For a small business owner in Maitland, hiring staff is a milestone worth celebrating. It’s also the moment your legal obligations multiply. Australia’s employment laws are complex and strictly enforced, and the penalties for getting them wrong have risen sharply in recent years. The uncomfortable truth is that many underpayment and compliance problems don’t come from bad intentions, they come from a poorly drafted employment contract.
At Hills Solicitors, we’ve advised Hunter Valley employers since 1894, and we see the same avoidable contract mistakes again and again. This guide covers the errors that most commonly expose employers across Maitland, the Hunter Valley and the Newcastle region to Fair Work claims and penalties, and how to avoid them.
The Stakes: Why Contract Compliance Matters
The Fair Work Ombudsman has become increasingly active in pursuing employers for underpayment and non-compliance, with a particular focus in recent years on small and medium businesses. Under the Fair Work Act 2009 (Cth), the maximum civil penalties for serious contraventions are substantial, particularly for companies, and wage theft can in some circumstances now attract criminal liability.
Crucially, ignorance is not a defence. An employer who underpays staff because their contract was based on the wrong Award, or because a salary arrangement didn’t properly cover overtime, is still liable for the shortfall plus penalties. The contract is where many of these problems begin, and where they can be prevented.
Mistake 1: Assuming the Contract Overrides the Award
This is the single most dangerous misconception in Australian employment. Many employers believe that if an employee signs a contract agreeing to a certain rate or conditions, that’s the end of the matter. It isn’t.
An employment contract sits on top of the relevant Modern Award and the National Employment Standards (NES). It can provide better conditions than these minimums, but it can never provide less. If your contract pays an employee less than they’re entitled to under the applicable Award, the contract term is unenforceable and you owe the difference, no matter what the employee signed. Always start by identifying the correct Award and its minimum rates, then build the contract on top of that.
Mistake 2: Getting the Award Classification Wrong
Even employers who know an Award applies often get the classification wrong. Modern Awards contain different classification levels with different pay rates, based on the employee’s duties, qualifications, and experience. Misclassifying an employee at a lower level than their role warrants is a very common source of underpayment.
Award classification can be genuinely difficult, particularly for roles that span multiple functions. Getting it right at the contract stage, and reviewing it as the employee’s role changes, is essential. If you’re unsure which Award applies or how to classify a role, this is exactly the kind of question worth getting advice on before problems accumulate.
Mistake 3: A Salary Set-Off Clause That Doesn’t Work
Many employers pay an annual salary intended to cover all entitlements, including overtime, penalty rates, and allowances. This is legitimate, but only if the contract contains a properly drafted set-off clause and the salary is genuinely high enough to cover what the employee would have earned under the Award.
The mistakes here are twofold. First, the set-off clause is often missing or poorly worded, meaning it doesn’t actually do the job. Second, employers assume a salary that looks generous automatically covers all Award entitlements, without ever checking the calculation. If the employee works significant overtime or unsociable hours, the Award entitlements can quietly exceed the salary, creating an underpayment. A proper set-off clause and a periodic reconciliation protect against this.
Mistake 4: Misclassifying Employees as Casual or as Contractors
Two related mistakes cause significant liability.
Casual misclassification: Labelling an employee “casual” doesn’t make them one. Recent changes to the Fair Work Act have redefined casual employment and strengthened the rules around casual conversion. An employee engaged as a casual but working regular, systematic hours may in fact be entitled to permanent conditions, including paid leave, creating a backpay exposure.
Sham contracting: Treating a worker as an independent contractor when they’re really an employee (to avoid superannuation, leave, and Award obligations) is known as sham contracting and carries serious penalties. The distinction depends on the true nature of the relationship, not just the label in the contract. Getting this wrong is expensive.
Mistake 5: Ignoring the National Employment Standards
The National Employment Standards are the minimum entitlements that apply to all national system employees, covering maximum weekly hours, leave, notice of termination, redundancy pay, and more. A contract cannot contract out of them.
