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Companies face executive crunch

Companies face executive crunch

COMPANIES WHICH haven’t properly thought through their employment contracts with senior executives could find themselves in hot water as the economy heats up, a survey has revealed.Deacons’…

COMPANIES WHICH haven’t properly thought through their employment contracts with senior executives could find themselves in hot water as the economy heats up, a survey has revealed.

Deacons’ latest “Workplace Pulse” survey has revealed that only 4 per cent of employers individually tailor employment contracts for their senior executives. Meanwhile, 38 per cent use standard “off the shelf” contract documents, while 45 per cent have their contracts drafted by external law firms or in-house counsel.

However, companies that use standard form contracts run the risk that some important considerations might not be dealt with, or adequately dealt with, which could become significant when the employment relationship ends.

Deacons partner David Cross explained that historically, the more prominent role of the industrial award system resulted in employers generally tending towards using off-the-shelf, rather than individually tailored, employment contracts.

“There was a time when for large sectors of the workforce, the industrial award was pretty much the ‘be all and end all’,” so there was not much point in putting in a whole lot of effort into the contract of employment because … it was the award that was the source of the actual terms and conditions that are applied day by day,” he said.

However, the role of industrial awards in setting the terms and conditions of employment has declined over the last two decades, he said, meaning that for a larger section of the workforce, these terms and conditions now need to be defined by the employment contract.

“The policy of successive governments has been that industrial awards are really just a safety net minimum … and that has opened up a larger domain for the contract of employment to be a more detailed document,” Cross explained. “[Employment contracts] obviously can’t operate in a way that’s inconsistent with the award, but there are a lot of things now that the awards don’t cover.”

Cross believes that for a number of reasons, companies have been reluctant to move across to using individualised contracts. One factor, at least in New South Wales, was that in the past the “unfair contracts” remedy was often invoked by the Industrial Relations Commission to virtually rewrite employment contracts perceived to be “unfair”.

“When the ‘unfair contracts’ remedy was at its height, there might have been a sense of fatalism about the issue of creating specific, written contracts. The remedy was often used and so employers might have thought that there was not much point because the court would take its own view anyway,” Cross said.

Another concern for employers is the perceived time and the costs involved. “[Employers see it as] an administrative exercise and it’s just much easier to deal with things using pro forma documentation ... believing that doing a customised contract is going to be more time-consuming and expensive. The real answer is that it’s not and it can be handled in a very economical way,” he said.

Considering the substantial costs of hiring senior executives (which can run as high as 30 per cent of the first year’s remuneration), Cross believes it’s well worth ensuring any employment contract is sufficiently tailored to minimise problems when the employment ends. One area in particular that Cross believes employers should pay careful attention to is restraint of trade clauses, which must only be so broad so as to legitimately protect the employer’s commercial activities.

“The courts have been very clear that they’re not going to enforce these where it just looks like a one-size-fits-all approach. Courts know what standard form drafting looks like, whereas if the contract looks like its been customised ... then there are better chances of enforcement.

He said another issue to consider is whether there is a need to protect intellectual property or confidential information, and if so, how it should be dealt with in the contract.

And aside from the purely legal issues, there are also HR concerns to consider, Cross pointed out. “If a person perceives they’re being dealt with on the basis that the document is a living document for that relationship, then you’re backing up your HR rhetoric with actual HR practice — you’re walking the walk as well as talking the talk. For executive recruitment, that’s pretty important,” he said.

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