You may offer someone employment without providing a written letter or contract. Perhaps you have outlined the terms of employment verbally 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 for claims from employees, 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. Importantly, a valid contract can be enforced under the law to ensure that both parties comply with their obligations. A contract is generally valid if it contains:

  • an offer and acceptance, meaning that the you must have communicated the 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 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.

If you have verbally offered a potential new worker employment, outlined their expected payment and the duties that they will be required to carry out, with the intention of offering them a job, you may have an enforceable contract.

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 is not always easy for both parties to recall the exact terms agreed upon at the time. Without a written contract you cannot refer back to your specific agreement.

Therefore, if disputes occur during employment, it will be far more difficult to resolve as neither party will be able to point to a particular part of the contract. Rather, you and your employee will be relying on your memory of the verbal agreement. This can make it practically difficult to make your verbal employment contract enforceable.

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. Under case law, employees have entitlements to ‘reasonable notice’ where there is no employment contract. When a court implies this right of reasonable notice into a verbal employment contract, the outcome is generally less favourable for the employer. This is because courts often find that employees are owed months or notice. 

In one case, an employee who had worked with a business for five years was entitled to 10 months pay in place of notice upon termination. Although the employer had originally provided five weeks’ notice, in like with the National Employment Standard (NES) minimum notice requirements for the circumstances of the case, they had not specified a notice period in the employment contract.

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:

  • 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: 

  • your memory of the verbal employment contract; or
  • rights and obligations established under case law.

This is because case law does not deal with all aspects of employment that you will need to protect your own 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 will be 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 worker; or
  • work carried out on days incurring penalty rates.

It is also important to include an offset clause. This is a term that allows you to refer to any payment that you make above the minimum wage specified by an award to offset any possible 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.

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 very important if you want to protect your business’ interests. If you would like assistance drafting a robust employment contract, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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