally either a standalone clause or form part of the definition of ‘confidential information’. Both should be checked, and the offending parts removed.

Fixed terms

As our earlier newsletter indicated, effective 6 December 2023 (or an earlier date by proclamation), the Act prohibits the use of fixed term contracts for a period greater than 2 years (including renewals). In addition, fixed term contracts cannot be extended more than once.

There are a number of exceptions, including where an employee earns more than the high income threshold (currently, $162,000 per annum) or is engaged to perform essential work during a peak demand period as well as contracts which are tied to particular types of government funding.

An employer must also provide an employee who will be engaged on a fixed term basis with a copy of the Fixed Term Contract Information Statement (which the Fair Work Ombudsman has been tasked to prepare).

Any fixed term contract entered into pre-6 December 2023 which an employer seeks to extend after that date will take into account the pre-6 December 2023 period. So for example, a one year contract could only be extended for a further 12 months.

Contemporary employment contract

Stand-downs and reducing remuneration – the legacy of COVID-19

The pandemic, at least in the early stages and in certain industries which were more heavily impacted by lockdowns, has also been responsible for some heavier stand-down provisions being considered. Such provisions include allowing stand-downs without pay in a broader range of situations than the legislative provisions under section 524 of the Fair Work Act 2009 (Cth) (FW Act). The ability to unilaterally reduce remuneration and benefits was another pandemic-induced consideration but has been less prevalent and is necessarily one which it may not be prudent to insist upon where there’s significant job applicant opposition to these terms.

Unlimited leave entitlements

Whilst still uncommon initiatives such as unlimited annual and personal/carer’s leave are being offered by employers and are obviously highly attractive for employees but they can present some challenges for employers. For a start, there are some practical issues to grapple with, such as how employers would estimate their annual leave and personal/carer’s balance for the purposes of their financial reporting, and how the unlimited paid leave provided to an employee accrues and, in relation to annual leave, is treated upon termination.

One approach is to consider the benefit of unlimited paid annual and personal/carer’s leave provided to employees as separate to and distinct from their legal entitlement to annual leave under the FW Act. That is, the employee would accrue their usual minimum entitlements to annual and personal/carer’s leave for each year they are employed but would be able to access additional leave benefits over and above that minimum entitlement. On termination the employee would only be entitled to be paid out the annual leave which they accrued but did not use, unless the employer exercised their discretion and was prepared to offer this. However if this approach, of separating statutory leave from discretionary, more generous leave, is implemented, there is a further issue as to what leave is being utilised by the employee when they take annual and personal/carer’s leave (ie is it their statutory entitlement component or the unlimited component of their annual and personal/carer’s leave). Employers should ensure any offering of unlimited paid leave, regardless of whether it is in an employment contract or employer policy, is carefully drafted to avoid such ambiguities.

Overall, while the idea of unlimited annual and personal/carer’s leave may be a significant draw card for employees, the issues associated with accrual and quantification of any pay out of annual leave on termination may become unnecessarily complex.

Employers may wish to consider providing additional but capped leave entitlements as an alternative to attract and retain talent.

The 4 day work week

The 4 day work week is one topical innovative entitlement for employers to attract and retain employees. From an employee’s perspective the benefits of a 4 day work week are obvious: additional time off for the same amount of pay. However, for employers, navigating the prospect of offering a 4 day work week to their employees can prove to be a minefield of regulatory issues.

The concept of a four-day working week, or a less than 38 hour full-time working week is gaining traction with two developments this month. Oxfam Australia has revealed it will be trialling a 30-hour working week under an enterprise agreement with the Australian Services Union and a Senate work and care committee report proposing that the Fair Work Commission review the operation of the 38-hour work week.

Employers are urged to not rashly amend employment contracts to deliver similar benefits without considering the implications of compliance with industrial instruments. However, we are likely to see further developments and innovative workplace arrangements being considered and adopted as part of employers’ initiatives to attract and retain staff in the current labour market and where the pandemic has resulted in employers being more accepting of a more regular and entrenched ‘working from home/working from anywhere’.

The initial hurdle in introducing a 4 day work week is whether these arrangements can coexist with the various hourly rates, penalty rates, overtime rates and allowances in Australia’s various modern awards without producing increased underpayment risks for employers.

For example, if an employer was to introduce a 4 day work week in which the employee is required to work 38 hours in a 4 day period, this would almost certainly result in the employee being entitled to (depending on the relevant modern award):

  • a penalty rate or overtime in respect of hours worked in the early morning or evening, or outside the span of hours contemplated by the award;
  • overtime for hours worked in excess of the ordinary hours of work under the award on any given day; and
  • overtime for hours worked in excess of the weekly ordinary hours.

