The elements which make up a contract include the elements of offer,acceptance, consideration, and certainty. The purpose of a contract is to capturethe intentions of the parties at the time when the contract is made, or in other words, a ‘meeting of minds’. Many principles of contract are applicable to
employment law. For example, an employer may offer a job to a prospective employee. If the prospective employee is happy with the terms of the contract,then the contract will be accepted. The provision of benefits such as remuneration constitutes the necessary consideration to enable the creation of a valid contractual agreement. However, some may be inappropriate as employment
contracts are in fact ‘relational contracts’.
A relational contract is one that lacks the certainty of a commercial contract but has instead a mutually convenient flexibility and cooperation to meet the needs of a long term relation with indeterminate obligations. As such, relational contracts require considerable modification of orthodox principles of classic contract law. In particular, relational contract theory explains the emergence of a concept of good faith in the performance of contracts. Where an employment relationship breaks down, the employer is said to have lost ‘trust and confidence’ in the employee based on this concept of relational contracting. Relational contracts contain some major differences from commercial contracts
• The fact that terms may not be all determined at the time of contracting.
• They normally contain fewer terms compared to commercial contracts.
• They may be loosely expressed to allow for the development of the
contract over time to meet the needs of the employer.
The contract of employment
The contract of employment determines certain contractual obligations on the employer and the employee. At its most basic, it requires an employee to turn up to work, and perform the work as reasonably and lawfully directed by the employer, and requires the employer to pay the employee the agreed rate of pay for work performed.
There is a legislative overlay to the contract that requires additional entitlements or obligations on the parties, such as those detailed in the National Employment Standard. In addition, the common law may imply certain rights or responsibilities on the parties, or may imply certain terms into the contracts of employment. It is important to view the employment contract, or the bargain reached, as a whole, rather than limiting our view to any written terms that may exist. Next, we consider the implied terms and contracts of employment, and the impact of policies and procedures on the contract of employment.
We have already discussed the different types of employment contracts in Australia. Employees can be grouped broadly into the following three categories: • Continuing employees – often referred to as permanent employees, meaning that there is no end date set out in their employment agreement. Continuing employees can be either full time or part-time. Employees also accrue leave and other statutory benefits. The relationship may be terminated by the employee through notice, serious misconduct by employee, or where the job undertaken by the employee is no longer required (redundancy).
• Fixed term employees – can be either full time or part time. Like continuing employees, fixed term employees are eligible to accrue leave and other statutory benefits. The relationship terminates at the
end of the contractual period, unless renewed. If the employer terminates the relationship early, the employer may be required to pay out the balance of the contract.
• Casual employees – have employment that is informal, irregular, and uncertain, and is not likely to continue for any length of time. The Common Law defines casual employees as a contract that comes to an end at the end of the period (e.g. shift), and each time work commences a new contract starts (therefore the employer is not under any obligation at the end of the period to offer more work). We have also looked at the interaction between the type of employment with the National Employment Standards, the Fair Work Act, applicable Awards, and Enterprise Bargaining Agreements. Legal elements required to formally create a contract For a contract to be legally valid and binding, or properly 'formed', certain requirements must be met:
(1) there must be a valid offer and acceptance of basic terms;
(2) there must be an exchange of something of value, such as a promise
to do something for money;
(3) there must be an intention to create legal relations; and
(4) there must be certainty of basic terms, such as price and the service/
The following cases relate to the third element of formation: the intention to create legal relations. Of relevance to this course, employment issues can arise in religious, charitable, and family arrangements, where a dispute may lead to the legal question being raised of whether there was a valid contract formed which created an employment relationship.
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2.Express Contractual Terms
A contract of employment will contain various terms depending on the job, industry, and employer. However, there are some general terms which will be evident in most employment contracts. These include: • The general rights and obligations of the parties
• Pay and conditions
• Any flexible working arrangements
• Confidentiality and ‘fidelity’ clauses (such as non-poaching of
• Notice clause, and reference to the ability to make payment in lieu of
• Any relevant industrial instrument, Modern Awards, National
Employment Standards, or statutory obligationsSeverance or
In attempting to determine the meaning of the contract, the courts will look to the surrounding circumstances, as was demonstrated in the case of Hollis v Vabu (2001) 207 CLR 21, where the High Court said that: The relationship between the parties … is to be found not merely from these contractual terms. The system which was operated there under and the work practices imposed … go to establishing the ‘totality of the relationship’ between the parties it is this which is to be considered.
Not every code of practice of the employer referenced within the employment contract may have any force, but rather, can be used as a guideline. Therefore, when considering whether or not a specific document imposes contractual obligations, the test to be applied in determining intention is whether a reasonable person would come to the conclusion that the person making the promise had the intention of being bound by the statement. In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, it was noted:
“[I]t is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe… That, normally requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction”. Determining express terms Express contractual terms are those which are expressly stated in the contract of employment. It is often the case that the more senior an employee, the more detailed and numerous the terms are, and therefore, more likely to dispute those terms.