Common NES-related contract mistakes include notice periods shorter than the NES minimum, failing to provide for redundancy pay where it applies, and leave provisions that fall short of NES entitlements. Any such term is unenforceable, and relying on it can lead to a claim. Every contract should be checked against the NES as a baseline.
Mistake 6: Unenforceable Restraint of Trade Clauses
Employers often include broad restraint of trade clauses to stop departing employees competing or poaching clients and staff. The mistake is drafting them too broadly. A restraint that goes further than necessary to protect a legitimate business interest (in duration, geographic scope, or the activities it covers) risks being read down or struck out entirely by a court.
An overly ambitious restraint can end up protecting nothing. A carefully drafted, reasonable restraint, tailored to the specific role and business, is far more likely to be enforceable when you actually need it. This is an area where precise drafting genuinely matters.
Mistake 7: Using an Out-of-Date or Template Contract
Employment law changes frequently. In recent years alone there have been significant reforms to casual employment, fixed-term contracts, and other areas. A contract template downloaded a few years ago, or borrowed from another business, may no longer be compliant.
Generic templates also fail to account for your specific Award, industry, and circumstances. A contract that isn’t tailored to your business and kept current with the law is a liability waiting to surface. Employment contracts should be reviewed periodically and updated when the law changes or the role evolves.
How to Protect Your Business
The good news is that every one of these mistakes is preventable. Protecting your business comes down to a few practical steps: identify the correct Modern Award and classification for each role, build the contract on top of the Award and NES minimums rather than assuming the contract overrides them, use properly drafted set-off, confidentiality, and restraint clauses, get casual and contractor arrangements right, and review your contracts periodically to keep them current.
For most small businesses, having an employment law solicitor draft or review your contracts is a modest investment that prevents far more expensive problems. It’s particularly worthwhile when you’re hiring your first employee, taking on casuals or contractors, or if your contracts haven’t been reviewed in a few years.
Frequently Asked Questions
Can an employee agree to be paid less than the Award?
No. An employee cannot validly agree to less than the minimum pay and conditions in an applicable Modern Award or the National Employment Standards, and a contract term attempting this is unenforceable. Even where the employee signed willingly, the employer remains liable for the shortfall and may face penalties. The contract can always provide more than the minimum, but never less.
What is a salary set-off clause and do I need one?
A set-off clause allows an annualised salary to cover Award entitlements such as overtime, penalty rates, and allowances. If you pay a salary intended to absorb those entitlements, you need a properly drafted set-off clause, and you should periodically reconcile the salary against what the employee would have earned under the Award. Without both, you can end up with an underpayment even though the salary looks generous.
How do I know which Modern Award applies to my employee?
Award coverage depends on the industry your business operates in and the occupation of the employee, and some roles are covered by more than one possible Award. Classification within the Award then depends on duties, qualifications, and experience. Because misclassification is a common source of underpayment claims, it’s worth confirming coverage and classification with an employment law solicitor rather than assuming.
What is sham contracting?
Sham contracting is treating a worker as an independent contractor when the true nature of the relationship is employment, typically to avoid superannuation, leave, and Award obligations. Whether someone is an employee or a contractor depends on the substance of the arrangement, not the label used in the contract. Sham contracting carries serious penalties, so the arrangement should be assessed properly before it’s put in place.
How often should employment contracts be reviewed?
As a general rule, review your contracts every couple of years, and whenever the law changes significantly or an employee’s role materially changes. Employment law has been reformed substantially in recent years, particularly around casual employment and fixed-term contracts, so contracts drafted before those changes may no longer be compliant.
Get Your Employment Contracts Reviewed
Fair Work compliance isn’t optional, and the cost of getting it wrong far outweighs the cost of getting it right. If you’re an employer in Maitland or the Hunter Valley, having your employment contracts professionally drafted or reviewed is one of the best risk-management investments you can make.
Hills Solicitors has advised Hunter Valley employers since 1894. We’ll make sure your contracts are compliant, protect your business, and stand up if they’re ever tested. To learn more, see our employment contracts service, or our broader employment law offering if you’re facing a workplace dispute.
Book a consultation with our employment law team today, or call us on (02) 4933 5111. Check our FAQ page if you have any questions.
