Implied Terms of An Employment Contract

  • Legal
Employment Contract

The bedrock of a legal relationship is contracts. An employment contract is an agreement between you and your employee which is legally binding and is the cornerstone of the business relationship. Included in the contract are the rights and duties of both parties, which are called the contractual terms. Although these terms are written out in a single document, do not be deceived into thinking that is all there is to the document. 

Contractual terms in an employment contract can either be expressly stated and agreed upon by both parties or they can be implied. It is possible to be legally bound to certain terms even though they were not expressly stated in the agreement. It is important to be aware of these implied terms so you are not taken aback if or when they come up. 

Express Terms v. Implied Terms

Express terms of an employment contract

Express terms of an employment contract are the terms that you and your employees explicitly agree on. They do not have to be put in writing (although it is preferable) but can be made orally also. Putting express terms in writing will assist when a conflict or dispute arises regarding what was said. However, if it is made orally, the agreement has to be clearly stated and understood by both parties. An express term may refer to pay, limitations of liability, etc.

Implied terms of an employment contract

Implied terms of employment contracts are terms not expressly stated in the employment agreement but are still legally binding on both parties. It might be terms not thought of by both parties or terms both parties did not consider important. These terms are implied in the employment contract by the courts. Implied terms may reflect the intentions of the parties or may simply be implied in the employment contracts on the grounds of public policy. 

Implied terms of an employment contract are really interesting because if you are not careful, you can fall into the trap of finding out you’re bound by them only when the courts become involved. This is because implied terms of employment contracts only become an issue when the employment relationship between you and your employee starts to break down.  Hence, as an employer, you need to be aware of this area of the law because it is effective from day one.

But do not worry, the courts do not just go about implying terms into your contract; they prefer to follow through with the parties’ intentions. The courts will only imply terms into your employment contracts in particular circumstances. Terms can be implied by fact, by law, by custom or trade, or by statute.

Terms Implied by Fact Into the Employment Contract

Certain terms may be implied into the employment contract to fill a gap or places that both parties might have missed out on when drafting the contract. These terms can either be implied into the contracts because they are necessary for the purpose of business efficacy or if the term is so obvious that a third party observing the agreement would have obviously expected such a term to be included. It can also be implied if such a term can be derived from the conduct of the parties. For a term to be implied it has to  satisfy the business efficacy test or the officious bystander test.

Business efficacy test

Based on this test the term will be implied into the employment contract if without such term the contract is simply unworkable. For these kinds of terms, the contract is simply unable to stand without the implication of such terms. For example, a mutual trust and confidence term may not be included in the employment contract for one reason or another but it is easy to see how without such a term in the agreement the contract cannot stand or is unworkable. Therefore, although the courts are reluctant to imply terms, they will most likely imply such terms when the contract cannot function without it 

Officious bystander test

When drafting an employment contract, it is easy to see how certain terms may be overlooked because they are obvious to or assumed by both parties. A term will be implied into the employment contract if it is so obvious or assumed that it goes without saying. These terms are so obvious that if an officious bystander were present when the employment contract was drafted and he or she mentioned that such term should be included in the contract both you and your employee would have said ‘of course’. A really basic example is stealing; the employment contract may not include that the employee should not steal, but this is a term that is obvious and easily assumed. 

Terms Implied by Law Into the Employment Contract

As an employer, you should also be aware of terms that are implied into every employment contract by law. The courts might imply these terms in a certain contractual relationship where the law already offers some protection to the weaker party (like employer/employee relationship). The courts only imply these terms in the employment contract where it is necessary and reasonable to do so. The courts, for example, can imply a duty of good faith or that wages be paid into the employment contract even though they were not included by the parties.

Terms Implied by Statute Into the Employment Contract

There is a clear imbalance of power between you and the employee. The government being fully aware of this sets out some laws to give some support and rights to the employee. Terms implied by statute into the employment contract are laws passed by the legislatureas an attempt to change the balance of power. If the employment contract does not already include such rights, the legislation will automatically imply it into the employment contract. 

An example of such a statute is the Employment Right Act 1996. In such a case where the term is implied by statute into the employment contract, the statute usually will explicitly state that the term overrides any express term that conflicts. For example, section 55 and 56 of the employment right act gives the right to paid time off for antenatal care. Therefore the employee is entitled to this whether or not it is included in the employment contract.

