Employment Contracts

Business relationships, although not marriages, can be just as binding and intimate, and the extraction can be just as complicated and expensive.  Business is all about relationships – the long and the short of business really is just a series of relationships, business can’t exist without relationships. Everything that you do in business is a part of a relationship, a dealing, a liaison with another person or entity.

Fundamentally and primarily, it’s our customers that we have and want to have a relationship with – supply and demand – we want to fulfil a need in the community at large and make money at the same time. And we’re all here because we want to network or ensnare more customers and learn how to grow our client base – to build more mutually beneficial relationships. But besides the customer relationship, there’s a myriad of other important relationships in the business life cycle: with our co-owners, with our contractors, with suppliers, with our landlord, with the government (in the form of regulatory bodies).

The role of a good business lawyer is to help you understand and control those relationships as much as you can, to give you advice, certainty and clarity around them, in many instances to draft the “Relationship Rulebook”, which is the contract that governs that relationship.

An employment relationship is one of those business relationships, it needs:

  • a relationship rulebook
  • and it needs certainty and clarity,

A good employment contract will be the rule book that benefits and defines both sides of this relationship.  A correctly drafted and comprehensive employment contract will work for you to retain your staff, which adds to your business value and bottom line. It will hold good employees to you making your business more attractive for a buyer or valuer.

Remember – replacement and re-training of staff devalues your business. Flip side – you need “outs”, you don’t want to retain a “dud”, someone who does not fit the culture and ethos of your business, does not share your vision, better suited somewhere else – your contract can lawfully help you to deal with these unwanted employees.You can get the best value out of your employees if your employment contract contains a clear duty statement of all roles and responsibilities that you want that employee to fulfil – this also gives you your OUT if they are not giving you everything you contracted for. You should put a lot of thought into what will be optimal for you to receive from that person. We have just employed a new conveyancer in the Queanbeyan office – we could have simply regurgitated the functions of a conveyancer: take instructions, prepare contract, book in the bank…. We want more than that for this role – we want a champion, a go-getter, so we’ve worked into the description of this role the requirement to GROW the conveyancing practice, to market, to network, to improve our profile and to enhance our exceptional service delivery – and you can ALSO include things like to improve our processes and precedents. You will get the best value out of your employee if you make these expectations clear at the start – and you will pay for that extra stuff because what you are asking for will be built into that role pay structure – but in paying for these added extras, you increase your profitability so it is WIN/WIN. Employment contracts, like any other contracts, are a negotiation, an agreed position must be reached. Especially if you want to change existing contracts, you will need to increase pay to increase their role and responsibilities. Think about these additional components of an employment role both in the people that you target, and the content of your relationship rulebook

Your contract can and should include all of the incentives that you negotiate with your employee:

  • Staff buy-ins:

the circumstances in which your employees can gain a stake in the business, you can plot out their career path. Gen Y want this certainty – they want to see a clear path to the top, to where they are going. Put this in the contract and set out the steps or milestones – might be budgetary, might be after particular training has occurred, might be when have engaged a particular number of own customers. Might never happen, but it’s covered in there. IF you have a staff member on a normal contract and discussions start about buy-in, this should be separately documented – a separate “Rule Book” to govern the progression of this relationship especially once share transfers or ownership responsibilities start passing. You need to control a third party’s entry into your business because they will have expectations, and they will also be holding themselves out to your customers as a stakeholder, need to have control of this process. BUY-INS need to be clearly documented.

  • Salary package and rewards need to be clearly documented:

The relationship between rewards and performance – well-written contracts outline the KPIs that the staff member must achieve and what you will give them in return. KPIs can be any number of things – your contract can record that if he or she grows your client base by a particular number of clients or by a particular proportion of $$, you reward them, or it can be less profit driven than that. Eg if they find and bring in another employee, they get a bonus – finders fee or spotters fee. If they reduce your debtors, if they help their team achieve their KPIs, if they develop a particular process or streamline one. All of this can go in your contract. As a rule, the staff member will appreciate the certainty and aim high. This clear content is also a mechanism – if these KPIs are not consistently met, this will lead to discussions about the future of their employment, this is your “out” for employees that aren’t the right fit.

