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How is an employment contract created?

By CCIWA Editor

A contract of employment is the legal relationship created whenever one person agrees to perform work under the direction of another for a reward.  

Once an employment contract is formed, legal rights and obligations are imposed on the parties in the employment relationship.  

This information sheet specifically deals with the relationship stemming from a contract of employment. Different rights and obligations apply to individuals who are volunteer workers and principal/subcontractors. 

How is an employment contract created? 

The essential elements for the creation of an employment contract are as follows: 

  • Offer by employer 
  • Acceptance by prospective employee 
  • Consideration by both parties 
  • Intention to create legal relationship 
  • Legal capacity of both parties 
  • Genuine consent of both parties 
  • Legality of the contract. 

While employment contracts may be oral or written (or a combination of both), it is recommended the contract be in writing.  

Well-drafted, written contracts reduce the likelihood of disputes over the terms agreed. 

Certain employment contracts are not enforceable unless presented in writing, such as a contract between an apprentice and their employer. 

Offer of employment 

An employment relationship is initiated with an offer of employment, preferably in writing which indicates a willingness of one party to contract another. 

The offer should always be expressed in very clear terms to avoid misunderstanding. 

Employment offers usually contain information about remuneration, duties, commencement date, and terms and conditions that will apply. The terms and conditions of the employment offer that are inconsistent with legislation or a relevant award have no legal effect.  

An offer may generally be withdrawn at any time prior to acceptance. However, an employer may still be legally bound by the offer prior to acceptance if the person relies on the offer to their detriment (e.g. resigns from their job in anticipation of new employment with the employer). 

Acceptance of employment by prospective employee 

Once an offer is accepted, the employment relationship is established and this creates legal rights and obligations between parties even if work is yet to commence.  

Acceptance of the offer must be complete and unqualified acceptance of the terms of the offer. Any qualified acceptance of an offer may amount to a rejection of the offer. Acceptance may be given orally or in writing, or implied by actually commencing duties. 

Consideration by both parties 

The consideration in an employment contract requires that the parties agree to exchange something of value. Typically the consideration is labour in exchange for money paid as wages.  

 Intention to create a legal relationship 

The parties to an employment contract must have a mutual intention to create a legally enforceable relationship. It is not uncommon that individual’s agree to work for social, political or religious reasons, which often means that an employment contract has not been created (e.g. volunteers and religious ministers.) 

Legal capacity of both parties 

For a contract to be legally enforceable, both parties must be legally capable of making a contract of employment. Age, mental incapacity or intoxication of a person may restrict their capacity to enter into a binding employment contract. 

Genuine consent of both parties 

A contract of employment cannot be formed unless there is real and genuine consent to the terms of the offer. The following circumstances may make the acceptance and the subsequent employment contract invalid: 

  • Acceptance made under duress 
  • Acceptance influenced by employers misrepresentation (whether innocent or not) 
  • Where either party is mistaken about a crucial element of the contract 

Legality of contract 

The courts will not enforce the terms of a contract that express a criminal purpose or that require the employee to breach legislative provisions that impinge upon the contract of employment (e.g. to require an employee to breach the duty imposed by the Occupational Health and Safety Act or to break the Road Traffic Act by breaching the speed limits). 

Contractual duties and obligations 

Certain duties and legal obligations, beyond the express terms of a contract are placed on both employers and employees when parties enter into a contract of employment. For example, employers must pay remuneration and ensure a safe workplace. On the other hand, employees must work in a skilful and competent manner, and obey lawful and reasonable commands. 

If the parties neglect their respective duties and obligations, they risk breaching the employment contract. The affected party can apply to the courts to enforce the contract, and in some cases, may receive damages. 

Relationship to other legal documents 

Employment contracts operate in conjunction with other legal documents that regulate particular employment terms.  

These documents may include: 

  • Fair Work Act 2009 (Cth) 
  • Minimum Conditions of Employment Act 1993 (WA) 
  • Superannuation Guarantee (Administration) Act 1992 (Cth) 
  • Long Service Leave Act 1958 (WA) 
  • Competition and Consumer Protection Act 2010 (Cth) 
  • Modern Awards 
  • Notational agreement preserving state award (NAPSA) 
  • State Awards and Transitional Agreements 
  • Australian Workplace Agreements or Individual Transitional Employment Agreements 
  • Workplace Agreements (including Collective Agreements) and Enterprise Agreements 
  • Employer-Employee Agreements (State and Transitional) 
  • Enterprise Bargaining Agreements (State, Federal and Transitional) 

Where such legal documents prescribe minimum conditions of employment, an employment contract cannot provide less than those conditions (even if the parties agree). However, the contract can provide more favourable terms and conditions. 

Types of employment contracts 

There are different types of employment contracts to suit individual employer needs. 

Employment contracts may be:  

  • fixed for a specified period of time - contain starting and finishing dates 
  • fixed for the duration of a specified task - the contract terminates with the completion of the task or event 
  • ongoing/permanent  
  • casual/temporary. 

Template contracts of employment are available for purchase through CCIWA’s Employment Forms Guide or the Human Resources Business Basics Manual. 

For more information on the Employment Forms Guide or the Human Resources Business Basics Manual please call CCIWA’s Employee Relations Advice Centre on (08) 9365 7660 or email [email protected]. 

Terms of an employment contract 

Employment contracts usually contain detailed terms regarding: 

  • remuneration 
  • hours of work 
  • duties 
  • employment type (casual, part-time or full-time) 
  • probationary period 
  • leave entitlements 
  • termination of employment. 

These terms are not exhaustive and vary between cases. 

Contractual terms can also be implied through law, which can occur due to the custom and practice of an organisation or where a matter is so obvious it ‘goes without saying’. These terms are implied even though the parties have not specifically agreed to such terms. 

Changing contract terms 

Contract terms can only be changed if the employer has: 

  • power in the contract to make such changes (whether expressed or implied) 
  • the employee’s agreement. 

An employer cannot unilaterally change the terms of an employment contract. An example of a unilateral variation may include reducing the employee’s wages; changing the employee’s hours of work; transferring or relocating the employee; or amending any existing entitlement that has been offered in the employment contract. Even during times of legislative change, it is important that employers consult with employees prior to making any changes to the contract of employment.  

Substantially changing an employment contract may terminate the contract and replace it with a new one. In this case, the employer must provide the employee with an appropriate termination notice or compensation in lieu. 

An employer seeking flexible contract terms should make appropriate provisions when entering the contract. 

For more information contact CCIWA’s Employee Relations Advice Centre on (08) 9365 7660 or email [email protected]

A contract of employment is the legal relationship created whenever one person agrees to perform work under the direction of another for a reward.  

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