A.        INTRODUCTION

So you are either currently an employer or looking at employing people to work in your business.  You may have a specific employment law query or might just be interested in learning a bit more about the area.  You might be looking at preparing contracts for new or existing employees or have been served with an unfair dismissal claim by a former employee and need to know what to do.

It may be helpful, both to people starting out in business, and to experienced business owners or managers, to recap the basic concepts of employment law.  This is to be contrasted to contractor law, which is addressed in the “Contractors” part of this website.  See Contractors

You may have heard of the terms common law contract, award, EBA, AWA, certified agreement, collective agreement, statutory minimum standards to name a few.  You may have also heard of a state industrial relations commission and a federal industrial relations commission as well as the Federal Court, Federal Magistrates Court and state courts.  It’s all very confusing and it may be helpful to know about the structures of employment law in Australia and where your issue fits in. 

B.        STATUTE LAW AND COMMON LAW

The starting point is to know that there are two basic types of law which exist in Australia, statute law and common law.  Statute law is the law which parliaments create in the form of legislation and regulations.  Common law is that body of rules created over the years by judges which are generally followed by courts in similar situations (this is called the “doctrine of precedent”).  Generally speaking, parliament is supreme and can pass any laws within its power.  It is up to courts to apply and interpret any ambiguities in legislation when necessary.  To give you an example, the legal claim that is made when someone is physically injured in an accident is a common law claim of negligence.  Negligence as a separate legal concept has only been recognised since the English decision of Donoghue v. Stevenson in 1932.  Whilst negligence is a common law creation, statutes now significantly regulate the detail of such claims like how much time there is to bring a claim, claims procedures to be followed and limits on certain types of monetary damages.  Employment law operates in a similar way in so far as the basic employment relationship involves a common law contract which has been regulated by statute.

There is a hierarchy of legal rules and documents which may affect your situation:

Legislative minimum rights

Awards/collective agreements

Common law contracts

Implied employment terms

C.        LEGISLATIVE MINIMUM RIGHTS

In summary, certain minimum rights and entitlements have been created by parliament to protect all employees, eg the right to four weeks annual leave.  There is no common law right to annual leave but this has been created by state and federal legislation.  At a federal level, these rights and entitlements are contained within the Australian Fair Pay and Conditions Standard which is part of the Workplace Relations Act 1996.  They are shortly to be replaced by the Rudd Labor Government’s ten National Employment Standards.  Examples of these are the right to annual leave, personal leave, compassionate leave and parental leave and the federal minimum wage.  These rules apply to all federal system employers.  Similar rights and entitlements exist in the state industrial systems.

In addition to these legislative minimum rights and entitlements, federal and state workplace relations legislation provides remedies for unfair dismissal and unlawful dismissal and there are minimum requirements for notice of termination of employment under legislation.

D.        AWARDS/COLLECTIVE AGREEMENTS

Beneath the overarching system of minimum legislative rights and entitlements sits industry or business specific rules which are given legal force by the federal workplace relations and state industrial relations legislation.  These rules provide for more detailed regulation of specific industries and businesses than that contained in the umbrella legislation.  These rules are contained in industrial awards and collective agreements.  Awards are generally made between unions as employee representatives and employer representative bodies and sanctioned by the federal Workplace Authority or state industrial relations commissions under powers granted by legislation.  For instance, the Clerical Employees Award – State 2002 is a Queensland award which covers all clerical employees in Queensland.  It contains specific rules in relation to things such as overtime, wage rates and hours of work. 

Collective agreements are business specific agreements which are made between a group of employees and their employer.  A collective agreement must be registered with a federal government agency (the Workplace Authority) or state industrial commission if applicable, and must meet certain minimum standards.  A collective agreement made under state law must be approved by the Queensland Industrial Relations Commission or the relevant state industrial relations commission.  These agreements have been formerly known as certified agreements or enterprise bargaining agreements.       

Until recently, there was another category of legislatively recognised documents containing specific rules for individual employees and that was the AWA (Australian Workplace Agreement).  This was an individual agreement between an employee and an employer which had to be registered with the Workplace Authority to have legal force but could then overrule any award requirements for its period of operation.  These have been effectively scrapped by the Labor Government. 

