Notes from Business Fundamentals Series on Monday 27th August at The Q – Queanbeyan Performance Centre
EMPLOYMENT CONTRACTS
Having loyal and committed staff will in itself add value to your business. In the majority of service industries your staff is the backbone of your business, and you would obviously struggle without them and lose value if they are gone. Replacement and re-training of staff devalues your business.
If good quality staff is the backbone or the skeleton of your business, then your employment contracts are the glue that holds that skeleton together, holds each employee in place. Given that your employment contracts are something so important, this document should be clear, tight, comprehensive, comprehensible! And in plain English!
An employment contract should have all the obvious things: names, start date, remuneration, hours, overtime, and a clear duty statement including all roles and responsibilities.
You must get even these basics right for the contract to be worth the paper that it is written on.
Names seem obvious but:
Make sure your name matches your business structure; it can be easy to get this wrong in the rush of establishing your business or growing it. If your assets are spread across various entities, the result is that you don’t have a cohesive structure that enables you place a value on the business as a whole, or to sell as a going concern.
Check the conditions against the Award:
A mistake as to pay, hours, overtime, i.e. that does not comply with award applying to an employee, can be unlawful if it breaches an applicable award. The consequences of this will be a lot more serious than losing a valuable employee; the law will impose other sanctions against you.
Aside from getting these basics right, the contract can be framed how you like and should contain whatever you have offered to and negotiated with your employee. Plain English is key; it should be clear and easy to understand! The staff member that you have attracted will know where they stand from the start. This clarity and certainty will go part of the way towards keeping them. You can give us, your lawyers, the content: what you want from the employee and what they are expected to bring to your business, what their role is within your organisation and what they need to achieve, and what they will get if they achieve it – and a good lawyer will mould all that into your agreement. In plain English!
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 wants this certainty – they want to see a clear path to the top, to where they are going.
- A salary package that rewards performance – well-written contracts can outline the key performance indicators (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 them. All of this can go in your contract. As a rule, the staff member will appreciate the certainty and aim high.
- 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 i.e. return customer calls within __ hours, document and report on customer complaints. In my first job as a check-out chick, Woolies required me to SMILE, and to ask the customer “how are you?” You can demand accuracy, you can demand excellence. And you can require your staff to mentor, supervise and train.
- Carrot V Stick! Above is 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, and with other staff members, will be a disincentive to leave. Gen Y wants the path of least resistance, and if moving on means building up a new clientele or customer-base, they may just avoid it! This shouldn’t be their only reason for staying – in the next seminar we will talk about 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 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.
Why will good employment contracts add value to your business?
- Firstly in retaining good staff you improve your profitability – hiring and retraining is an expensive exercise, avoid it if you can.
- Secondly at a point of sale of the business, good employees that are attached with good employment contracts are attractive for a buyer. The buyer can take over the contracts, or engage the employees on the same terms.
PROTECTING YOUR IP
A good employment contract should always contain mechanisms that protect your business’ Intellectual Property. Your know-how, techniques and procedures, client databases – your business loses value if this can walk out the door with an employee. IP must be guarded as against third parties generally, not just employees – because your IP in the hands of a competitor will render your business value-less. You improve the value of your business by being innovative and different – you can‘t be different from your competitors if they’ve stolen all of your winning formulas!
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. This should include 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, even business partners or part-owners should have restrictions on their use of the IP outside of the business. By saying business partners or part-owners we are touching on a different area of business fundamentals (your structure documentation such as partnership agreement or shareholders agreement – these are crucial documents that we will talk about later in the series of seminars, the foundation of your business), but if your business is at a formative stage then your IP is an asset of your business and these foundations should be set so that one owner cannot walk away with IP as if it were the business ute or a bank account.
Protecting your know-how is one thing, did you know you can also own your employee’s ideas and innovations if it comes about during their employ 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.
In Australia we have automatic copyright protection, that’s free, for things that we create such as written documents – your internal instruction manuals, your promotional material, will be covered by this. When you have ownership of an invention, an idea, a work, design or concept, my advice is that copyright is not enough – you should protect this asset against the world at large by registering a Patent. It is expensive, but so is losing your multi-million dollar invention. This is especially important if the patent you are registering is a creation of your employee, absolute protection from them thinking that they own the idea and taking it elsewhere.
Patent is greater protection than copyright, it’s more absolute and there are fewer grey areas. But as a rule, you need to register in all different countries to protect against the world at large. Copyright laws offer less protection because there are more grey areas, more scope for someone to infringe your copyright because you don’t specifically register your creation and have to prove that you created it. Copyright laws differ from country to country, however Australia is party to a number of treaties that increase the copyright protection of international works.
Protect your business name, your brand and your logo by registering them as a TRADEMARK. Will always need advice on whether your particularly name, brand and logo is registrable – usually can’t be a phrase of common usage, or number or numbers or one word. If you have a name and brand and logo that are registrable, your trademark becomes an asset of your business that has a $$ value and can be sold.
Business name should be registered at law, and again becomes an asset of the business worth $$.
DATABASE OF CLIENTS AND SUPPLIERS
When someone buys a business, they are generally weighing up whether they can avoid the cost of the purchase price and set up themselves. If you want your business to have value as an asset that you can market and sell, it must have components that are saleable – I’ve already touched on employees under good employment contracts, your IP in the form of registered trademarks or patents, your business name which encompasses your goodwill, these are all assets of the business that you should be nurturing and protecting to give your business value.
But what is a business without clientele? A valuer or potential purchaser can look at your figures and turnover, but what they really want to see for indication of future turnaround and viability is a list of customer names with a promise that they are already wedded to your business. Winning repeat business makes it even more legitimate for you to have a client or customer name on a list with your endorsement that they are wedded to your business. Your systems should allow you to create and maintain such lists, and having ready access to this information allows you to carry out marketing activities that ensure this repeat business – you will have a list ready to go to whom you can send marketing and product information and specials information, or follow up for feedback on your service delivery. Records like this add value to your business.
We have an information management system on our clients that allows us to record not only their contact details and matter details, but also birthdays, likes and dislikes, and previous events we’ve attended with particular clients. This allows us to more effectively target that client for repeat business or networking.
A comprehensive customer database will add value to your business because a potential purchaser will say to themselves – I will pay for this because I do not need to go out into the marketplace and establish my clientele.
A valuer or potential purchaser of your business will also look at your record of supplier relationships – if this is a comprehensive database showing no gaps in your avenues of supply, this will also add value.
It’s also worth here looking at how you legally tie up these relationships, to give certainty and protection. This certainty and protection will increase value.
The client contract:
- Will set out exactly what you are being contracted to do. What is the product you are providing, its size and shape and colour, its functionality. This is also where the disclaimers come in – what won’t it do. Full disclosure in writing at the start of the engagement will prevent argument later when the client says: but I thought it would do this!
- Will set out what you are to be paid for the work you do – rates or lump sums, additional charges or scope for variation. A business with multitude of unpaid invoices subject to argument/litigation is not attractive and is valueless.
- Must correctly name your client / customer and you.
- Can contain very nice disclaimers as I mentioned which protect you from clients, we’ve all had those difficult customers who will find fault in anything.
Best and easiest option is a pro forma contract where you fill in the blanks, and lawyers can help you with the disclaimers.
The supply contract:
- Should be a one off for multiple supplies, giving future certainty
- Set out prices including scope for increases and potentially with a cap on increase.
For more information or to make and appointment contact our Business Services team:
p: 02 6206 1300 | e: info@elringtons.com.au
