How to enter into an employment agreement as an employer

Introduction

The Employment Relations Act

Employment law is governed by the EMPLOYMENT RELATIONS ACT 2000, which came into force on 1 October 2000.

The previous Act, the Employment Contracts Act 1991, tended to treat employment contracts like any other contracts; by contrast, the EMPLOYMENT RELATIONS ACT 2000 recognises the inherent inequality in power between employers and employees and therefore promotes collective bargaining through unions to offset this. The Act also requires the parties to an employment relationship to deal with each other in "good faith" at all times.

The Act provides for the Minister to approve various "codes of employment practice" to provide guidance on how the Act should be interpreted, either generally or in relation to particular types of situations or particular areas of the employment environment. The Employment Relations Authority and the Employment Court can take these codes into account when making decisions.

Substantial amendments to the Act were made on 1 December 2004 by the EMPLOYMENT RELATIONS AMENDMENT ACT (NO 2) 2004. Those amendments are included in this information sheet.

What does "good faith" mean and when does it apply?

The Act requires the parties to an employment relationship to deal with each in good faith, which includes not doing anything (directly or indirectly) that would mislead or deceive the other. Good faith requires the parties to be active and constructive in achieving employment relationships in which the parties are, among other things, responsive and communicative.

This duty applies to employers and employees dealing with each other, to unions and employers dealing with each other, and various other employment relationships, such as unions and their members. So you will be bound by this duty whenever you negotiate an agreement with your existing employees, whether it is a collective or an individual agreement.

Good faith also requires you to consult with your employees if you are proposing to do something that would negatively affect the continuation of their employment, such as selling the business (for the rules that apply in those and other restructuring cases, including new laws introduced on 1 December 2004, see How to make an employee redundant).

It's a breach of good faith for you to advise an employee, or attempt to induce them, not to be involved in collective bargaining or not to be covered by a collective agreement. (For the requirements of good faith in the context of bargaining for collective agreements, see below, "Collective agreements and collective bargaining / Good faith and collective bargaining".)

While the general duty of good faith doesn't appear to apply to negotiations between an employer and a prospective employee, a different provision in the Act also protects against "unfair bargaining" for any individual employment agreement (see below, "Individual employment agreements / Protection against ‘unfair bargaining'"), and this protects prospective employees. Employers also have specific obligations towards prospective employees and new employees (see below, "Collective agreements and collective bargaining / New employees: Your obligations when a collective agreement exists" and "Individual employment agreements / Your obligations in bargaining for individual agreements, terms and conditions").

Penalties for breaches of good faith

A party to an employment relationship who breaches the general duty of good faith is subject to a penalty under the EMPLOYMENT RELATIONS ACT 2000 if the breach

  • was deliberate, serious and sustained, or
  • was intended to undermine an employment relationship or agreement, or undermine bargaining for an agreement, or
  • consisted of intentionally undermining a collective agreement or collective bargaining by passing on, to other employees, terms from that agreement or terms reached in that bargaining (see below, "Collective agreements and collective bargaining / Passing on terms from collective agreements")

"Collective" versus "individual" employment agreements

The EMPLOYMENT RELATIONS ACT 2000 allows employees and employers to negotiate either collective or individual agreements. However, the Act actively promotes collective bargaining and collective agreements. Only unions can negotiate collective agreements for employees and only union members can belong to a collective agreement (although a collective agreement can provide for non-members to get the terms and conditions in the agreement if they pay the union a "bargaining fee": see below, "Collective agreements and collective bargaining / Bargaining fee arrangements"). Unions must be registered with the Department of Labour, which means they have to meet particular requirements (see How to: Union rights).

Although employers can't give preferential treatment or conditions based on being or not being a union member, this doesn't prevent collective agreements including a term intended to recognise the benefits of collective agreements (such as an additional payment or other additional benefits).

Individual employees covered by a collective agreement can negotiate terms additional to the collective agreement.

There's nothing to stop employees who are not union members from negotiating collectively, but the end result can only be a number of individual agreements, not a collective agreement.

