Person signing an employment contract

Why employment contracts are important for your business

If you’ve ever wondered just how important employment contracts are for your business, or for your rights as an employee, we’ve got all the information you need right here.
Kerrie-Anne Chinn, Content & Editorial Manager

Signing on the dotted line of an employment contract is always a thrill, signifying the start of an exciting new chapter in your career. These days, most companies ask new employees to sign an employment contract before coming on board. Employment contracts are standard practice across industries, regardless of whether an employee is full-time, part-time, or casual. Most likely, you signed one for your current job.

Accordingly, employment contracts are essential for both staff and employers, legally establishing your working relationship and setting out important frameworks, expectations, and policies.

Pull quote with the text: Employment contracts are essential for both staff and employees, legally establishing your working relationship and setting out important frameworks, expectations, and policies.

These contracts provide employees and employers with a legally binding agreement that establishes their working relationship, including what is expected from each party and the rights, responsibilities, and obligations of all stakeholders.

For workers, employment contracts protect your job security, income, leave entitlements, and other basic rights. On the other hand, they also protect employers from certain risks, such as breaches of confidentiality or underperforming employees.

So, if you’ve ever wondered why employment contracts are vital to your business or your rights as an employee, we’ve got all the information you need right here. Here are five reasons why employment contracts are a must-have for any business.

Understanding employee duties

One of the first things a good employment contract should do is clearly define an employee's position, responsibilities, and duties.

For employees, role clarity is vital. It helps to have a document that contains information about your job description, duties, salary, and benefits. There’s nothing worse than starting a new role and not being clear on the tasks and duties involved. You're left stabbing in the dark, unsure on the workload you're expected to take on. Thus, your job description should be clearly established by your employer, through your contract, before the onboarding process.

While this might sound fairly basic, many businesses fall at this hurdle. According to Effectory, just 53% of employees experience high role clarity, leaving 47% of workers with poor role clarity. That's not all, as Effectory also finds that employees with high role clarity are 53% more efficient, 27% more effective, and enjoy a 24% increase in overall performance. If that wasn't enough, 75% of employees with high role clarity are more passionate about their jobs, reporting higher job satisfaction than those without role clarity.

Pull quote with the text: Just 53% of employees experience high role clarity, leaving 47% of workers with poor role clarity.

As such, role clarity is in everyone's best interests, and it starts with having a well-defined job description in your employment contract. Having a contract that explains the standards expected of each employee is a great way to get the best out of everyone. When all parties know what is expected of employee performance, there is no room for confusion. Plus, if an employee is consistently underperforming and not meeting the expectations outlined in their contract, their employer will have grounds to take further action.

Employment contracts typically also give the leeway to add or subtract benefits, such as bonuses, according to the employee’s performance.

Job security for employees

An employment contract should also outline the terms of employment. That is, exactly how long an employee is contracted for or when their contract will be reviewed or re-evaluated. For example, is it a fixed-term contract with a clear start and end date? Will an employee have to pass a certain probationary period? Is there an expectation that an employee will be eligible for a raise or promotion after a certain amount of time? All of these questions should be answered in your contract.

Having this information in the employment contract guarantees job security for employees, as long as they do not violate the terms of their contract. When staff feel secure about the terms of their role, they are likely to have higher levels of performance and engagement.

Unfortunately, job insecurity remains a significant issue in many places. According to a recent survey, 88% of Australians think job security is a big problem. Likewise, the ADP finds that just 20% of workers feel their jobs are secure. These are concerning numbers, leaving a lot to be desired for the state of job security in many businesses.

Pull quote with the text: 88% of Australians think job security is a significant problem

Employment contracts should also specify exactly what actions can result in termination. Including this information ensures that employees know which activities are mandatory to their role and which actions or behaviours are against company policy and will result in dismissal.

Defined pay rates and income

Additionally, an employment contract should define pay rates and income. It should also state how often an employee will be paid (i.e. weekly, fortnightly, or monthly).

Containing all this information in one document shows an agreement between both parties on salary, leaving no room for miscommunication. Workplace disagreements often centre around money, so employment contracts minimise this risk.

Within an employment contract, you can set your employees' annual income as well as their working hours and any relevant bonuses.

Clear leave protocols

It’s also essential to include information about staff leave entitlements in your employment contracts.

Throughout their employment, staff will need to take different forms of leave, such as annual holidays, sick days, or maternity or bereavement leave. Having this information explained in a contract means that the procedure for taking leave is consistent and legal for all staff.

This way, employees can refer directly to their employment contract for guidance how to take leave. The contract should also clearly define any payments staff receive when they take days off work, for whatever reason.

Despite this, taking leave is still seen as taboo in some companies; a sign that you're not fully committed to your work. While this attitude is becoming less and less common (particularly in the wake of COVID), a recent study by Attendance Bot uncovered some startling statistics: 85% of employees admit they've sgone to work when they're sick rather than taking sick leave. Alarmingly, 4% say they didn't take leave because their manager would frown upon them not coming in even if they're sick. While this number is trending downwards in the right direction, it should be 0%.

These statistics underscore the importance of having clearly defined leave policies within your employment contracts, while also fostering a culture where employees feel psychologically safe to take their entitled leave.

Confidentiality for employers

Confidentiality is primarily in the best interest of employers.

Many positions give employees access to confidential company information and data. If this information was leaked or fell into the wrong hands, it could have negative ramifications. As such, it’s standard practice to include a confidentiality clause in each worker’s contract to protect your business.

With a confidentiality clause in place, employees can't divulge sensitive or confidential information. Confidentiality clauses typically prevent information from being released to the media or public, shared on social media, or used for any other purposes. If an employee breaches their contract and leaks confidential information, their employer can take legal action against them.

Employment contracts also often include a ‘non-compete clause’, which prevents employees from working for any competitors for a certain period (perhaps two or three years) after the employment ends.

Pull quote with the text: Next time you're asked to sign an employment contract, take the time to read it thoroughly and make sure it reflects your understanding of the position, salary, and benefits

As you can see, employment contracts are essential in the workplace, protecting both employers and employees. Next time you’re asked to sign an employment contract, take the time to read it thoroughly and make sure it reflects your understanding of the position, salary, and benefits. For employers, ensure you’re protecting your workers and your business with clear, well-defined contracts!

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