E.         COMMON LAW CONTRACTS

At its most basic level, an employment relationship between an employer and an employee is a civil contract where the employee agrees to do work for the employer in exchange for monetary or other payment.  In this sense, the employment contract is no different from any other civil contract such as a contract to build a house.  This means that the employer and employee are free to agree on whatever terms of employment they like, subject to legislative minimum rights and award or collective agreement requirements. 

The general rule is that courts will uphold contract terms where there is a signed contract and the employer and employee have freely entered into the contract.  There is only a small number of cases where this general rule will not be applied.  This is important to keep in mind because there are a number of issues not specifically regulated by legislation, such as post employment restraints and intellectual property.

A contract does not have to be in writing but it will make it much easier to establish and enforce the terms of a contract where it is in writing. 

F.         IMPLIED TERMS

The courts have also held that a number of implied terms exist in an employment contract even where they are not spelt out.  The best example is the duty of mutual trust and confidence.  This requires both the employer and employer to act in good faith during the employment relationship.  

G.        IS YOUR ORGANISATION COVERED BY FEDERAL OR STATE WORKPLACE RELATIONS LAW?

It is also necessary to keep in mind that there are state and federal industrial systems affecting employment law.  One of the features of the Work Choices legislation was to provide that federal law covered all trading corporations.  Previously, most businesses were regulated primarily by state legislation.  However, all trading companies are now covered almost exclusively by federal law.  Some matters though, such as long service leave entitlements, remain covered by state law.

The Workplace Relations Act 1996 (Cth) applies to what are called “constitutional corporations”.  The Commonwealth Government has power to make laws in relation to “overseas, trading and financial corporations” under the Commonwealth Constitution.  If your employing entity is a private company and its activities are clearly of a commercial nature, it will generally be subject to coverage by the Workplace Relations Act and be regarded as a federal system employer.

However, if your employing entity is a sole trader or partnership or family trust, you will generally be covered by state industrial relations law.  A grey area exists for those corporations which are essentially charitable in nature but carry out some element of trading, such as incorporated associations and companies limited by guarantee.  For those organisations, it is necessary to consider whether the corporation is a trading corporation for the purposes of the constitution.  The courts have held that in deciding whether an incorporated entity is a trading corporation, the question is whether trading is a “substantial” activity of the corporation.  Trading does not have to be the primary purpose of the corporation. 

Another area of doubt applies to trusts.  Whilst a trust is not a corporation for constitutional purposes, it may have a corporate trustee and it is generally advisable to ensure that the employer is recorded on all documents as the trustee corporation rather than the trust itself. 

Substantial has been held to mean “not insubstantial” in the sense of not being trivial and not merely being a “peripheral activity”.  In deciding this issue, courts have considered the level of actual income generated by trading activities and what percentage of the total income of the organisation is formed by these activities.  It is difficult to state any general rule of thumb as every organisation needs to be treated on its own merits.  However, in one instance, a corporation with as little as 4% of its income derived from trading activities has been held to be constitutional corporations.  In another case, a Western Australian university which derived 20% of its income from activities of a trading character was held to be a trading corporation.

Whilst these statutory requirements and rules regulate employment, the relationship is still fundamentally a common law contract relationship.  And although any applicable award/collective agreement or legislative minimum right will have precedence over a common law contract, there are many aspects of the relationship not affected by legislation.  It is helpful to be aware of these various concepts because they may affect the resolution of your particular problem. 

The attached flowchart may help with determining whether your organisation is covered by federal law or state law.

H.        CONTRACTORS

This section addresses issues faced by employers in dealing with employees.  If you want to consider the pros and cons of engaging contractors or are encountering an issue with an existing contractor, you should go to the “Contractors” section of this website.  Contractors do not have many of the rights and entitlements of employees and it is necessary to consider the nature of the relationship and the job to be performed, as well as taxation and insurance implications in determining whether to engage someone as an employee or independent contractor.  See contractors