When you hire new employees who are already union members, they are automatically covered by any collective agreement that exists in your workplace. If there is no collective agreement, employees can negotiate individual agreements with you, whether or not they are union members.

If a collective agreement expires, the employees are covered by individual agreements based on the terms of the collective agreement. The same applies if a union member covered by a collective agreement resigns from the union.

Collective agreements and collective bargaining

Good faith and collective bargaining

The EMPLOYMENT RELATIONS ACT 2000 requires collective bargaining between unions and employers to be conducted in good faith. This means they must meet with each other, consider and respond to each other's proposals, and give reasons if they reject any offer or proposal. If they're deadlocked on an issue, they must continue to bargain about any other issues on which they've not reached agreement.

The duty of good faith requires unions and employers to reach an agreement unless there's a genuine reason, based on reasonable grounds, not to do so. It doesn't amount to a "genuine reason" that a party objects in principle to collective agreements or to bargaining for them, or that the party disagrees about including a "bargaining fee" clause (for bargaining fees, see below).

The parties must also provide each other, if requested, with information to substantiate claims or responses to claims made during bargaining. This can be provided to an agreed third party. If you're concerned about the confidentiality of the information, you can supply it to a mutually agreed third party - an "independent reviewer". If the independent reviewer thinks the information should be kept confidential he or she must decide whether or not the information does substantiate the claim or response in question, then inform the parties of this and answer any questions they have.

You cannot advise employees, or attempt to induce them, not to be involved in collective bargaining or not to be covered by a collective agreement.

A Code of Good Faith for collective bargaining was drawn up in 2000. The Employment Relations Authority and the Employment Court can consider the Code in deciding whether the parties have bargained in good faith It doesn't reflect the amendments made to the Act on 1 December 2004, and is currently being reviewed. There is also a specific Code of Good Faith for the Public Health Sector (contained in Schedule 1B of the Act).

Passing on terms from collective agreements

Employers are prevented from undermining collective agreements and collective bargaining by automatically passing on collectively bargained terms and conditions to employees who aren't covered by them.

Under these rules, the duty of good faith prohibits employers from intentionally undermining a collective agreement by passing on its terms to individuals who aren't party to that agreement, or intentionally undermining collective bargaining by passing on to an employee a term that the parties to the collective bargaining have agreed will be part of the collective agreement when it's concluded.

Similarly, good faith prohibits employers from intentionally undermining one collective agreement by passing on its terms to another collective agreement, or from intentionally undermining collective bargaining by passing on, to another collective agreement, a term that the parties to the bargaining have agreed will be part of the collective agreement when it's concluded.

Employers who breach these rules are liable to a penalty.

However, the rules above don't prevent unions and employers agreeing to pass on collective terms and conditions to other unions or employees – for example, through a "bargaining fee" arrangement (see below).

"Facilitation": Assistance from Employment Relations Authority to resolve disputes

In some cases, collective bargaining that breaks down can be referred to the Employment Relations Authority for it to "facilitate" the bargaining. The Authority will play this role only if

  • there has been a serious and sustained breach of good faith, or
  • the bargaining has been unnecessarily drawn-out and extensive efforts to resolve the differences have failed, or
  • there has been protracted or acrimonious strike or lock-out action, or
  • a strike or lock-out has been proposed that would substantially affect the public interest (because it would endanger someone's life, safety or health, or significantly disrupt social, environmental or economic interests)

The facilitation process must be carried out in private. But otherwise the Authority is free to decide what process will be used. Statements made during the process cannot later be used in any proceedings in the Authority or the courts.

The Authority can make recommendations at the end of the process. The parties don't have to follow these recommendations, but they do have to consider them in good faith.

Authority can determine collective agreement in case of serious breach

The Employment Relations Authority can fix the terms and conditions of a collective agreement if:

  • a breach of good faith has been so serious and sustained that it has significantly undermined the collective bargaining, and
  • all other reasonable alternatives have been exhausted, and
  • this is the only effective remedy for the innocent party

What must be included in a collective agreement?

A collective agreement must be in writing and must be signed by each union and employer that is a party to it, otherwise the agreement has no effect.