In circumstances where a full-time employee on an annualised wage arrangement is working pursuant to a 4 day work week, for example, the employee’s various entitlements to overtime, penalty rates and allowances can result in an employer inadvertently underpaying their employees if the annualised compensation is not sufficient to cover the employee’s entitlements under their applicable award.

It is therefore probable that employers would be required to pay their full-time employees on an annualised wage arrangement working pursuant to a 4 day work week additional compensation (compared to if they worked a standard 5 day work week) as a result of their entitlement to overtime, penalty rates and allowances. This is because in circumstances where the employee worked according to a 5 day work week within the ordinary span of hours contemplated by their relevant award it is highly unlikely the same amounts of overtime, penalty rates and allowances would be payable.

Other issues which flow from the introduction of a 4 day work week include:

  • whether any additional working hours worked in excess of the 38 hours worked in the 4 day period would cause an employer to be more likely to breach the maximum weekly hours’ provisions in the National Employment Standards (given the already extended length of the employee’s working hours, or if an employee was required to work on the fifth day);
  • work health and safety considerations, such as whether requiring employees to work extended shifts would result in increased fatigue and therefore a higher risk of injury to employees; and
  • practical considerations, such as whether an employer’s human resources software or leave management system would correctly accrue an employee’s leave entitlements where they are working 4 days a week at full time hours.

Temporary international remote work

A final innovative entitlement which has gained some traction in light of the mass adoption of flexible and remote work arrangements is to allow employees to take an extended period of remote work overseas, sometimes described as a temporary international remote work arrangement.

Such an innovative entitlement would be popular with employees, who are able to undertake their usual working duties and then utilise their non-working time to explore the country they are remotely working from.

From an employer perspective, such an arrangement could be a successful tool to attract talented employees provided a sufficient relationship of trust exists. However, an international remote work arrangement is not necessarily without risk to the employer.

In particular, we note the following questions arise where an employer agrees to an employee working pursuant to a temporary international remote work arrangement:

  • Is the employee to remain classified as an ‘Australian-based’ employee? This question is relevant to whether the employee is covered by the rights and entitlements associated with Australian workplace relations laws.
  • If the employee is no longer working within Australia, how does this interact with State and Territory based workplace relations issues, such as long service leave and public holiday entitlements?
  • Do the laws of the specific country (and the location within that country) that the employee is performing remote work in impact upon the employment relationship, and if so, how?
  • How does an extended period of remote work impact upon taxation considerations? Would the employee’s income have to be reported differently for pay as you go withholding, payroll tax, fringe benefits tax and super guarantee obligation purposes?

While some of these questions can be resolved through an appropriately drafted employment contract and workplace policies, the ambiguity surrounding this innovative leave entitlement reduces the attractiveness of such an arrangement from the perspective of the employer.

How should these innovative benefits be reflected in employment documentation?

Should innovative entitlements be inserted into the employment contract?

Some employers are adopting the approach of inserting innovative entitlements directly into an employee’s employment contract. A clear benefit of this approach is to directly incentivise the specific employee to join the employer’s business or remain in the employer’s business, particularly when the employee is comparing competing offers and can see a tangible benefit included into their employment contract.

However, employers should be wary of this approach. Firstly, where these benefits are incorporated into the employee’s employment contract, it creates enforceable rights between the employer and the employee. This approach also leaves little discretion for the employer to amend any aspect of these entitlements in the future (for example, in response to new legislation supporting innovative entitlements or in response to operational changes in the employer’s business), or extend the innovative entitlements to existing employees without offering all employees new employment contracts and/or negotiating variations by consent.

What is the best practice approach for employers?

Our suggested approach, if an employer decides to do so, is to incorporate these innovative entitlements into a policy so that the discretion to alter the benefits remains with the employer. This approach allows employers to better respond to the needs and performance of the business from time to time, while still providing the employer with a tool to attract and retain talented employees.

While amendments to policies can give rise to consultation requirements, this approach is preferable in light of the issues discussed above. Employers should be wary of their potential legal liability if they choose to introduce these initiatives as contractual entitlements, which create enforceable contractual entitlements an employee can rely upon to claim additional compensation if the relationship sours. Employers would also need to clearly disclose in any recruitment process that these benefits are found in the employer’s policies, rather than the contract itself, in order to avoid claims for misleading or deceptive representations.

Notably, introducing a policy will likely assist with the retention of current staff and avoid the tension and division associated with providing only new employees flexible benefits (given under their employment contracts), while existing employees have no entitlement to such benefits.

This article was written by Kathryn Dent, Partner.

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