3.Implied Contractual Terms
A distinction should be made between implications of law, which arise from the relationship between the employer and employee, and factual implications, which arise from the particular facts and circumstances surrounding the parties. • Implications of law: the inherent nature of the employer/employee relationship may give rise to an implied term. For example, an implication of law can refer to the appropriate period of notice of termination and under such a circumstance, the law will make a determination of what is reasonable between the employer and employee. Other duties implied by law can also include occupational health and safety, and the duty of mutual trust and confidence.
• Implications from fact: we can turn to BP Refinery Pty Ltd v Hastings Shire Council in which the Privy Council said the following in regards to terms implied from fact: “[F]or… a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract”.
Terms implied in fact
An employment term implied in fact is one that arises out of the particular circumstances of a particular employee and his/her employer. Any reading of implied terms into employment contacts should only occur where it must be obvious and necessary for the function of the contract. The court will ask whether, in an objective assessment, the term is so obvious that if the mind was turned to it, it would have been agreed upon. For example, implied that as part of the contract of employment for a stockbroker, the employer will provide access to a computer with access to stock prices. If the Court
determines that a term is implied in fact, it would have the same effect as an express term. For a term to be incorporated into a contract, apply the BP Refinery Test. That is,
the term must be:
1. Reasonable and equitable.
2. Necessary to give business efficacy to the contract (no term will be
implied if the contract is effective without it).
3. So obvious it goes without saying.
4. Capable of clear expression, and
5. Not contradictory to an express term of the contract.
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However, we should note that the BP Refinery Test is specifically in reference to complete contracts, so if a contract is partly written and partly oral, the judgment of Justice McHugh and Justice Gummow in Byrne v Australian Airlines, may provide some clarity: The first task is to consider the evidence and find the relevant express terms. Some terms may be inferred from the evidence of a course of dealing between the parties. It may be apparent that the parties have not spelled out all the terms of their contract, but have left some or most of them to be inferred or implied. Some terms may be implied by
established custom or usage… Other terms may satisfy the criterion of being so obvious that they go without saying in the sense that if the subject had been raised the parties to the contract would of replied “of course” … If the contract has not been reduced to complete written form, the question is whether the implication of the particular term is necessary for the reasonable or effective operation of the contract in the circumstances of the case; only where this can be seen to be true will the term be implied…
In addition to the BP Refinery Test, Hawkins v Clayton also developed the Necessity test. In that case, Justice Deane noted that “a Court should imply a term by reference to the imputed intentions of the parties if, and only if, the implication of the particular term is necessary for the reasonable or effective
operation of a contract of that nature in the circumstances of the case”. Terms implied from customs and practices Terms may also be implied if there has been a custom or practice in a particular industry or workplace that has been so longstanding that it would be reasonable to assume that everyone is contracted on the understanding that the custom or practice would apply to them.
The applicable test is the Con-Stan Industries Test. For a term to be implied from
custom or practice, the following must be satisfied:
1. The existence of the custom or practice (question of fact)
2. The custom/practice relied on must be so well known and
acquiesced that everyone making a contract in that situation can
reasonably be presumed to have imported that term
3. A term will not be implied from custom or practice if it is contrary to the express terms of the agreement (including contract and any award or EBA), and
4. A person may be bound by a custom or practice, notwithstanding the
fact that the person had no knowledge of it (e.g. new manager)
Changes to contractual terms
Whether changes to a contract are just a variation of the original contract or constitute a new contract depends on how much the nature of the contract and/or position, and role of the employee, has changed.
As a general rule, no contractual terms can be changed without the agreement of both parties. The employee, by continuing to work under changed conditions,
is mitigating their loss by entering into the new contract (therefore, changes cannot constitute a breach of the original contract).
4.The Employment Relationship The relationship between an employer and employee is a contractual one. It is often referred to as a contract of service. Such a relationship is typically contrasted with the independent contractor/principal relationship which, in law, is referred to as a contract for services. An independent contractor typically contracts to achieve a result, whereas an employee contracts to provide his or her labour (typically to enable the employer to achieve a result). An independent contractor works in his or her own business (or on his or her own account), whereas an employee works in the service of the employer.
While at either end of the ‘of service/for service’ spectrum it may be easy to discern a classic employee and a classic independent contractor, at the centre there is no sharp division between the two relationships. The emergence of performance-based contracts, flexible working hours, and work from home typify a trend which is blurring the traditional distinctions between employee and independent contractor.
