Startup Lawyer’s Guide to Terminating Employment Contracts

As a tech startup you may be taking on a number of new employees, or even if you are an established business you will be taking on new staff from time to time. Take it from a startup lawyer, whatever position your business is in, it is important that you understand the legalities of terminating employment contracts.

There are different circumstances that may lead to an employment contract being terminated, and the employees’ entitlements will change accordingly.  The employee may be entitled to:

• Notice of termination; 
• Payment in lieu of notice; 
• Payment for any leave that they have accrued but not taken; 
• Payment of long service leave entitlements; and 
• Payment for any outstanding wages. 

What is termination by mutual consent?

One way in which a contract of employment may come to an end, is by a mutual agreement between both the employer and employee. 

This usually occurs when there has been a change to the employee’s position, maybe:

• Their duties have altered; and 
• You want to vary or replace the original contract. 

You must consider whether the terms of the original contract allow for the changes to be made. 

As your tech startup grows and changes, this may be something that you need to consider. 

What is termination by notice?

When you have a contract of employment that goes for an indefinite period, you will likely have a clause included the allows the agreement to be terminated at any time in accordance with the contract. 

There are statutory requirements provided in the Fair Work Act regarding the minimum notice that must be provided to the employee upon termination. This is determined by their length of service. 

A national system employer (which is an employer that is bound by national workplace relations laws) cannot terminate an employment without giving written notice the day of termination. 

This however does not apply to cases of serious misconduct by the employee.

The employee also has the right to terminate if it is consistent with the terms of the contract or the relevant industrial instrument. 

Payment in Lieu 

If you are considering providing payment in lieu of giving notice to an employee upon termination, it must be provided for under their employment contract or industrial instrument, and written communications provided to the employee. 

How do industrial instruments apply?

You must also consider whether an industrial instrument applies to your employee. These set minimum standards for all employees in a certain occupation or industry, through an industry award or enterprise agreement. 

There may be a longer period of notice required under these, which you must comply with.

What is gardening leave?

Sometimes when an employee gives their notice of termination, the employer will require them to take what is known as ‘Gardening leave’ which is where the employee continues to get paid for their notice period, however is not required to attend the workplace or perform their duties. 

This could be used where the employee is leaving to work for a competitor, or to keep the employee out of the workplace so that confidential information they know about the employer becomes out of date.

This could be particularly useful to you as a tech startup as confidential information will be key in the success of your business.

What is the Federal Unfair Dismissal Regime? 

Under the Fair Work Act, employees are able to make an unfair dismissal claim if they believe that their termination was harsh, unjust or unreasonable. The employer must be able to prove that there was a valid reason for termination, that the dismissal was a proportionate response and that procedural fairness was followed. Issuing a clear written warning to an employee that their employment may be at risk due to their current performance is an example of providing procedural fairness.

Terminating an employee on probation

When hiring a new employee, you are entitled to put them on a probationary period to determine whether they are suitable for the role. Usually this lasts for six months however may vary. You may want to consider implementing this in your tech startup to ensure new employees are a good fit for the business. 

Employees on probation are: 

• To receive the same entitlements as someone who is not, such as accruing leave;
• Required to receive notice complying with Fair Work’s standards; and
• Entitled to have accrued leave paid out.

They can still be covered if the termination was unfair, even if they are not able to bring an unfair dismissal claim. 

How do you terminate casual employment?

Casual employment is not defined at law and is dependent on the circumstances of each case. The following usually indicate that the employment relationship is casual: 

• Uncertainty and irregularity in employment;
• No guaranteed hours of work;
• Works irregular hours and is not obligated to accept a shift;
• Not entitled to paid leave;
• No commitment as to the duration of employment; and
• Can have employment terminated without notice. 

Casual employees are not entitled to receive notice of termination or other obligations upon termination, provided that their employment does reflect that of casual employment, otherwise they have the ability to argue they were a permanent employee. 

Taking on casual employees can be ideal for an innovative startup, as you have the ability to save on staff costs if required. 

How does a fixed term contract end?

You can hire employees for a specific or fixed term. Particularly in a technology business, you may need to hire employees for certain projects. 

This employment agreement will automatically end when the time is up, and there is no requirement to give notice. 

If the contract is terminated before the end date, this could be considered a breach and the employee may be eligible to make an unfair dismissal claim. If terminated by the employee, the employer may be able to claim damages. 

Outer time limit contracts are similar to fixed term contracts, however, include a provision permitting termination of the contract during the set term. 

Can I make an employee redundant?

A genuine redundancy happens when and employee’s job doesn’t need to be done by anyone anymore, it is not due to the actions of the employee, therefore dismissing someone and replacing them with another employee is not considered a redundancy. 

An employee is not able to make an unfair dismissal claim if they are genuinely made redundant. However, if for example you hired someone else to do the role, the employee may be eligible. 

The Fair Work Act provides obligations upon redundancy including minimum payout requirements, period of notice requirements and other rules, additional obligations may be imposed under industrial instruments or the employment contract.  

What happens to employment contracts if the business is sold?

If a business is sold, the employee’s employment is terminated when the employer transfers the business to the other entity, therefore the original employer must still comply with the termination clauses under the employment contract. 

What other ways can an employment contract end?

Repudiation

Sometimes you will find that either party cannot or will not perform their obligations under their contract of employment. 

Repudiation exists where either party shows an inability or unwillingness to perform the contract consistent with the party’s obligations.

There must be a clear indication that they are unable or unwilling to perform, for example they may clearly state that they are unwilling to perform their obligations, or they may stop showing up to work. 

If this occurs, you will have the choice either to:

• Continue with the contract even though they will likely repudiate again in the future, or
• Accept that the other party is unwilling, accept the repudiation and bring the contract to an end. 

You may have the option to claim damages as the innocent party.

If you elect to continue with the contract despite their unwillingness, you lose the right to terminate for that specific conduct, however, may still be able to claim damages for further repudiation. 

It’s important that you correctly identify if a repudiation has occurred, or the employee could be found to be the innocent party!

Post-employment restraints may also not be enforceable following reputation by an employer (e.g. confidentially clauses) if you wish to enforce these, you must adhere to your obligations under the contract. 

Frustration

Frustration occurs when a contract cannot be performed in a way contemplated by the parties due to an unforeseen event that is out of either parties control, and therefore the contract is terminated. For example, this could occur due to an illness or injury of the employee. The Employer will still be required to pay the employee any minimum entitlements they are obligated to upon termination, however neither party can claim damages. 

What obligations do employees have upon termination?

Usually an employment contract will contain obligations which will survive the termination of the contract with the purpose or protecting the interests of the employer, which will be of particular importance to you as a tech startup. Common obligations include: 

• Obligation to maintain confidentiality. 
• Restraint of trade to prevent the employee working for a competitor; and
• Cease use of intellectual property.

Final Note on terminating employment contracts

As you can see, there are a number of requirements when terminating contracts of employment. Every business takes on new employees and terminates existing ones at times, therefore it is important that you understand your legal requirements or engage legal services to ensure your contracts and terminations are lawful.

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