The agreement must contain:

  • a "coverage clause" (this is a clause specifying the work that the agreement covers, whether by reference to the work or type of work, or to employees or types of employees, including referring to named employees, or to the work or type of work done by named employees, to whom the collective agreement applies)
  • a plain language explanation of the services available for resolving employment relationship problems, including the 90-day time limit for raising a personal grievance with the employer (see How to defend a personal grievance claim brought by an employee)
  • for new agreements made after 1 April 2004, a clause confirming the right of an employee who works on a public holiday to be paid either time and a half or penal rates contained in the agreement, whichever is more (Agreements already existing on 1 April 2004 must be amended to include this the next time they're amended, but not later than 1 April 2005.) (For more details, see How to ensure you receive your full holiday and leave entitlement as an employee.)
  • for new agreements made after 1 December 2004 (unless the agreement covers one of the industries specified in the Act), a provision negotiated between the parties that protects employees affected by restructuring (Agreements already existing on 1 December 2004 must be amended to include this by 1 December 2005, or the next time they're amended, or before the restructuring takes effect, whichever is earliest.) (These "employee protection provisions" for employees affected by restructuring are explained in detail in How to make an employee redundant.)
  • a clause providing how the agreement can be varied
  • the expiry date

Apart from these requirements, the agreement can contain any provisions that the parties agree on, provided they're not unlawful or inconsistent with the rights and obligations contained in the Act (see below, "Other issues / What other matters should be included in an employment agreement?").

Bargaining fee arrangements

This is an arrangement whereby employees who are not members of a union can be employed on the same terms and conditions as those contained in a collective agreement if they pay a bargaining fee to the union that negotiated the collective agreement.

The arrangement must be agreed to by the employer and the union in a collective agreement and then agreed to in a secret ballot by majority vote of all employees (union members and non-members) whose work is covered by the coverage clause in the collective agreement. The ballot must be held before the collective agreement comes into force, and must be run jointly by the union and employer.

Non-union employees who don't want to pay the bargaining fee must notify the employer of this in writing, within the period specified for this purpose in the collective agreement. Those employees will not be required to pay the fee, and their terms and conditions will remain the same, rather than being based on the collective agreement.

Bargaining fees are deducted from the employee's wages by the employer and paid to the union. The fee cannot be more than the employee would pay as a union fee if a union member.

New employees: Your obligations when a collective agreement exists

If there is an existing collective agreement in your workplace, new employees who already belong to a union that is a party to the agreement will automatically be covered by the collective agreement.

If a new employee doesn't belong to the union, you must tell him or her that the collective agreement exists. The employee then has 30 days to decide whether or not to join the union and be covered by the agreement. During the 30 days the employee is covered by an individual agreement on the same terms as the collective one.

If after 30 days the employee decides not to join the union, you can then negotiate a new individual agreement. If you don't negotiate a new agreement, the employee continues to be covered by an individual agreement on the same terms as the collective agreement.

Individual employment agreements

Good faith in bargaining for individual agreements

In determining whether an employer and employee bargaining for an individual agreement are dealing with each other in good faith, a relevant factor is the circumstances of each of them, including the "operational environment" of the employer and employee and the resources available to them.

Your obligations in bargaining for individual agreements, terms and conditions

You have the following obligations towards employees whenever you're bargaining for an individual employment agreement, or bargaining for individual terms and conditions that are additional to a collective agreement:

  • You must give the employee a copy of the intended agreement, or the part of it, that's under discussion.
  • You must inform the employee that they're entitled to seek independent advice about it.
  • You must give the employee a reasonable opportunity to seek this advice.
  • You must consider any issues the employee raises, and respond to them.

