This article is not intended to bore you to death by getting into the legal requirements and obligatory terms and conditions.  It is to share my thoughts on the benefits and pitfalls of either using or not using employment contracts in your small business.

I hope to be able to convince you to consider the use of employment contracts, in fact, to get you to make them part of your employment practices.

If you already have them in place, you might be able to pick something up by reading this that might help you to make sure they are working well for you and your business.

When I meet with small business owners I ask them if they have employment contracts in place and it still surprises me that many don’t.   When I ask why, I am usually given a whole range of different reasons such as:

“Mine is just a small business so I don’t feel I need to worry about them”


“I am very happy with my employees and trust them so I decided we didn’t contracts”

This last answer is the one that worries me the most, along with the view, often expressed by many business owners who think that contracts are too and a waste of time.

When I was working as a Consultant, one of my then prospective new clients told me that he didn’t want to be obligated to any employee by having an employment contract in place just in case he wanted to let someone go down the track. He was of the view that contracts would be too restrictive for him and his business.

Well, he went on to become one of my clients – just as well because, little did he know, his confusion over the need for an employment contract had the potential to cost him his business.

So, let’s see how an employment arrangement begins in a small business

In days gone by it was common place for a small-business owner to simply ask a new employee …  Can you start Monday? and a shake of the hand would seal the deal.

There wasn’t much discussion about terms and conditions, pay rates discussed were often ‘roughly in line’ with expectation, and the employee either said yes or no.  No thought was given at that stage about how the employment arrangement might end.

With the complexities of Australian employment laws, these ‘can you start Monday?' days are over – or at least they should be!

Employment laws here in Australia are incredibly complex and they impose an ever-increasing, always changing set of rights and obligations on both you and your employees.

Specifically, when it comes to paying the correct award rate, penalties and the obligation to provide a safe workplace for your employees. There is little or no difference from small to big business.

Let's face it, not many of us start a business with a view to becoming experts in HR, IR or Workplace Health and Safety.

As small business owners, we don’t have access to the services of an HR manager or the resources of a dedicated HR Team such as BHP or Wesfarmers have at their disposal yet, under employment law and with just a few exceptions we are held to the same compliance standards as big corporations.

HR expert or not, in my view, it is really important that before you take on even one employee, you should implement one of the basic HR procedures and that is – Employment Contracts.   You must make sure your employment arrangements are documented clearly, that the terms and conditions under which you employ your workers are compliant and will not put you and your business at risk down the track.

While it can seem like a chore at the start, it should be an absolute necessity for all businesses and employing workers should be treated as seriously as you would any other ‘business risk’.

Becoming an Employer – a huge change to your business dynamic

So, let me share with you one of the fundamentals of becoming an employer, which I think is of particular importance when dealing with start-ups or anyone looking to grow their small businesses.  Picture this:

Suddenly your business has ceased to be ‘your business’ in terms of employment law, it is now, first and foremost,  Jo and Wendy’s workplace.

As an employer, your business takes on an entirely different dynamic.

Now, remember all those complex employment laws I spoke about earlier?    You are not just a business owner, now you are also an employer and this comes with a whole lot of obligations.  Taking on employees needs to be taken seriously and small business owners should start as they mean to go on.

List of items covered in a basic employment contract

You can find a list HERE that covers just some of the items you would find in a basic Employment Contract.  However, for particular employment arrangements, you may need more clauses and separate schedules – but more of that later.

Non-Compliance Issues

It is not difficult when speaking with business owners, some of them with 2, 3 or more years into the life of their business, to find discrepancies or non-compliance issues – often through lack of knowledge and not a lack of willingness to comply.  Perhaps these are in the hourly rate they are paying their workers, or their casuals may have been eligible to be offered permanency under their award or, worse still, that the injury to one of their workers – minor or not – has highlighted the fact that they have no safe work practices in place or those that are in place are not in line with work health & safety legislation.

The most distressing and often financially crippling issue we discover is that of underpayment to workers whether wittingly or unwittingly.

If for instance such an underpayment has been accumulating for a couple of years in a business the amounts run up very quickly.  Whether underpayments occur by deliberate action or by mistake makes no difference to how Fair Work views any such underpayments in terms of repayment to the workers of the amount they have been underpaid.

They will insist the repayment happens immediately and you would also have to make an immediate adjustment upward of your payroll to meet the correct rate going forward.  Unfortunately and all too often, we have found this is the straw that breaks the backs of some small businesses.  It is a cost they can’t recover from.

It is true that Fair Work would likely apply any penalties or fines more leniently if it was proven to be a mistake rather than a deliberate attempt to underpay. But the business owner has the onus of proof and the underpayment still has to be repaid.

So how would you fare?
  • Could your business survive if it was to find itself in an underpayment situation to the tune of $30-$40k or more?
  • Could your business afford the penalties Fair Work may apply?
  • How would you defend an Unfair Dismissal claim without documented terms of engagement?
So what difference would employment contracts make with these issues? 

