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10 common employment agreement mistakes

Nick Stanley

by Nick Stanley
September 05, 2018

In New Zealand, an employment agreement is the fundamental legal document between an employer and an employee.

Employment agreements (formerly known as employment contracts) set out the terms and conditions that govern the employment relationship, and under the Employment Relations Act 2000, every employee must have a signed, written employment agreement.

Whether the employment agreement is an individual one (negotiated between the employer and the employee) or a collective one (negotiated between the employer and a union representing workers), it’s essential to get it right.

You don't want to face an employment dispute, a fine from the Labour Inspectorate, or wind up in the Employment Court because there are issues with the employment agreement.

They're not difficult to get right, but there are some common errors that every business wants to avoid.

Not having a written agreement at all

In the eyes of the law, the workplace isn't the Wild West and while it may be tempting to think you can get someone to work at your company without drawing up an employment agreement (EA) that you both sign, don't give in to temptation.

The employment agreement forms the legal basis for employment, and if a Labour Inspector finds you don't have one for every single employee, no matter when they started, you could be in hot water. Fines can run into the tens of thousands of dollars.

If you are in the process of hiring a new team member, or have staff that have been with you for a long time, you should absolutely guarantee you have a written employment agreement for each of your employees.

That includes your casual and part-time workers.

Not getting the type of agreement right

Under employment law, there are three types of employees: permanent, fixed-term, or casual, and each person's employment agreement must match the type of work they do, the hours and frequency of their work, and other terms and conditions.

From the outset, it is crucial to get each employee on the right type of employment agreement. This may seem reasonably straightforward, but there are some mistakes that businesses commonly make:

  • Using a casual employment agreement for part-time workers. As soon as a person is required to work regular hours, no matter how few, they are not a casual.
  • Using fixed-terms to try people out. Fixed-term employment must be for genuine commercial reasons, e.g. the work is seasonal, for a short-term project, or cover for parental leave.
  • Hiring contractors who are actually employees. Contractors are self-employed and aren’t covered by most employment-related laws. Find out more about the differences between contractors and employees.

Having an employee on a type of agreement that does not match the reality of their work could mean you face an employment dispute or other costs, including outstanding wages, holiday pay, or PAYE tax.

So before you hire someone, it's essential to consider what work needs to be done, how often, and for how long. That will make it easier to choose whether a permanent, fixed-term, or casual employee is the best fit.

Find out more about employment types at business.govt.nz.

Not complying with employment legislation

At its most basic, every employment agreement must have a number of clauses that are legally required. These are:

  1. The names of the employer and the employee.
  2. A description of the work to be performed (keep a copy of the job description with the employment agreement).
  3. An indication of the place of work.
  4. The agreed hours.
  5. The wage rate or salary payable and how it will be paid.
  6. A plain explanation of how to help resolve employment relationship problems.
  7. A statement that the employee will get (at least) time-and-a-half payment for working on a public holiday.
  8. An employment protection provision to apply if the employer’s business is sold or transferred, or if the employee’s work is contracted out.
  9. The nature of the employment - for example, if the employment is fixed-term or permanent.

As you can see, the mandatory clauses aren’t extensive and it's reasonably easy to ensure your employment agreements comply with the law. Because of this, Labour Inspectors can get pretty frustrated with businesses whose agreements don't meet the basic requirements.

Also, if you ever found yourself in an employment dispute, an agreement without all the mandatory clauses may not provide the necessary legal protection.

Trying to shortchange workers’ rights

In New Zealand, every employee enjoys the protection of minimum rights, such as minimum wage rates, paid annual and public holidays, paid rest and unpaid meal breaks.

These minimum entitlements are the responsibility of the employer and, by law, all employment agreements must provide them to all employees.

As an employer, you can't ask your employees to agree to less than the basic rights and an employee could make a claim for disadvantage, breach of good faith, or unfair bargaining if they believe they were significantly disadvantaged during negotiations or during their employment.

Even if you don't include them in an employment agreement or have terms in the agreement that don't comply with the law, the minimum rights are still legally binding and if a Labour Inspector finds you have breached them, you could owe your employee(s) unpaid wages or back pay for leave. You could also be fined.

Remember, the employment agreement is the basis of the relationship between you and your employee. Having a watertight agreement will get you off to a good start and provide an honest foundation to build on.

Find out more about minimum rights of employees at Employment NZ.

Reusing old templates

While the good old DIY approach might save time, taking an old template and applying it to all new employees can be risky.

Sure, most individual employment agreements are broadly the same for all employees, but failing to tailor your agreements to each employee means you may miss important things (such as all the mandatory clauses) and put you in jeopardy of not complying with employment law.

