Written by Tyler Lord – National Business Development Manager Success Group
Many business owners don’t realise that having employment contracts is just the beginning of protecting their company. A shocking statistic reveals that fewer than 25% of businesses fully understand the distinction between contracts and policies. Even fewer have both in place. This knowledge gap exposes companies to significant legal risks. Every business, regardless of size or industry, faces the same legal obligations and penalties. Very few receive the support needed to navigate these complexities. In this article our very own Tyler Lord breaks down the critical differences between contracts and policies. He also explains why robust, tailored policies are essential for risk mitigation and long-term success.
Tyler Talks
One of the questions I ask business owners when I meet with them is a simple one: “Do you know the difference between contracts and policies and the importance of strong, tailored policies?”. I think many would be surprised to learn that less than 25% of the businesses I meet with actually know the answer to that question and even fewer have both contracts and policies in place.
This statistic is through no fault of their own. It is through the lack of educational resources available to business owners, which leaves a huge gap in the areas of risk mitigation. Most business owners/managers are not experts in the field of Human Resources (HR). They are experts in their own field of work, whether that be construction, engineering, restaurants etc.
Unfortunately, all these businesses and industries are all treated as if they should also be experts in employment law. Regardless of the industry or the size of their business, every business still has the same legal obligations, responsibilities and most importantly penalties but nowhere near the same level of support or resources available to them. This is where Success HR comes in to plug the gap for many businesses, offering them a similar level of support as these larger corporations who have internal HR experts but at a margin of the cost and occasionally providing free resources, materials and education.
Contracts vs Policies
In the interest of helping to close the gap to mitigate risk and based off a personal grievance case I just finished reading against First Security Guard Services Limited, I would like to explain the critical difference between contracts and policies. As well as not only how having policies is helpful, but why strong tailored policies are essential.
A contract is easy to understand. It is a legal obligation to confirm the employment relationship between employer and employee and contains clauses that are legally required to include. A business audited that does not have employment agreements in place may be fined up to $1,000 per employee who does not have a contract by the labour inspectorate and enforceable by the employment relations authority, payable to the crown.
There are 3 things I see when I meet business owners:
- 1. An employment contract that is typically 15-30 pages long. This is standard but contains little to no policies in the contract or as external documents.
- 2. An employment contract that is 50+ pages long. More common in larger businesses, typically written by a lawyer and have policies written into the contract. A big no-no in the world of HR. I will explain why further on.
- 3. An employment contract that is 15-30 pages long but has policies that lay outside of the contract as separate documents. This is exactly what I like to see when I meet a business. Unfortunately only around 10% of businesses I meet with are set up like this.
Regarding the second outcome above, lawyers are brilliant people and write fantastic legal documents however they do have flaws. The flaw being, they think so contractually minded that they believe everything should go into a contract. However when it comes to employment relations, that couldn’t be further from the truth. Many times leaving business owners in sticky situations. Let me explain.
Policies in focus
The critical differences between contracts and policies, are that policies are changeable as the business grows, downsizes, adapts or changes direction. These variable policies should never be in a contract. Once they are written into a contract, they become contractual. If that business ever wanted to amend or update a policy, they would have to go through a consultation process with staff. They would have to explain what changes the company wants to make, consider the employees feedback, let the employees know they have considered the feedback, are still planning to go ahead with the change, update the contracts, roll them out to staff and then ask them to sign the new contract to which the employee can say…. Yup, you guessed it. NO.
You are trying to change the original terms and conditions of the agreement from when they signed on with you. So, what now? Have half the staff sign and the other half don’t? Make the staff who don’t sign redundant, an even riskier and more drawn-out process? It becomes extremely complicated and difficult for owners and managers to navigate.
Having the policies separate from the contract gives you the ability, within reason, to make changes without, or with limited consultation. Of course, in good faith you should always consult. The reason we are able to do this is we implement a specific clause in the employment contract. This is not verbatim, but it will read something along the lines of: “You will be issued out policies and procedures. The policies do not specifically make up part of the employment agreement however, they must be adhered to. Failure to do so may result in disciplinary action up to and including termination of your employment. The employer reserves the right to update, amend, remove or add in policies at their discretion.”
Policies may include but are not limited to: drugs and alcohol, dress and appearance, bullying and harassment, vehicle, GPS, surveillance, data and privacy, phones, IT and equipment, returns, deductions, excess, duration of warnings, credit cards, accommodation and food, lateness and sickness, leave, bonus structure etc.