  • You can set the standard of service in your employment contract:

Not only the duties and responsibilities that an employee has, but the way in which they must fulfil them ie return customer calls within __  hours, report to the customer on a weekly basis, do a follow up enquiry on each job. You can demand accuracy, you can demand excellence. And you can require your staff to mentor, supervise and train.

  • Carrot V Stick!

Above are the incentives contained in the contract designed to attract to come and to stay. Below are the mechanisms you can include (in the fine print) as a disincentive to leave….

  • Lock-in period –

You might invest money in the training of an employee so that they are a greater asset to your business. Your employment contract can record that the staff member must stay with you for a particular period of time in exchange for that training – or else they must pay you back.

  • Restraint:

Good and tight restraint clauses that prevent an employee from moving on to a competitor with their following of customers/clients, and with other staff members, will be a disincentive to leave.  Gen Y want the path of least resistance, and if moving on means building up a new clientele or customer-base, they may just avoid it! Hopefully this isn’t their only reason for staying – Michael has talked about motivators and ways to retain staff. But you want your restraints to work. The law on restraints is a mine-field, the clauses must be done properly or they are meaningless/toothless. You might have seen a restraint clause, it can have decreasing or “cascading” options of distance and time so that if a court finds 5 years is too long, you can fall back on three years, then two then one. The more restrictive you try to be, the more uncertain it is – then you won’t know if it will actually be enforceable until you’re in court trying to enforce it – court decides each case on its own merit, so hard to predict what you can achieve. Also, so that it is enforceable, the clause will be framed in a way that prevents the departing employee from courting or enticing customers and other staff members, rather than stopping the actual employee or staff member from going to the departing employee – this means that if you are going to prosecute for a breach of restraint, you need to have proof of the departing employee having made an approach to the customer or staff member which will constitute the breach. A restraint that stops them ever dealing with a customer or staff member is likely to be void because it goes against public policy (too great a control on free trade and the consumer’s right of choice). Usually framed to stop them approaching clients and staff. Enforceability will depend on the type of business you are in – like lawyers, financial advisors, insurance brokers, where the relationship with the individual advisor transcends the relationship with the business, restraints will be much more crucial. These are the employees who will target their existing clients when they set up elsewhere, this is what you have to protect yourself against.

  • First consideration of a court in these situations is: does your business have a legitimate interest to protect.  Second – is the drafted restraint a reasonable protection of that interest? NSW courts can also apply the Restraint of Trade Act to read down the broadness of a clause. Two recent successful cases in NSW enforcing restraint of trade clauses – a recruitment consultant and an accountant.

PROTECTING YOUR IP

A good employment contract should always contain mechanisms that protect your business’ Intellectual Property.

Your business loses immediate value if your know-how, techniques and procedures, client databases can walk out the door with an employee. Your IP in the hands of a competitor will render your business value-less.

In the context of employees: your employment contract should say that any information or confidential information gained by your employee once they work for you is YOURS and cannot be used by them afterwards – contract should clearly set out what that confidential information is: know-how, techniques procedures or methods used in operation or training, marketing or business plans or strategies, your financial books and records, your precedent documents, your client information, your supplier and contractor information, your log-ins and passwords. As well as being in your employment contracts, you should have similar protections and restraints with anyone who comes into your business and has the opportunity to observe any of this IP – contractors, secondees.

I mentioned last week that you can also own your employee’s ideas and innovations if they are devised during their employment with you. Your employment contract can be framed in a way such that you own the inventions/creations of your employees and all the copyright. Within the contract, you build in the employee’s consent and cooperation, including to allow you to edit, improve and adapt their inventions, works and designs. This is a fundamental way in which your employment contract can add value to your business, by creating ownership of the ideas that your employees come up with while working for you – where the ideas have value, they stay with the business. Copyright is free and easy in Australia but is not enough – grey areas where you will be arguing with your employee about when they formulated their ideas and if it was in the course of their employment. Better to use patent, more expensive and convoluted but greater protection.

Finally, where your employment contract has family friendly working conditions in place as an incentive such as working from home or job sharing, include the necessary protections for you as an employer – for example setting it up as a safety compliant, checklists about what is in the home office, what you are allowed to do (eg not to mow the lawn). For job sharing, there must be clear guidelines and requirements for handovers.

For more information or to make and appointment contact our Business Services team:

p: 02 6206 1300 | e:  info@elringtons.com.au