Those obligations apply in all of the following situations:

  • when the employee is bargaining for individual terms and conditions additional to a collective agreement that covers the employee
  • when the employee is bargaining for individual terms and conditions additional to a collective agreement on which their current individual agreement is based, or bargaining for variations to those individual terms and conditions (This applies where the collective agreement has expired or the employee has resigned from the union, in which case the employee is covered by an individual agreement based on the collective one.)
  • in the case of a new employee who's not a union member, when they're bargaining for individual terms and conditions additional to the terms, based on the collective agreement, that cover them for the first 30 days
  • when the 30 days have expired and the employee has decided not to join the union, and they're bargaining for any variations to the individual agreement that applied during the 30 days
  • when no collective agreement covers the employee and they're bargaining for an individual agreement
  • when a fixed-term agreement, or a probationary or trial period, is proposed
  • when the employee is bargaining over an "employee protection provision" to cover restructuring situations (This situation, which applies only to workers outside certain industries specified in the Act, is explained in detail in How to make an employee redundant.)
  • when the employee is bargaining with you, as a new employer to whom they've transferred as part of their previous employer's restructuring, over redundancy entitlements (This situation, which applies only to employees in the industries specified in the Act, is explained in detail in How to make an employee redundant.)

Protection against "unfair bargaining"

The EMPLOYMENT RELATIONS ACT 2000 places some restrictions on unfair bargaining for any individual employment agreement. This applies to negotiations with prospective employees and negotiations for new individual agreements with existing employees.

If it finds that you as an employer have bargained unfairly, the Employment Relations Authority can order you to pay compensation to the employee, or it can cancel or alter the employment agreement or make some other order.

"Unfair bargaining" exists if, when bargaining is taking place or when the agreement is entered into, one of the following circumstances existed, and you (or your representative) were or should have been aware of those circumstances:

  • The employee was unable to understand the agreement adequately because of, for example, age, sickness, mental or educational disability, a disability relating to communication, or emotional distress.
  • The employee reasonably relied on your skill, care, or advice or on that of someone acting for you.
  • The employee was induced to enter into the agreement by oppressive means, undue influence, or duress.
  • You did not give the employee the proper information and opportunity to obtain advice as you are required to under the Act (see above, "Your obligations in bargaining for individual agreements, terms and conditions").

Employers are also protected against unfair bargaining by employees.

What must be included in an individual employment agreement?

An individual employment agreement must be in writing and must include:

  • the names of the employee and employer concerned
  • a description of the work to be performed
  • an indication of where the employee is to perform the work
  • an indication of the arrangements for hours of work
  • the wages or salary
  • a plain language explanation of the services available for resolving employment relationship problems, including the 90-day time limit for raising a personal grievance with the employer (see How to defend a personal grievance claim brought by an employee)
  • for new agreements made after 1 April 2004, a clause confirming the right of an employee who works on a public holiday to be paid either time and a half or penal rates contained in the agreement, whichever is more (Agreements already existing on 1 April 2004 must be amended to include this the next time they're amended, but not later than 1 April 2005.) (For more details, see How to ensure you receive your full holiday and leave entitlement as an employee.)
  • for new agreements made after 1 December 2004 (unless the agreement covers one of the industries specified in the Act), a provision negotiated between the parties that protects employees affected by restructuring (Agreements already existing on 1 December 2004 must be amended to include this by 1 December 2005, or the next time they're amended, or before the restructuring takes effect, whichever is earliest.) (These "employee protection provisions" for employees affected by restructuring are explained in detail in How to make an employee redundant.)

Apart from these requirements, the agreement can contain any provisions that the parties agree on, provided they're not unlawful or inconsistent with the rights and obligations contained in the Act (see below, "Other issues / What other matters should be included in an employment agreement?").

Requirement to inform new employees about holiday and leave entitlements

When you enter into an employment agreement with an employee, you must tell them about their minimum rights under the HOLIDAYS ACT 2003. You must also tell them that they can get more information from their union (if they're a member) or from the Department of Labour. See How to ensure you receive your full holiday and leave entitlement as an employee.

Can an agreement be for a fixed term?

Yes, an employer and employee can agree that the agreement will end after a certain period, or when a particular event happens, or when a particular project is completed.

However, you as employer must have genuine reasons based on reasonable grounds for this. You cannot negotiate a fixed-term agreement merely as a means of denying the employee his or her rights under the Act, nor to set up a period of probation, nor to exclude or limit the employee's rights under the HOLIDAYS ACT 2003.