You don't want to end up in an employment dispute and find the agreement is missing important elements and is not legally binding. An administrative error because you reused an old template is no defence.

Personalising the employment agreement will not only safeguard you from legal risk, it will ensure it is specific to the position, the person, and the needs and goals of your business.

Not being clear...

An employment agreement is based on mutual understanding – which is why it is an agreement rather than a contract – and everything in it should be clearly understood by both parties.

Any ambiguity in the agreement could mean that your employee does not know what the business expects of them, and what their obligations and duties are.

If you agree to a trial period, a certain number of working hours, a roster, on-call availability, or procedure for shift changes, these things should be clearly set out in clauses in the agreement.

Ensuring the terms and provisions are all clearly defined and match the reality of the job the person needs to do will ensure the employment agreement is legally robust, and will greatly reduce the likelihood of problems or disputes down the track.

The employment relationship will be a lot sturdier because you also know exactly what your employee expects of the business, for example, what allowances they may qualify for or how they can earn incentives such as bonuses, skill payments, or study entitlements.

As in all relationships, honesty and transparency are always the best policy.

...or being too specific

Being clear is the overarching rule, but there are some areas where being too specific in the employment agreement could be a disadvantage.

For example, if the agreement has stated times when your employee can take rest and meal breaks and this turns out to be difficult to achieve in the regular workday, it could be a breach of your employment agreement. Both parties would be better served if the agreement leaves room for flexibility or doesn't specify times at all.

A good rule of thumb is, aside from the provisions you are legally obliged to include, only add those that you are confident you want to bind your workers to and that you want to be bound by.

Individual employment agreements can be changed, but only if there is a genuine reason and both parties agree. Going back to tweak them over and over so they match the reality of the job could be laborious and may strain the relationship you have with your team members.

Confusing the EA with business house rules

So you’ve worked through the mandatory clauses and added any others that ensure your employee (and you) know exactly what’s expected of them. At this point, you might be tempted to include policies and procedures you want to be part of the business culture (better known as the house rules).

But before you do, think about whether you want to give the rules the permanence and legal weight of a clause in the agreement. It may be better to create non-contractual policies and procedures you want workers to follow. Doing that will give you the flexibility to alter them if things in the business or wider industry change, rather than having to go through the process of changing the employment agreement.

Any policies and procedures that are contractually relevant, however, should be explicitly referenced in the agreement so a new employee knows they exist and that it’s part of their job to know and follow them. For example, if the business gives the person a company car as part of their package, you should have a clause outlining expectations of company vehicle use.

If you keep the clauses short and simple, they will be easier to understand and abide by.

Not following the provisions of the agreement

Once you’ve created an employment agreement and you and your employee have signed it, you both must follow the obligations within it.

It may be tempting to take shortcuts in the workplace - for disciplinary reasons or if you feel your team should be more productive - but it's not good practice.

One of the guiding principles of the Employment Relations Act is that the employer and the employee must act in good faith. That means if an employee comes to management with a concern, you must listen, investigate, and take any necessary action to resolve the issue.

Likewise, if you have a problem with an employee you must handle it promptly and fairly. A mandatory part of the employment agreement is an explanation of how to resolve problems in the employment relationship, and that process should be followed. If you've also included a disciplinary process, you must follow the steps that have been agreed to.

Failure to adhere to the provisions of an employment agreement and act in good faith could mean an employee could successfully challenge you with a grievance. Labour Inspectors may also fine you.

It's much better to see the agreement as a building block for quality employment relationships, and a building block for a workplace culture of cooperation, trust, and excellence.

Not keeping it up-to-date

So you and your new employee have signed the employment agreement, and you’ve filed it somewhere safe and accessible. At this point, you could leave it to gather dust (or its digital equivalent).

However, going forward, it is much better to regularly review your employment agreements and update them if necessary.

For example, if there are changes to the nature or terms of the job you should update the agreement. Legally, you have to amend the agreement if the hours of work change (this includes guaranteed hours, days of work, or start/finish times). You can get into trouble if you don’t.

There must be a genuine reason for any changes and any amendments must be discussed with the employee and be made in writing.

Regularly reviewing your employment agreements will also mean you stay compliant with laws and regulations. There are often changes, eg to the minimum wage or how holiday pay is calculated, and you don’t want to be caught out because you failed to update the employment agreement.

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AUTHOR
Picture of Nick Stanley

Nick Stanley

Nick comes from a diverse writing and publishing background, with a Masters degree in Creative Writing and a Diploma in Journalism. He has worked in variety of environments, from a busy newsroom to local and central government offices, and various private-sector firms. He has developed a keen interest in HR strategies and believes in the incredible power of collaborative effort.