Busted! Top 7 employment law myths


Busted! Top 7 employment law myths

Lawyer Simon Obee dispels some commonly held employment law misconceptions.


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Simon Obee, employment lawyer at Swaab Attorneys, dispels some commonly held employment law misconceptions.

Myth No. 1: It's illegal to give a bad reference

Many people believe that giving a “bad” reference is somehow against the law.

In fact, there is no general obligation at law to give an employee (or former employee) any sort of reference – good or bad.

Where the law might intervene (for example in an action in defamation) would possibly be if an employer provided a deliberately dishonest or misleading reference which caused some harm to an employee.

To avoid such potential pitfalls many employers adopt the position of just providing a statement of service confirming an employee’s length of service and position, but not commenting further.

Myth No. 2: You need to give someone three warnings before you can dismiss them

“Three strikes and you’re out” may have some application to the laws of baseball, but it does not generally apply in the field of employment law.

For employees who have a right to claim unfair dismissal*, the Fair Work Act 2009 provides that one matter the Fair Work Commission must take into account when dealing with such a claim is “if the dismissal related to unsatisfactory performance by the person – whether the person had been warned about that unsatisfactory performance before the dismissal” (s 387(e)).

However, there is nothing in the Act that deals with how many warnings an employee must be given. Sometimes more than three might be appropriate, sometimes less. In cases of very serious misconduct or poor performance it may be permissible to dismiss an employee without any warning at all (like being out for a duck in cricket, rather than being struck out in baseball?).

It may also be the case that an employment contract, workplace policy or enterprise agreement prescribes that a certain number of warnings must be given before an employee that can be dismissed. Failure to follow these requirements could also give rise to a claim. It is therefore very important to check all such documents before taking any decision to terminate an employees’ employment on the grounds of performance or misconduct.

(*They have completed the minimum period of employment and one or more of the following applies: (a) they are covered by a modern award, (b) an enterprise agreement applies to their employment or (c) they earn less than the “high income threshold”.)

Myth No. 3: Oral contract? It's not worth the paper it's written on!

There is no general requirement for employees to be given a written contract. That is not to say it is not strongly advisable to have one in place, not least because there will be less room to argue about the terms of the employment in the future.

It is important to note that oral contracts – such as a verbal agreement as to how much an employee will be paid, or their duties whilst at work – can be binding at law. So too can contractual terms that are “implied” through a course of conduct.

Issues frequently arise where an employee is consistently given a benefit over a period of time and then the employer wishes to remove or alter the terms of the benefit at a later date (for example, to a bonus or to a company car). Without a written contract specifying the terms under which an employer is entitled to do so, the potential for a dispute will always be there.

It should also be noted that, generally, awards require employers to put in writing particular details about the terms under which employees are engaged; for example, what their award classification is and, in the case of part-time employees, the hours they are to be engaged for.

Myth No. 4: If they've got an ABN, they're an independent contractor

A frequent area of confusion in employment law is the use of independent contractors. In particular, whether someone engaged as a contractor would in reality be found to be an employee at law. The confusion is understandable – there are different tests as to when a person is an “employee” under various different bits of legislation. Given that companies can face significant financial penalties if they wrongly classify someone as a contractor, the question is of fundamental importance.

Many employers are of the view that if an individual provides them with an ABN this means the individual will automatically be deemed to be a contractor. This, however, is not the case. Courts frequently have found an employment relationship to exist where individuals have their own ABN. The approach the courts tend to take is to look at the relationship as a whole to determine the contractor/employee conundrum. Having an ABN is just one factor that will be taken into account, but it will not be the end of the story.

Myth No. 5: If they're not performing well, I can just extend their probationary period

Many employers consider that starting new employees off on an initial probationary period is a useful way to assess their suitability for the role, before deciding to offer them permanent employment. Situations often arise where the employer is still unsure at the end of the probationary period whether to offer the employee ongoing work. In such situations, many employers will simply extend the probationary period for another few months to see if the employee is able to lift their game. So long as the employee is aware that their probationary period is being extended, there’s no risk of a claim if they’re let go before the end of probation, right?

It may come as a surprise that probationary periods are not concepts recognised by the unfair dismissal provisions in the Fair Work Act 2009. Once an employee has completed six months' service (or 12 months' service in the case of a “small business employer”) then they will have an ability to bring a claim for unfair dismissal* – regardless of whether they are still within a probationary period or not.

As a consequence, for dismissals based on unsatisfactory performance during a probationary period, there will be a risk of a finding against the employer if it has not followed the usual steps the Fair Work Commission expects to be taken for dismissals of this nature (warnings about the need to improve, a formal meeting with the employee and their support person to discuss the employment prior to taking the decision to dismiss, etc).

It is therefore usually advisable that probationary periods are not extended beyond the six (or 12) month period. In addition, care should be taken to ensure that any “end of probationary meetings” are scheduled well in advance of the six (or 12) month cut off, so as to avoid the possibility of the employee accidentally tipping over into unfair dismissal territory.

An alternative approach – used by some savvy employers – is to initially engage probationary employees on a fixed-term contract. If an extension to the probationary contract is required, a further fixed term employment contract is entered into. As an unfair dismissal claim cannot be brought where the reason for termination is the expiry of a fixed term contract (see section 386(2)(a) of the Fair Work Act 2009), this provides one way of managing risks where extra time is needed to assess an employee’s suitability.

(*So long as one or more of the following applies: (a) they are covered by a modern award, (b) an enterprise agreement applies to their employment or (c) they earn less than the high income threshold.)

Myth No. 6: If I pay them a salary, the award doesn't apply

Most employees in Australia are covered by an industry or occupation-specific modern award which provides for minimum terms and conditions whilst so employed. Importantly, the awards set minimum pay rates depending on an employee’s classification under the award. The classification will (depending on the award in question) be determined by factors such as the employees’ duties, experience and qualifications.

In addition to separate rates of pay for “ordinary hours”, overtime and weekend work (penalty rates), most awards provide for employees to be entitled to various allowances. For example, under the Building and Construction General Onsite Award 2010 there are separate allowances for work that is “hot”, “wet” or “dirty”. Under the Funeral Industry Award 2010 there is an “exhumation allowance” for each body exhumed (currently $86.57 per body).

Most awards also provide that employees are entitled to an annual leave loading (uplift) of 17.5% of their ordinary pay when they take a period of annual leave.

For employers, it can often be something of a bureaucratic headache to work out exactly what each employee is entitled to be paid for each hour worked when so many variables have to be taken into account. It is common practice, therefore, for employers to pay an annual salary which attempts to take into account all financial entitlements under the applicable award. Problems often arise when an employee is not given a written contract of employment which specifies that the salary is directed to all monetary entitlements under the award.

In addition, some awards have very strict requirements about what written notice an employee must be given when paid an annualised salary (see, for example, clause 17 of the Clerks – Private Sector Award 2010).

It is also a common misconception that where an annual salary is paid, the award no longer applies. This is not the case. For starters, any annual salary paid must be at least equivalent to what the employee would have received if they were paid strictly in accordance with the award. In addition, paying an annual salary – even a very generous one – will not by itself avoid the need to comply with other terms of the award that deal with non-monetary entitlements. An obvious example is the requirement under most awards to provide employee with breaks (for example the Live Performance Award 2010 decrees that “employees performing striptease, erotic dancing, tabletop or podium dancing will be given a break of no less than 30 minutes between the end of one performance and the commencement of another performance”).

The penalties for breaching the terms of an award are up to $63,000 for companies and $12,600 for individuals involved in the contravention.

There is a limited ability to “contract out of the award” if an employer and employee agree to enter into a formal “guarantee of annual earnings” where the employee will be paid at least $142,000 (gross) per annum. The guarantee needs to be in the form of a written undertaking and comply with various formalities. A simple employment contract is unlikely to be sufficient.

Myth No. 7: There's no point having a restraint of trade in an employment contract because courts don't enforce them

It is a common misconception that courts don’t enforce “restraints of trade” (those clauses in employment contracts preventing former employees from competing with their previous workplace, soliciting their clients and/or poaching staff).

In truth, courts will, and frequently do, prevent former employees from acting in breach of their contractual restraints. That is not to say that employers have “carte blanche” in this area: a court will not enforce a restraint if it considers there is not a legitimate business interest to protect. It will also be reluctant to do so where the effect of enforcing the restraint will mean the employee cannot perform any form of meaningful work. Sometimes the area of restraint is considered too wide, sometimes the length of restraint is too long. But in many cases a court will enforce even lengthy and wide-reaching restraints. Earlier this year, a WA court considered a 10 year-long restraint of trade to be reasonable at an initial “interlocutory hearing” (ie, a hearing considering interim remedies before deciding on the final result).

Although this case turned on its own facts (the employee was previously the owner of the business and had received a large payment in lieu of agreeing not to compete) it is still a useful illustration that courts can be willing to enforce even long and wide-ranging terms.

DISCLAIMER:  This  article  is  not  legal  advice  and  the  views  and  comments  are  of  a  general  nature  only.  This  article  is  not  to be  relied  upon  in substitution for detailed legal advice.
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