You may offer someone employment without providing a written letter or contract. Perhaps you have verbally outlined the employment terms, and the employee agreed. This arrangement can still amount to a contract and will be legally enforceable if it fulfils the elements of a contract. However, to protect your business and reduce your potential exposure to employee claims, it is best practice to have a written employment agreement in place. This article explores what elements are required to make a verbal employment contract enforceable and outlines the risks of a verbal contract.
What is Required to Make a Verbal Contract Enforceable?
A contract is a legally binding agreement or a set of promises formed between two or more parties. A valid contract is enforceable under the law to ensure both parties comply with their obligations. A contract is generally valid if it contains the following:
- an offer and acceptance, meaning that you communicated an offer of employment and the employee accepted the terms of that offer;
- a common intention between the parties to create binding relations, such that you and the employee understand the legally enforceable nature of the contract; and
- consideration for the promise, which involves you promising to pay the employee remuneration for their work.
However, verbal contracts may create confusion and uncertainty between the parties. You can better protect your business by preparing a clear written employment contract.
What Are the Risks of a Verbal Contract?
1. Argument Over Recollection of Terms
When you and an employee strike a verbal bargain, it can be difficult for both parties to recall the exact terms agreed upon at the time. You cannot refer to your specific agreement without a written contract.
Therefore, if disputes occur during employment, they will be far more challenging to resolve as neither party can point to a particular part of the contract. Rather, you and your employee will rely on your memory of the verbal agreement. This can make it hard to enforce a verbal employment contract.
2. Common Law Notice Claims
If you do not have a written employment contract between the parties, your employee could establish a right to notice of termination. Employees may have entitlements to ‘reasonable notice’ where there is no employment contract. When a court implies this right of reasonable notice in a verbal employment contract, the outcome is generally less favourable for the employer. This is because courts often find that employees are owed months of notice.
Therefore, failing to detail a notice period in writing can open your business up to risk in terms of a potential payout if an employee makes a claim.
3. General Business Protection
A well-drafted employment agreement usually includes clauses that cover the following:
- confidential information;
- intellectual property and moral rights;
- post-employment restraints;
- return of property; and
- directions, to attend or not to attend the workplace.
It is best to have a watertight written contract rather than rely on the following:
- your memory of the verbal employment contract; or
- rights and obligations established in past cases.
This is because past cases do not deal with all aspects of employment that you need to protect your business. For example, case law does not cater for post-employment restraints.
4. Protections for Employers’ Remuneration Structure/Clauses
Problems may arise in making your verbal employment contract enforceable where it is unclear what remuneration you will offer your employee. On the other hand, a written contract allows you to specify your remuneration structure.
For example, if you pay your employee an annual salary, you may need to comply with the annualised salary provisions under any applicable modern award. It is worthwhile specifying this in the contract to establish your intention to pay a salary for the entire year to remunerate:
- all work carried out;
- any overtime work; or
- work carried out on days incurring penalty rates.
It is also important to include an offset clause. This term allows you to refer to any payment you make above the minimum wage specified by an award to offset any claim for underpayment.
For example, you might pay an award employee a salary well over the standard award rate. However, you might not pay overtime. If they end up working a significant amount of overtime, such that they should receive more than the flat rate you provide, you may be able to offset the underpayment owing to your employee with the additional rates that you pay.
When you do not have a written agreement, you will not get any protection regarding remuneration. As a highly technical agreement, it will be difficult to prove that it exists if you do not have a written agreement in place.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
Key Takeaways
While it is possible to make a verbal employment contract enforceable, it is best practice to have a written contract prepared because:
- you can clearly outline the terms so that both parties can refer back to them;
- there is no argument or confusion regarding the contract terms;
- you will not be subject to claims made for employee rights established under case law; and
- you can clarify a clear remuneration structure.
Therefore, a written contract is essential to protect your business interests. However, a poorly drafted contract may cause additional issues, so it is always a good idea to have complex contracts, such as employment agreements drafted by a professional.
If you would like assistance drafting a robust employment contract, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A written employment agreement ensures that you and your employees understand where each of you stands in the arrangement. It means you both have something to refer to if there is a misunderstanding or a dispute. It also offers additional protections and benefits for you as an employer. For example, by clearly outlining the remuneration structure where you pay above the award rate, you may not need to pay additional wages if the employee works overtime. In addition, you can protect your business’s confidential information and intellectual property and impose restraints on your employee following the end of the employment period.
Regardless of whether you have a verbal or written contract, your employee is still protected by legal mechanisms to enforce their rights, such as those described in this article. This can be costly and time-consuming, so having a clearly outlined, written employment agreement is the only way to ensure everything is clear.
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