Drafting Employment Contracts That Actually Hold

Employment contracts are the document that nobody reads carefully until the relationship is ending badly. This is not a criticism of employees or employers — it reflects the entirely rational human tendency to focus on the beginning of a promising relationship rather than its potential dissolution. The lawyer's job, in this context, is to think about the ending while the parties are still thinking about the beginning, and to translate that thinking into provisions that are enforceable, clear, and proportionate.

Most employment contract failures — the provisions that are unenforceable on their face, the clauses that are ambiguous at the precise moment clarity would have mattered, the terms that were standard in a different industry and carry assumptions that don't translate — are created at the drafting stage. They are usually created, more specifically, by lawyers who were drafting against a precedent without adequate attention to the specific relationship they were documenting.

The restraint clause problem

No area of employment contract drafting generates more post-employment litigation than restraint of trade clauses. No area of drafting is more routinely done badly.

The core legal principle is well settled: a restraint is enforceable only to the extent that it is reasonable having regard to the legitimate interests of the employer and the corresponding burden on the employee. That principle is applied differently in different jurisdictions — New South Wales has the cascading restraint mechanism under section 4(1) of the Restraints of Trade Act 1976, which allows a court to enforce the greatest restraint consistent with the public interest, while other states apply the common law reasonableness test without that mechanism — but the fundamental analysis is consistent across the country.

Despite this, restraint clauses continue to be drafted as if the employer's preferred outcome will simply be granted by a court that hasn't been asked to consider whether it is reasonable. Twelve-month post-employment non-solicitation restraints, drafted broadly enough to capture customers with whom the employee had minimal contact, are not enforceable in their full breadth. Two-year non-compete clauses covering every competitor in the employee's industry will be read down or struck down, depending on the jurisdiction and the specific drafting.

Good restraint drafting starts with a clear identification of the legitimate interests the restraint is designed to protect: customer relationships that were genuinely built by this employee, confidential information that is genuinely specific and valuable, or a training investment that is genuinely significant. From that identification flows a restraint that is proportionate to the protection of those interests — not a single catch-all clause drafted on the assumption that courts will enforce whatever the employer wants.

In New South Wales, the cascading mechanism should be used thoughtfully. Providing multiple restraints of diminishing scope is valuable, but only if each provision is itself a coherent and proportionate restraint; a cascade of unreasonable restraints produces, at best, one enforceable restraint of minimal scope.

Termination provisions

The notice period is the most frequently litigated simple term in an employment contract, and the one most often drafted with insufficient attention to its implications. A bare reference to the minimum period under the National Employment Standards is almost always inadequate for a senior employee; it creates no contractual entitlement that exceeds the statutory minimum and may, depending on the circumstances, create a reasonable notice period at common law that substantially exceeds what either party anticipated.

For senior employees, the appropriate approach is to specify the contractual notice period explicitly, to address whether payment in lieu of notice is permissible, and to specify what "payment in lieu" includes — whether it is calculated on base salary only or on all components of remuneration. The failure to address this last point creates expensive arguments when a contract is terminated without notice and the employee's remuneration included bonus entitlements, incentive payments, or equity.

The termination for cause provision deserves particular attention. A well-drafted clause specifies the grounds for termination without notice with enough particularity to give content to the term, without being so prescriptive that conduct clearly warranting summary termination falls outside the literal scope. The obligation under the Fair Work Act to follow a procedurally fair process before dismissal for serious misconduct operates alongside the contractual term, not in substitution for it; a lawyer who treats these as alternatives rather than complements is setting their client up for an unfair dismissal claim that could have been avoided.

Variable remuneration and discretion

Bonus clauses, where they provide for the exercise of employer discretion, generate litigation with remarkable frequency. The pattern is consistent: a clause says that a bonus "may" be paid "at the employer's discretion." The employee, who received a bonus every year for five years, expects a bonus in year six. The employer, restructuring its cost base, pays nothing. The employee claims that the discretion was exercised in a way that was capricious, irrational, or contrary to the implied duty of good faith.

Courts have recognised that discretions to pay variable remuneration are not absolute — they must be exercised genuinely and, in most analyses, must not be exercised so as to deprive the employee of a benefit that the contract could fairly be understood to have conferred. A clause that purports to confer absolute discretion but has been operated consistently in a way that has created reasonable expectations may be read against the employer's subsequent exercise of that discretion.

The solution is not to remove discretion — genuine performance-linked remuneration serves legitimate purposes — but to draft the exercise of discretion in a way that makes its conditionality genuinely clear, sets out the criteria (however broad) that will be applied, and does not create expectations it then frustrates.

IP assignment

For employees in technology, research, creative, or product development roles, the intellectual property assignment clause is one of the most important provisions in the contract. A blanket assignment of "all intellectual property created during employment" raises several issues that a thoughtful drafter should address: Does it extend to IP created outside working hours, using personal equipment, in relation to activities unconnected with the employer's business? Does it capture IP that the employee created before the commencement of employment but uses in their role?

Australian law does not recognise the broad "work for hire" doctrine of American copyright law in the same form; the contractual basis for assignment needs to be clear and specific. The assignment provision should identify the categories of IP being assigned, the temporal scope of the assignment, and the mechanics of assignment (vesting on creation, or assignment at the employer's election). Where the employee has a separately developed IP portfolio that predates the employment, a schedule of pre-existing IP is worth the modest administrative effort it requires.

Good drafting does not guarantee peaceful employment relationships. But it does ensure that when an employment relationship does end badly — as some will — the contract operates as an instrument of clarity rather than a source of additional dispute.