Articles.

3 Ways Employment Contracts Can Save Your Business Money  

These days, almost every company will ask new employees to sign an employment contract before coming on board without even thinking about why they do it – it’s just something ‘you should do’. But have you ever taken a moment to think about why you actually need employment contacts? Or that they can help save your business money and unnecessary risk?  

Through this article, we’ll highlight three ways that your employment contract can, in fact, save your business money.  

The set-off clause 

It is becoming increasingly common for employers to pay employees a set salary or hourly rate that covers all amounts owing to an employee, also known as a set-off clause in an employment contract. So instead of an employer paying their employees the modern award base rate, plus any award entitlements such as overtime, penalty rates, allowances etc., you have the option to pay your employees one larger sum that includes all these benefits. 

However, without a written employment contract confirming this arrangement, there is a risk that your employees will argue that the set salary or hourly rate only covered their base wages. If taken to court, you as the employer may be liable for thousands of dollars in overtime, penalty rates and allowances in addition to the salary already paid to your employees. 

Discretionary benefits 

When business is booming, you may decide to share some of the profits with your employees in bonuses or commissions. Unfortunately, this may impose ongoing obligations you did not expect if an employment contract is not in place. For instance, if you continue to pay a bonus or commission for a few years in a row, there is a risk that such payment will form part of the employment contract – even where there is no written contract! 

When this happens, you may be required to pay the bonus or commission even when your business is less profitable during certain months of the year. In those circumstances, a failure to pay the bonus or commission could be considered a breach of the ’employment contract’. 

To avoid this scenario, it is important to have a written contract confirming that any bonuses or commissions paid by you are entirely discretionary and can be withdrawn at any time. 

The notice period for termination of employment 

The National Employment Standards (NES) specify the minimum period of notice required to be given by an employer when terminating an employee’s employment. 

Because the notice requirements set out in the NES are expressed as minimums, if there is no employment contract with your employee or if there are no termination notice provisions in their contract, they may be entitled to a longer period of “reasonable notice” before their employment can be terminated.

What is considered “reasonable notice” will vary depending on the circumstances – for senior employees, a reasonable notice period may be six months or more. 

If you are entitled to pay your employee in lieu of having them work out the required notice period, the implied “reasonable notice” can result in a hefty termination payment. Whether an award covers the employee or not, it is best to have a written employment contract outlining the required notice period from either party if the employment is to be terminated. 

To find out how Clearpoint Legal can help you draft up an employment contract for any of your new or existing employees book a free discovery call today.