Basic examples
I will give you an easy example to understand why policies are so powerful. Let’s say you use a generic Ministry of Business, Innovation and Employment (MBIE) templated contract (FYI, I do not recommend using these). The notification for sick leave reads: “If you are going to be late or sick you must notify your employer as soon as reasonably practicable.” So, if my start time is 8AM and I text you at 9AM to say I’m not coming in because I’m sick are you going to discipline me? Give me a written warning?
What if I’ve done this 10 times in the past 6 months are you going to terminate me? Because if you do, you will have a personal grievance (PG) on your hands for unjustified dismissal, and this is an easily winnable case for a quick 15K tax free. And just to rub salt in the wounds, I’m going to apply for reinstatement too, which we know the courts are awarding more frequently now. You want to know my argument and every lawyer’s argument? “My contract says to notify you as soon as reasonably practicable, when I texted you, that was my earliest convenience. You also complained I didn’t call you, my contract doesn’t say I have to call you, it just says I have to notify you, which I did.” CHECKMATE.
Now, we all know it’s easier to retain then retrain, so ideally you want to keep this employee. You just want his behaviour corrected. Having a policy around notification for sick leave/lateness makes this process much easier. All I have to do is update the policies and procedures to state: “If you are going to be late or sick you must notify your employer/manager at least 1 hour before the start of your shift. You must do this via phone call and make at least 2 genuine attempts. If you do not reach your employer/manager, you may leave a voice message or text your reason as to why you are late or sick. Failure to do so will result in disciplinary action and repeat behaviour may lead to termination of your employment.”
Now they can either correct their behaviour and comply with the new policy, or you start a disciplinary process and work toward exiting them from the business.
Let’s fast forward, it’s now 3 months later and I am still not following the new process. I have had a letter of concern (LOC), a written warning and I’m now on my final warning. Then I comply with the policies and 8 months later, I fail again to follow process. I was already on my final warning so now you terminate my employment. And I raise a personal grievance (PG)… wait, WHAT!?
You as the employer followed process, you did everything correct, how can they raise a PG and win, surely not right? Well, maybe. Many times, I see warnings being issued out to employers that do not indicate how long that specific warning will remain in place for. They also do not have a policy around the duration of warnings. In which it should state that a LOC will remain in place for 3 months, a written warning for 6 months and a final warning for 12 months.
So, my argument will be: “It’s been 8 months since my last breach of that policy. When do we wipe the slate clean and start again or move back 1 stage? We have seen this many times in the Employment Relations Authority (ERA) and many times they are awarded in favour of the employee. A durations of warnings policy is often overlooked, maybe 1 in 100 businesses I meet have it.
Personal Grievance – First Security Guard Services Limited
The ongoing case of First Security Guard Services Limited is a PG for unjustified dismissal as the employee was recorded using a dashcam in the car and using his phone on multiple occasions whilst driving. This case will likely be won by the employer however. The only reason the courts have said that the employee has a case, albeit a weak one, is because although they had a policy around dashcams in the car to monitor employees and policies around traffic infringement, drugs and alcohol etc, they didn’t specifically have one around using a phone whilst driving.
They shot themselves in the foot by saying that if the phone was in the phone holder he wouldn’t have got in trouble for answering calls, but because he was holding it, they decided to discipline him. His argument is, either way he would have been distracted and you have no policy saying I can’t answer calls without it being in the holder.
This case is all because their policies were not specific enough. If they were, this case wouldn’t even be happening right now. Something so basic but overlooked. Now imagine if they had no policy at all and the employee crashed. Who pays the excess? Well unless you have an excess policy and a deductions policy, the company would have to pay for the excess. Deduction from pay without this policy and consultation would be a breach of the wages protections act.
Need help?
I could keep writing forever about policies. However I hope these easy-to-understand examples clearly indicates the differences between contracts and policies and showcase just how important strong, tailored and specific policies are. You may have great employees; you may have some good and some bad or you may have all bad employees. Everyone wants that family culture in their business. Employees are your biggest asset whilst also being your biggest risk. You never know when you’re going to get a bad egg. Strong, tailored policies may be just the thing that saves and protects you and your business from many future headaches.
If you are not with Success HR and would like a free side review of any contracts or policies, please reach out to me personally and I would be happy to help. If you are with Success HR and would like some policies amended or new ones developed for your business, please call or email or Susan. Or contact us on our website here: https://successgrouphr.com/contact-us/