Before a fixed-term agreement is entered into, you must advise the employee of when or how the agreement will end and the reasons why it is for a fixed term. This must also be stated in the agreement in writing.

If this information isn't included in writing in the agreement, or if the reasons aren't genuine ones based on reasonable grounds, the employee can choose to treat the fixed-term aspect of the agreement as ineffective, in which case you won't be able to end the employee's employment in reliance on it. However, the validity of the rest of the employment agreement won't be affected.

Can an agreement include a period of probation?

It can be part of an employment agreement that the employee will serve a period of probation or trial, in which case the agreement must state this is writing. If it's not stated in writing in the agreement, the employee can choose to treat this aspect of the agreement as ineffective, in which case you won't be able to rely on it; however, the validity of the rest of the agreement won't be affected.

Even if the agreement does include a probation period, the employer must still follow the requirements of procedural fairness in dismissing the employee: the employer must provide the proper warnings and provide the employee with assistance, training and opportunities to improve his or her performance, the same as with any other employee.

However, it may be that an employer will be permitted a wider discretion in the area of substantive reasons for the dismissal than is the case with permanent employees.

Other issues

What other matters should be included in an employment agreement?

Other matters commonly included in employment agreements are:

  • your company policies (see below)
  • procedures for taking disciplinary action (see below)
  • a confidentiality clause (see below)
  • remuneration and fringe benefits – for example, long-service leave and staff options to buy company products or services
  • arrangements for parental leave (see How to: Entitlements to parental leave)
  • indexing of wages to the Consumers Price Index
  • health and safety issues (see How to complain about health and safety standards in your workplace)
  • provision for employees on jury service

Incorporating company policies into the contract

The employment contract is the appropriate way for the employer to state and enforce company policy on issues that the employer considers important. By making these policies part of the contract, they become binding on the parties and their importance to the company is stressed. This may include policies on, for example, discrimination, illegal substances, smoking, equal employment opportunities and retirement.

Disciplinary procedures

It is best if a formal disciplinary procedure is included in the contract (whether an individual or a collective agreement). The parties therefore have a written document to refer to should it become necessary. This also allows for easier action if the claim goes before the Employment Relations Authority or Employment Court.

Confidentiality agreements

You should consider the nature of your business and whether there is any need to make a confidentiality arrangement with your staff.

Negotiating the contract: do I need a representative?

Employees and employers can choose some other person or organisation to represent them in negotiating the contract and in dealing with employment issues generally. In the case of an employer, the representative might be a lawyer or an industrial-relations consultant.

"Employee" versus "independent contractor": Is an employment agreement required in my case?

It may be that the person you are hiring would in fact be an independent contractor, and not an employee, in which case an employment agreement is not applicable.

The courts have applied a number of tests to determine whether a particular business relationship is one of employment. A helpful test that is often applied is the "control" test – this asks whether the person performing the services is performing them as a person in business on his or her own account. If this is so, the person will be considered to be an independent contractor, not an employee.

Problematic situations have included deciding whether an agent or salesperson paid by commission is an employee. Courier operators, owner-driver operators and contract tradespeople are generally regarded as independent contractors, not employees. The EMPLOYMENT RELATIONS ACT 2000 also makes clear that real estate agents and sharemilkers are not employees.

In determining whether a particular person is an employee or a contractor, the Employment Relations Authority and the Employment Court must decide on the basis of the real nature of the agreement and not the particular words the agreement uses.

Cautionary notes
  • As well as assisting you in negotiating the terms of the employment agreement, your lawyer or industrial-relations consultant will be able to advise you of your rights and obligations under employment law. He or she will also be able to advise and represent you should you need to defend a personal grievance claim (see How to defend a personal grievance claim brought by an employee).


United States
Fast & cost effective answers to your unique legal questions. US
Ask a Lawyer a question now







United States
Fast & cost effective answers to your unique legal questions
Ask a Lawyer now

DIY Legal Documents

Solve your own legal issue cost effectively with these DIY documents

Related HowTos

Other related HowTo articles that may be helpful








  Bookmark this page in your web browserwww.howtolaw.co - Home PageCartNo Items in your Cart