Contracts are considered vitally important and can have far reaching effects if not properly documented and structured. However, employment contracts or 'letters of appointment' are often drafted quickly with little thought to consistency and whether the package and structure conform to company policy. Companies that want to improve their governance should look toward generating these contracts from their payroll and HR solutions.
"Contracts that are incorrectly drafted can impact two areas: tax and disputes," explains Peter Ibbotson, CEO of Praxima Payroll Africa Ltd. "Very often, a company will structure an employee package through negotiation. It is then captured onto the payroll/HR system without checking to see if it complies with company policies. Issues such annual and sick leave, benefits and overtime calculations, for example, are built into the employment contracts and must be consistent with good labour practice and company policy to prevent potentially expensive litigation or settlements.
"It is thus better to create and extract the contract from the payroll/HR system, which is rules-based and will factor in legal and company-specific parameters. This results in a higher probability that the contract will be correct."
In terms of disciplinary measures, many may consider the employment contract a separate matter, yet it should be an extension of a company's disciplinary policies and documents, notes Ibbotson, as it will stand the company in good stead if it is ever called to the CCMA over an employee dispute.
"Companies that don't draft and administer their contracts properly are usually inconsistent in defining their policies," Ibbotson adds. "If an employee is disciplined or dismissed for a certain offence, for example, and another employee that commits the same offence receives a different 'punishment', this inconsistency can result in the reinstatement of the first employee or can have huge financial repercussions. In a worst case scenario, the company might have to pay the wronged employee a 24-month severance package."
In addition to labour disputes, an employment contract that is badly compiled can have negative tax implications. A typical example of this is when a company states that the provident fund contributions will be split 50/50 between employer and employee, yet the company pays the amount in full. Imagine having to explain to an employee that they are liable for a large shortfall due to an oversight - by the company - in their letter of appointment.
"Contracts should be updated on a regular basis to ensure they comply with new policies. These changes might be driven by legislation or companies might experience a dynamic growth phase that will require an update to policies and rules.
Ibbotson advises: "Rather than simply filing an employment contract and letting it gather dust, it is prudent to embark on an annual exercise of reviewing and updating employees' contracts. To relieve the strain of conducting an update on all employee contracts at one time, they could be reviewed on the anniversary of the employee's engagement."
This process could be managed through a payroll/HR solution, easing the burden of having to drive contract reviews. Flexible reporting will enable companies to establish which contracts are due for review and which areas need to be amended. Ibbotson notes: "The payroll/HR solution must be up to date. If the data does not reside in the application, it cannot be extracted or reported on.
"Generating and managing contracts through a payroll/HR solution can save companies time and money and ensure they are adhering to good practices," he concludes. "After all, isn't that what all companies should be doing?"
Share
Editorial contacts