Just by going through the exercise of completing a ‘contract’ forces business owners to address all the issues at the outset.

  • Following a template makes sure they address all the clauses of the contract one-by-one at the outset
  • They are forced to check the correct pay rate because they are signing off on it on the contract reducing the risk of underpayments down the track
  • Nothing is left to chance
  • Nothing left to sort out later – when it might be too late

It can’t be stated strongly enough, Australian employment laws are complex and, although you are not legally bound to use an Employment Contract, it is certainly in your best interest to do so.

Please take note that there are some ‘terms of employment' that are automatically ‘implied in law’ whether they have been written into a contract or not.  So, as a business owner, you should want to know what your obligations are and plan your employee management strategy around them.

Many small business owners may prefer to outline their terms of employment in a simple letter of offer and this is perfectly ok.  However, the terms and conditions of the employment arrangement must still be clear and precise and be able to be applied in reality over the course of the employment relationship.

So now you know why employment contracts are important, how do you go about implementing them in your business?

The good news is, whether Letter of Offer or a more formal Employment Contract, there are great templates out there for you to follow, but you will need separate templates for different employment arrangements:

  • Award covered casual employees
  • Award covered part & full-time employees
  • Award-Free casual employees
  • Award-free part &full-time employees
 Make your Employment Contract work for you and your business!

One of the clauses common to most Employment Contracts will state that employees must follow the company’s Policies & Procedures and so it is important to have a set of Policies & Procedures as this is where the protection comes in.

A well-crafted employment contract will provide clarity to your employees as it will outline not only their rights as employees but also their obligations to you as their employer.  By signing this Employment Contract/Letter of Offer your employee is agreeing to be bound by it and is also agreeing to follow your Policies & Procedures.

You should also ensure your Employment Contract has terms and conditions, policies and procedures which are suitable for your particular business needs.

This is probably the time to get some expert advice and either have an Employment Contract written for you or, at the very least, have an HR expert review the template you have chosen for its suitability and compliance.

With the caveat that your Employment Contract must comply with all aspects of Australian employment laws, you should also see it as a protection for you and an instrument to help you manage your business.

So how can we turn Employment contracts into a good news story for your business?

Yes I agree,  the process of preparing, negotiating and then signing an employment contract can seem daunting so it’s no wonder small business owners tend to ‘wing it’ when they employ people but I will counter this by re-stating what I think are the best reasons small business owners should implement Employment Contracts.

  • Employment Contracts and accompanying Policies & procedures are the foundation to a sound business and are critical in providing small business owners with a range of protections as they open up their business to employees.
  • They are a powerful employment and ongoing performance management tool for small business owners who struggle with the mantle of being ‘the employer’.
  • Many small business owners make the mistake of ‘getting too close’ with their workers and find it difficult to pull back when issues arise.
  • Having an Employment Contract in place allows you to refer to the agreement you have made with each other and, in my experience dealing with my own staff, I found this so much easier than having awkward conversations.  It gave me the basis to say “hey can we talk about this area”.
  • A well written Employment Contract tailored to your business and accompanied by a set of Policies and Procedures can:
  • Give a clear direction for the mature growth of your business – no more ‘winging it’
  • Help you develop a sense of team
    • how do you want your staff to interact with your customers?
    • how do you want them to interact with each other?
    • how do you want them to interact with you?
Employment is a transactional arrangement between a business and its employees

The reality for small business owners and their employees is that this transactional arrangement usually happens side by side and on a daily basis.  The business owner and the employee(s) usually work alongside each other, very often in the first few growth years of the business and there is great potential for this ‘closeness’ to work very well or very badly.

Figure out how you want this transactional arrangement to look and feel like and what does this mean for the ‘culture’ of your business.  Once you think about this you might agree that you need to make some decisions early.  Some of the questions you might like to ask yourself are:

  • Are you comfortable with your employees being close to your business, with them having intimate knowledge?
  • Are you happy to take your workers into your confidence?
  • Are you happy for them to treat your business as if it’s their own?
  • What are the parameters around this?
  • Are there family members employed in the business and how is this dealt with?

So the message here is to choose your employees well and seal the deal with Employment Contracts for your protection. Check out my article on Recruiting for Small Business

In Summary

I hope I have been able to convince you to implement Employment Contracts and create a set of Policies and Procedures for your business.  Having a clear understanding of the rights and obligations of both employer and employee makes for a good working relationship and is a great help if and when any disputes arise.

  • No more “can you start Monday?”- complexity of employment laws
  • Business Owner to Employer – Change in business dynamic
  • Start as you mean to go on – Demonstrate the maturity of your business
  • Get some expert help – worthwhile investment
  • Turn your contracts into your GOOD NEWS STORY – make them work for you and your business
  • Engine Room Hub

    Angie Mardon is the founder of Engine Room Hub and a serial entrepreneur. She is a long-time champion for the vital SME community and entrepreneurs who keep our economy vibrant. Though not officially a business coach she regularly shares her know-how and expertise by mentoring business owners and helping them get started in business.