The issue is contentious because of the different consequences attached to each relationship, particularly from the payer’s perspective. The obligation to make PAYG deductions is one consequence of having an employee. Other consequences may include vicarious liability, workers’ compensation, industrial instrument minimum wage rates and conditions, superannuation, and payroll tax. The International Labour Organisation defines the employment relationship as the legal link between employers and employees, existing when a person performs work or services under certain conditions in return for remuneration. It is through the employment relationship, however defined, that reciprocal rights and obligations are created between the employee and the employer. It has been, and continues to be, the main vehicle through which workers gain access to the rights and benefits associated with employment in the areas of labour law and social security.
The existence of an employment relationship is the condition that determines the application of the labour and social security law provisions addressed to employees. It is the key point of reference for determining the nature and extent of employers' rights and obligations towards their workers. Workplace Policies
There are many policies and procedures that are required in the workplace so that employees know their rights and responsibilities and act accordingly. Such core policies and procedures include: • Equal Employment Opportunity and Diversity Policies
• Grievance Procedures
• Work Health Safety and Wellbeing Policy and Procedures
8 Employment Law: BUSM4591 And then of course there are many policies and procedures in place that capture
the business processes employees should follow, such as:
• Recruitment Procedures
• On-boarding Procedures
• Off-boarding Procedures
Other policies and procedures have a compliance element to them, but they go further than the strict entitlements, rights or responsibilities, and detail the specific business processes, expectations, and/or entitlements of the workplace. For example:
• Redundancy Policy and Procedures
• Community Service Leave Policy and Procedures
• Annual Leave Policy and Procedures
Often employers will place all workplace policies and procedures together in one booklet and name it the ‘Employee Handbook’, or ‘Our Workplace Ways of Working’, or ‘Employer ABC How We Work’, et cetera. This can often be the best way to ensure quality control of each workplace policy and procedure, by housing them in the one place, and it can also prove to be an efficient way of ensuring
employees have at their fingertips the required business processes to perform their roles. The risk, however, is that such policies and procedures become part of the contract of employment, and the rights and responsibilities, if broken by one of the parties, gives rise to a breach of contract claim.
5.The Employer’s Implied Duties
Sometimes employees want to assert their perceived right to fairness, their right to something that they can’t point to or name beyond the feeling that something just isn’t right. For a long time, this fell into the bucket of the potential that there may be an implied term of mutual trust and confidence. In Commonwealth Bank v Barker (2012), the High Court determined that there is no blanket term of mutual trust and confidence that applies to employment contracts in Australia. While this provides a level of certainty, there is still the potential for the term to be implied in the specific circumstances of a case. What we do know is that there is no implied term of mutual trust and confidence in relation to termination of employment – the unfair dismissal jurisdiction effectively determines in a legislative fashion when fairness must be provided to employees in relation to termination of employment.
There may still be other implied terms
which employers must comply with in the lead up to termination. For example, there may be a duty to provide work in certain circumstances. Next, we will review some of the established implied duties for both employers and employees. The ‘no work no pay’ principle In any employment-based relationship there exists a mutual obligation whereby the employee provides work in return for payment by the employer. Under the ‘no
work no pay principle’ the employee is entitled to payment for services performed. Service may in fact extend beyond actual performance of duties. An employee who is wrongfully terminated cannot claim wages for being ‘ready, able and willing’ to work, they can only earn wages by actually rendering whatever service is required by the employer. In Automatic Fire Sprinklers v Watson (1946), Justice Dixon noted that the common understanding of a contract of employment at wages or salary periodically payable is that it is the service that earns the remuneration, and even a wrongful discharge from the service means that wages or salary cannot be earned, however ready and willing the employee may be to serve.
Under common law, an employee is not entitled to partial payment for partial performance. The employer is entitled to demand that the employee perform the full range of duties required by the contract. Where the employee refuses to perform the full range of duties, the employee is not entitled to any payment for that period. This general rule is subject to contractual terms to the contrary. In cases where the employer permits part performance to occur, the employee may be entitled to payment for the work they did do. Employers have a right to stand employees down from their job. The concept is that where an employee is stood down, the employee’s contract is suspended for the time being. Under the Fair Work Act, s524 provides that the employer may stand down employees in certain circumstances, including where the employee cannot usefully be employed because of one of the following circumstances:
• Industrial action;
• A breakdown of machinery or equipment; and
• A stoppage of work for any cause for which the employer
cannot reasonably be held responsible. A Duty to Provide Work The general principle is that there is no duty on an employer to provide work in Australia as long as the employer is prepared to pay. The exceptions to this include where exposure is important to the employee and their ability to earn income (e.g. performers, athletes, models, etc.) which is usually seen as an implied term that work be given to the employees to allow the exposure to take place, and where the employee must perform the work to earn the remuneration (i.e. commission-based work).
