Employment Contracts in Australia: What Every SME Owner Needs to Know

An employment contract is the written or verbal agreement that sets out the terms of the working relationship between an employer and an employee. In Australia, a written contract is not legally required for most permanent employees — but every contract, written or not, is automatically overridden by the Fair Work Act 2009, the National Employment Standards (NES), and any applicable Modern Award. A contract can give an employee more than the legal minimum, but it can never give them less. For casual employees, fixed-term employees, and anyone on an Individual Flexibility Arrangement, a written contract is effectively essential in practice.

For small and medium businesses without an internal HR team, this is where the risk sits: many SMEs are working from a template downloaded years ago, a verbal agreement, or a contract that was never updated when an employee’s pay, hours, or role changed. This guide explains what the law actually requires, what a compliant contract should contain, and the mistakes that most commonly land Australian small businesses in front of the Fair Work Ombudsman.

What Is an Employment Contract, Legally Speaking?

An employment contract is the agreement — written, verbal, or a combination of both — that establishes the employment relationship. According to Fair Work Ombudsman guidance, most employees covered by the national workplace relations system get their minimum entitlements from a combination of sources that sit on top of, or alongside, the contract itself: the Fair Work Act 2009, the National Employment Standards, any applicable Modern Award or registered agreement, and the contract terms themselves.

The critical legal principle for SME owners is simple: whatever the contract says, the NES and the relevant Modern Award set the floor. A contract cannot provide less than the minimum entitlements set out in the applicable award or agreement, even if both parties sign it. A clause that tries to undercut those minimums is not just unwise — it is legally unenforceable, and the NES or award entitlement applies automatically in its place.

This means an employment contract’s real job in an SME is not to replace the legal minimums, but to:

• Confirm the specific terms that sit above the minimums (job title, salary, hours, location, reporting line)
• Record entitlements and obligations that aren’t covered by the NES or award (confidentiality, intellectual property, restraint of trade where appropriate, probation)
• Reduce the risk of disputes by making expectations explicit in writing

The National Employment Standards: The Non-Negotiable Floor

The National Employment Standards are 11 minimum entitlements set out in the Fair Work Act 2009 that apply to all national system employees, regardless of what an individual contract, award, or enterprise agreement says. Fair Work Commission guidance confirms these cannot be reduced by agreement between employer and employee, by a Modern Award, or by an enterprise agreement — they are an absolute floor.

The 11 NES entitlements are:

1. Maximum weekly hours – 38 hours per week, plus reasonable additional hours
2. Requests for flexible working arrangements – certain eligible employees can ask to change how, when, or where they work
3. Offers and requests to convert from casual to permanent employment
4. Parental leave and related entitlements – up to 12 months of unpaid leave, plus the right to request an additional 12 months, along with other maternity, paternity and adoption-related leave
5. Annual leave – four weeks of paid leave per year, plus an additional week for some shiftworkers
6. Personal/carer’s leave, compassionate leave and family and domestic violence leave
7. Community service leave (including jury duty)
8. Long service leave
9. Public holidays – including paid absence on a public holiday for employees who would otherwise have worked
10. Notice of termination and redundancy pay
11. Provision of a Fair Work Information Statement – employers must give this to every new employee, and it covers the NES, modern awards, agreement-making, freedom of association, termination of employment, individual flexibility arrangements, right of entry, transfer of business, and the roles of the Fair Work Commission and Fair Work Ombudsman

Employees engaged on a fixed-term contract must also be given the separate Fixed Term Contract Information Statement (FTCIS) before, or as soon as practicable after, signing.

Do You Legally Need a Written Contract?

Not for most permanent employees — but the practical reality for SMEs is different from the strict legal minimum.

A written contract is not the only way entitlements get set: awards, the NES, and registered agreements apply regardless of whether anything is on paper. However, without a written contract, an SME has no clear record of the specific terms both parties agreed to — salary, hours, duties, and any above-award conditions — which becomes a serious problem the moment there’s a dispute, a performance issue, or a termination.

For certain employment types, a written agreement is effectively mandatory in practice:

• Casual employees — since the casual employment rules changed on 26 August 2024, a clear written statement of the engagement (including that it is genuinely casual, with no firm advance commitment to ongoing work) materially reduces the risk of a later casual conversion or backpay dispute.
• Fixed-term employees — since 6 December 2023, fixed-term contracts (including any extensions or renewals) generally cannot run longer than two years, cannot be renewed more than once, and cannot be used to keep an employee on a rolling series of contracts for the same or substantially similar work beyond that cap. Some exceptions apply — for example, where the employee earns above the high income threshold, is engaged for specialised or peak/emergency work, or is an apprentice or trainee, and the high income threshold is $190,100 from 1 July 2026.
• Individual Flexibility Arrangements (IFAs) — must be recorded in writing and signed by both parties to be valid.

Probation Periods: A Common Point of Confusion

Many SME owners believe a “3-month probation period” is a legal concept that removes an employee’s rights. It isn’t. Probation periods are not defined in the Fair Work Act and typically range from three to six months from the employee’s start date. While on probation, employees continue to receive the same entitlements as anyone not on probation — full pay, leave accrual, and notice from day one.

What the law does set is the separate minimum employment period, which determines when an employee becomes eligible to bring an unfair dismissal claim:

• 6 months for businesses with 15 or more employees
• 12 months for small businesses with fewer than 15 employees

This minimum employment period — not whatever the contract’s probation clause says — is what actually governs unfair dismissal eligibility. A probation clause that says “3 months” does not shorten this legal protection window, and it doesn’t remove an employee’s right to bring a general protections claim (for example, over discrimination or exercising a workplace right) at any point, including on day one.

Practical takeaway: Set your probation length based on how long you genuinely need to assess someone in the role — commonly three to six months — and document performance conversations throughout, rather than relying on probation as a safety net.

Current Rates You Need to Get Right

Getting the contract’s pay terms wrong is one of the fastest ways to end up in a Fair Work Ombudsman investigation. As of 1 July 2026:

• The National Minimum Wage is $1,004.90 per week (based on a 38-hour week), or $26.44 per hour
• Casual employees relying on the National Minimum Wage must receive at least $33.05 per hour, which includes the 25% casual loading
• Award-covered employees must receive a 4.75% increase to their minimum award wages, with the lowest ongoing rate in any award required to be at least $1,004.90 per week ($26.44 per hour), and any entry-level rate for the first six months of employment required to be at least $978.10 per week ($25.74 per hour)

Most Australian employees — and most SME staff — are covered by a Modern Award, not just the National Minimum Wage. Before you finalise any contract, check the applicable award through the Fair Work Ombudsman’s Find My Award tool or the Fair Work Commission’s Pay and Conditions Tool, because award pay rates and conditions, including penalty rates and allowances, may be higher than the National Minimum Wage, and the minimum entitlements in the relevant award apply even where a contract is silent on them.

What a Compliant Employment Contract Should Include

A solid SME employment contract should clearly set out:

• Parties and start date — full legal names, ABN/entity name, and commencement date
• Employment type — full-time, part-time, casual, or fixed-term, and if fixed-term, the specific end date or event
• Position and duties — job title, key responsibilities, and reporting line
• Hours of work — ordinary hours, and how additional hours or overtime are handled
• Remuneration — base salary or hourly/award rate, pay frequency, and how the applicable award or agreement interacts with it
• Applicable Modern Award or agreement (if any), noting that award terms apply regardless of what the contract says
• Location of work — including any expectation of travel or remote work
• Probation period — length and review process, alongside a clear note that this doesn’t override statutory notice or unfair dismissal timeframes
• Leave entitlements — referencing the NES minimums, plus any above-NES leave the business chooses to offer
• Termination — notice periods (in line with the NES and any award), and circumstances allowing summary dismissal
• Confidentiality, IP, and (where genuinely appropriate) restraint of trade clauses
• Reference to workplace policies — many SMEs find it far more effective to keep detailed conduct, IT, and workplace behaviour rules in a separate Employee Handbook rather than cramming them into the Employment Contract itself, since a handbook can be updated without re-signing every contract

Two SME Examples

Example 1 — The promoted employee. A retail business owner promotes a sales assistant to store supervisor, with a pay increase and new duties, but never issues an updated contract — the employee is still technically working under their original casual agreement. Eighteen months later, a dispute arises over overtime entitlements, and the business has no written record of the new role, hours, or salary structure. A simple variation letter or new contract at the time of promotion would have avoided the ambiguity entirely.

Example 2 — The “standard” fixed-term contract. A hospitality business keeps re-hiring the same event coordinator on a series of six-month fixed-term contracts for what is, in substance, ongoing work. Once the total period exceeds two years or a second renewal occurs, this risks breaching the fixed-term contract limits introduced in December 2023 — and the employee may be entitled to be treated as a permanent employee from that point, with the redundancy and unfair dismissal protections that come with it.

Common Mistakes SMEs Make with Employment Contracts

• Using a generic template found online that doesn’t reflect the applicable Modern Award or the business’s actual state/territory obligations
• Never updating the contract after a promotion, pay rise, or change in duties, leaving outdated terms as the only written record
• Assuming a probation clause limits unfair dismissal rights — it doesn’t; the statutory minimum employment period applies regardless
• Treating casual employees as if no paperwork is needed — since the August 2024 casual employment changes, a clear written casual engagement statement matters more, not less
• Rolling fixed-term employees over repeatedly without tracking the two-year/one-renewal cap
• Setting pay rates from memory instead of checking the current award rate and National Minimum Wage each financial year
• Failing to provide the Fair Work Information Statement (and the Fixed Term Contract Information Statement, where relevant) to new starters
• Mixing detailed workplace conduct rules into the contract itself, rather than in a separate, easily updated Employee Handbook

Employment Contract Checklist for SME Owners

Use this as a quick pre-signing check for any new hire:

[ ] Confirmed the correct Modern Award (or absence of one) using the Fair Work Ombudsman’s award finder

[ ] Pay rate meets or exceeds the current award/National Minimum Wage rate

[ ] Employment type (full-time/part-time/casual/fixed-term) is correctly identified and consistent with how the role will actually operate

[ ] Fixed-term contracts checked against the two-year/one-renewal cap (unless a genuine exception applies)

[ ] Probation period length is reasonable and clearly explained as separate from the statutory minimum employment period

[ ] Notice and termination clauses align with NES minimums

[ ] Fair Work Information Statement provided (plus FTCIS for fixed-term hires)

[ ] Contract references, rather than duplicates, relevant workplace policies in the Employee Handbook

[ ] Contract signed and dated by both parties, with a copy retained by the business

[ ] Calendar reminder set to revisit the contract on promotion, restructure, or annual award wage increases (each 1 July)

Related Reading in the HR Knowledge Centre

This article works best alongside:

• Employee Handbooks: What Australian SMEs Should Include and Why
• Casual Employment in Australia: Rules, Conversion Rights and Common Mistakes
• Ending Employment the Right Way: Notice, Redundancy and Unfair Dismissal Risk for SMEs

How HR Excellence Partners Supports SMEs

Employment contracts sit right at the intersection of legal risk and everyday business practicality — which is exactly the gap most SMEs feel without an internal HR function. HR Excellence Partners works with small and medium Australian businesses to review and rebuild employment contracts so they reflect the correct Modern Award, current NES entitlements, and the realities of how the business actually operates — not a generic template. We also help SMEs build the companion documents, like Employee Handbooks and onboarding checklists, so contracts stay focused and easy to maintain as the business grows.

If you’re not confident your current contracts would hold up to a Fair Work Ombudsman review, the best next step is a structured review of where you stand. Book an HR Health Check with HR Excellence Partners and we’ll assess your contracts, policies, and compliance position against current Fair Work requirements. Use code HEPFREE at checkout to have the cost of your HR Health Check waived.

Vas Papadopoulos Founder & Principal HR Consultant HR Excellence Partners vas@hrexcellencepartners.com.au hrexcellencepartners.com.au +61 432 244 744

References

1. Fair Work Ombudsman, About employment contracts — https://www.fairwork.gov.au/employment-conditions/employment-contracts/about-employment-contracts
2. Fair Work Ombudsman, National Employment Standards — https://www.fairwork.gov.au/employment-conditions/national-employment-standards
3. Fair Work Ombudsman, Introduction to the National Employment Standards fact sheet — https://www.fairwork.gov.au/tools-and-resources/fact-sheets/minimum-workplace-entitlements/introduction-to-the-national-employment-standards
4. Fair Work Commission, National Employment Standards — https://www.fwc.gov.au/work-conditions/minimum-wages-and-conditions/national-employment-standards
5. Fair Work Ombudsman, Probation — https://www.fairwork.gov.au/starting-employment/probation
6. Fair Work Ombudsman, Fixed term contract employees — https://www.fairwork.gov.au/starting-employment/types-of-employees/fixed-term-contract-employees
7. Fair Work Ombudsman, New Fixed Term Contract Information Statement — https://www.fairwork.gov.au/newsroom/news/new-fixed-term-contract-information-statement
8. Fair Work Ombudsman, Minimum wages — https://www.fairwork.gov.au/pay-and-wages/minimum-wages
9. Fair Work Ombudsman, Minimum wage increase starts today (1 July 2026) — https://www.fairwork.gov.au/newsroom/media-releases/2026-media-releases/july-2026/20260701-minimum-wage-increase-media-release
10. Fair Work Ombudsman, Minimum wages increase from 1 July 2026 — https://www.fairwork.gov.au/about-us/workplace-laws/annual-wage-review/annual-wage-review-2026
11. Fair Work Act 2009 (Cth) — https://www.legislation.gov.au/C2009A00028