Terms Implied by Custom Into the Employment Contract

There are certain standard customs for certain trades. These are customs that are so common and consistent that it is assumed the parties should have been aware of them. The courts are simply there to enforce that assumption. For these terms to be implied into the employment contract they have to be either so common and generally applied in that particular trade industry or more than just a practice and lawful and reasonable. There is a need to be cautious in this area because you do not need to be aware of these customs to be bound by them. Rather it only needs to be assumed that you should have been aware.

Terms can also be implied as a result of custom in the workplace. If for example a business closes consistently for a particular holiday and the staff get paid this can become a custom that is now implied into the contract. A far-fetched example can also be if the employees take the employers  birthday off as a paid holiday. If this is done consistently for a long time it can then be implied into the employment contract as a term. 

Some Implied Terms to be Aware of in Your Employment Contract

Duty of fidelity

There is a duty of fidelity implied in the employment contract. The term is implied into all contracts and it places a responsibility on employees to serve you as an employer faithfully.  Your employees shall not act in any way that is against the interest of you or the company. This is especially useful when an employee is leaving the company to work for a competitor or to launch their own business. In such a case, if there is a post-employment restriction contract that ex-employee cannot leverage trade secrets shared during the duration of employment to his own advantage. 

The duty of fidelity also requires honesty; employees cannot go behind the company’s back to take part of the company’s profits without permission, and they cannot misuse the company’s capital. 

Duty to maintain mutual trust and confidence

This mostly comes up in the case of constructive dismissal. It is a duty to not act in a way that will damage the relationship of trust and confidence without reasonable and proper cause. It requires both parties to not act in a way in which no reasonable person in their position would act. This is an area to be mindful of because a mistake still counts as a breach. This duty is binding on both you and the employees, and it is mostly relied upon by the employee since you as the employer dictate the express term of the contract. 

You have an obligation to not conduct yourself in a way that has the potential to damage the relationship between you and your employee. Examples include physically, sexually or verbally abusing an employee, or setting unfair working conditions. You as an employer can also rely on this right and justify dismissing an employee because of a breach of this implied term. However, to rely on this as a justification for dismissing employees requires caution because the misconduct has to be serious enough to justify a breach.

Duty to pay

It should not be a surprise that employees are entitled to remuneration. This is most often included as an express term of the employment contract. But in the rare case that it is not, there is an implied term in the employment contract for employees to be paid. There is also an implied term that employees are paid at least the minimum wage as is implied by statute. If it is the case where the employee is carrying out unpaid work, then it is not an employment relationship as remuneration is one of the ingredients needed for an employment relationship to be formed.

Duty to take reasonable care for the health and safety of the employee

You have a duty of care for the physical and mental health of your employees. This includes not overworking them and being aware of when an employee needs a sick leave. This duty also means you are responsible for creating a safe working environment for your employees, thereby protecting them from physical and mental harm in the form of discrimination or bullying.

Duty to take reasonable care when providing a reference letter for your employee

You are not under any obligation to provide a reference letter for your employee. However, if you do decide to, then you come under a duty of care. This duty of care is to take care when writing or providing the reference letter. There is a duty to ensure that the information provided is true and accurate. This duty extends beyond the employment contract, and an employee can claim a breach if the carelessness of an employer causes him/her to lose out on a job or opportunity.

Can an implied term override an express term in the employment contract?

When there is a clash between an express term and an implied term, the court will likely seek to prioritize the intentions of the party. It is likely in such a case that the express term will prevail. However, an implied term can override particularly where it is implied by statute or the express term gives the employee a particular discretion.  

Do’s and Don’t For Employers!

The first thing is to ensure the lawyer drafting the contract is aware of the different essential implied terms.

The safest thing to do with implied terms is to include them in the contact. The duty of fidelity, the duty to maintain mutual trust and confidence, duty to pay and all the duties listed above should all be included in the contact. Of course, you may not be able to cover every possible ground but it is important that you cover as many grounds as you possibly can.

One thing to avoid is assumptions. No matter how obvious a term might seem (e.g. duty to pay), it is still important to include it in the contract. Avoiding assumptions will avoid many of the unnecessary legal suits.

To Sum Up

It is important to be aware of implied terms and how they apply to your employment contract. Where possible try and cover as many grounds as you can in the employment contract so implied terms do not sneak up on you when it is too late.