In Bunning v Lyric Theatre (1894) the Court held that there was an implied duty for an employer to provide work so the employee may receive exposure. The Court noted that it was a breach of contract for the theatre not to provide Bunning with sufficient work as a musical director, as the opportunity to appear in public as the music director was one of the considerations which the servant bargained for from the master. Likewise, in Baumann v Hulton Press , it was held that contracts based on commission entailed an implied duty for the employer to provide the employee an opportunity to earn remuneration. 10 Employment Law: BUSM4591
An employer does not have a general duty to provide a skilled employee work to do. In Mann v Capital Territory Health (1981), Mann, a senior general surgeon in a salaried role, was able to treat public patients and had the right to treat a small proportion of privately insured patients. As a result of changes to public health policies, the hospital employed 9 additional surgeons to the 3 already on staff (of which Mann was one) to treat public patients. This caused a fall in the patients Mann could treat and he argued that this adversely affected his surgical skills, as he did not have sufficient opportunity to practice, in his action for breach of contract against the hospital. The Court held that no such term could be implied into his contract. The Court applied the BP Refinery test to determine whether the requirements for an implied term had been satisfied. In this case the term was too uncertain and thus difficult for a reasonable person to ascertain what such a term should contain, and the vicissitudes attending the employment were too many and too varied to allow the term to be implied.
Duty to provide a healthy and safe working environment In common law, the employer has a duty to care for the health and safety of workers. This is a duty recognised in the law of negligence, but may also be a contractual duty, either express or implied. Employers also have a statutory duty to provide a safe work environment. The employer’s duty to provide a healthy and safe working environment has been given statutory form in state occupational health and safety legislation. Employers may be prosecuted by the state for breach of their statutory duties. In principle, employees have a right to sue for damages in negligence if the employer breaches the duty of care, and losses that are reasonably foreseeable result from the breach. However, most employees are compensated for workplace injuries and illnesses through statutory workers’ compensation schemes. The liability of employers to pay damages in negligence is generally heavily circumscribed by workers’ compensation legislation. In Victoria only workers who suffer a legislatively-defined ‘serious injury’ may sue at common law, and the legislation limits the amount of damages the court may award.
6.Employee’s Implied Duties
By virtue of the personal nature of the employment relationship, numerous duties are implied as a matter of law into the contract of employment. In Consolidated Press Ltd v Thompson, it was noted that: Terms implied by law are incidents of a special nature attached to this type of contract by reason of the nature of the subject matter and the personal obligation resting on the employee to serve and obey the employer and upon the employer to pay for the services and to carry out any other obligations which he has assumed towards his employees.
These duties will apply to all employment relationships, regardless of whether it is included in the express terms of the contracts or not, unless expressly excluded by the contracting parties. Duty of Obedience In R v Darling Island Stevedoring & Lighterage Co Ltd; Ex parte Halliday (1938), the test for lawful and reasonable order was established by Justice Dixon. In the case Justice Dixon noted: If a command relates to the subject matter of the employment (i.e. falls within the scope of the contract) and involves no illegality, the obligation of the servant to obey it depends at common law on it being
reasonable. What is reasonable is not determined in a vacuum, but depends on the nature of the employment, its established usages and common practices and any instrument (e.g. awards/EBAs) affecting it.
As such, employers cannot demand performance that would involve unlawful behaviour or expose the worker to personal danger. What happens if an employer directs an employee to act unlawfully or place the employee at risk of injury? What does reasonableness entail in the scope of the contract? The general principle under Common Law, is that when an employee has a contract of a specific character, the employee is not obliged to render all services that may be thought reasonable, but only service that properly appertains to the character of the contract. What this means is that, say for example, in the event of a cleaner’s strike, public hospitals employee surgeons will not be obliged to clean the operating theatre after their work is completed.
The surgeon’s scope of employment is limited to surgical services, and just because it may be reasonable for an employee to do the cleaning work as there is no one else available, it does not properly appertain to the character of the contract. The scope of the employment contract has been held by courts to be very wide, in the case of professionals (including teachers). But orders are likely to be unreasonable if they completely change the nature of the job. Further, Courts give considerable weight to the employer’s right to manage their business without interference and have held that failures to obey lawful and reasonable orders were breaches of the employees’ contracts, thus allowing the employer to terminate the employment relationship. However, how does the law balance the needs and interest of the employer to exercise their managerial prerogative with those of the employee?
The following cases will provide an overview of the considerations that go into balancing stakeholder interest. Duty of Obedience: Outside Work What about outside of work hours? Do employers still have the ability to control what employees do during their own time? Out of work conduct can be discussed
under the duty of obedience by arguing that an order regulating an individual’s behaviour in private is not lawful because: