The contract of employment 

Employment law in Australia begins with a straightforward proposition and then complicates it. The relationship between an employer and an employee is a contract, formed and interpreted according to ordinary contract law principles. But it is overlaid with terms the law implies because of the special character of the relationship, and it sits inside a comprehensive statutory scheme that operates alongside the contract rather than replacing it.

A contract, with implied terms

An employment contract can be written, oral, or a mixture of both, and like any contract it requires offer, acceptance, consideration and an intention to create legal relations. What distinguishes it is the set of duties courts imply into every employment relationship regardless of what the parties wrote down. These implied duties fill gaps and, in some cases, cannot be excluded even by express agreement.

Duties the employer owes

The most significant implied employer duty is mutual trust and confidence: an employer must not, without reasonable cause, engage in conduct calculated or likely to destroy or seriously damage the relationship of trust and confidence between employer and employee. Employers also owe a duty to provide a safe system of work (reinforced by statutory work health and safety duties), a duty to pay the agreed remuneration, and, in some circumstances, a duty to provide work rather than merely pay for it, particularly where the employee's remuneration or reputation depends on actually performing the role.

Duties the employee owes

The employee's central implied obligation is fidelity (sometimes called good faith): an employee must serve the employer honestly and must not act inconsistently with the employer's interests, underpinning restrictions on competing with the employer while employed and on misusing confidential information. Employees also owe a duty to obey lawful and reasonable directions and a duty to exercise reasonable care and skill. A direction that is unlawful, or unreasonable in the circumstances, does not have to be obeyed, and refusing it is not a breach.

These implied duties operate independently of any express written terms, though an express term inconsistent with a non-mandatory implied duty may in some cases displace it. Some implied duties, and most statutory protections discussed elsewhere in this module, cannot be contracted out of at all.

Employee or independent contractor

Not everyone who performs work for another person is an employee. A person may instead be an independent contractor, running their own business and contracting to supply services rather than labour. The distinction matters enormously: employees attract the statutory protections and entitlements built around the employment relationship — unfair dismissal protection, minimum standards, discrimination protections tied to employment, and the work health and safety duties owed to "workers" — while independent contractors generally do not, and instead operate under commercial contract and consumer-protection principles.

Australian courts approach the question by construing the totality of the relationship as reflected in the parties' rights and obligations, with particular attention to the terms of the written contract where one exists — the approach confirmed in Hollis v Vabu Pty Ltd (2001) 207 CLR 21,¹ where bicycle couriers labelled "independent contractors" in their own contracts were nonetheless found to be employees. Traditional indicia — control over how work is performed, whether the worker can delegate the work, who bears the risk of profit and loss, who supplies equipment, and how integrated the worker is into the business — remain useful evidence of the relationship's character, though the primary focus is now the contractual rights actually agreed. A label the parties attach to their own relationship is not decisive if the substance of the arrangement is one of employment.

That primary focus is recent, and it has a source. In Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd (2022) 275 CLR 165³ Kiefel CJ, Keane and Edelman JJ held at [59] that where the parties "have comprehensively committed the terms of their relationship to a written contract the validity of which is not in dispute", characterisation "proceeds by reference to the rights and obligations of the parties under that contract", and there is "no occasion" for "a wide-ranging review of the entire history of the parties' dealings". The indicia are not abolished: at [61] their Honours confirmed the totality of the relationship still matters, but that a matter must be "concerned with the rights and duties established by the parties' contract, and not simply an aspect of how the parties' relationship has come" to work in practice.

Then Parliament put practice back in, for Fair Work Act purposes. Section 15AA of the Fair Work Act 2009 (Cth), in force from 26 August 2024, requires employee status under the Act to be determined by "ascertaining the real substance, practical reality and true nature of the relationship", with regard had "not only to the terms of the contract governing the relationship, but also to other factors relating to the totality of the relationship including, but not limited to, how the contract is performed in practice". The Note to the section says it was enacted as a response to Personnel Contracting and Jamsek.

Two limits decide whether that matters to your problem. Section 15AA operates "for the purposes of this Act", so it does not touch characterisation at common law — whether a worker is an employee for vicarious liability in tort is still answered by Personnel Contracting. And ss 15AB and 15AC let a qualifying high-income individual opt out, so check whether s 15AA applies to the relationship rather than assuming it does.

The national workplace relations system, and Western Australia

Since the Fair Work Act 2009 (Cth), Australia has operated a largely national system of workplace relations, built primarily on the Commonwealth's constitutional power to legislate with respect to trading, financial and foreign corporations. Because the great majority of employers are constitutional corporations, the great majority of private-sector employees across the country are covered by the one Commonwealth scheme — the same unfair dismissal framework, the same minimum standards, and the same enterprise bargaining rules, regardless of which state they work in. Those minimum standards — the National Employment Standards — cannot be displaced by agreement.²

Western Australia is the well-known exception worth remembering. WA retains its own state industrial relations system, covering employers who are not constitutional corporations — broadly, sole traders, partnerships, and some state government employment — and their employees. That state system operates alongside the national system rather than having been absorbed into it: coverage depends on the legal character of the employer, not simply on working in Western Australia. This split matters for every other topic in this module, since eligibility for unfair dismissal, national employment standards, and the applicable discrimination framework can all differ depending on whether an employer falls inside or outside the national system.

Applying this in a problem question

1. Identify whether a contract of employment exists at all, and on what terms, express and implied.
2. Ask which implied duty is engaged — trust and confidence, fidelity, obedience to lawful directions, or care and skill — and state it precisely rather than generally.
3. If the character of the relationship is disputed, work through the indicia of employment versus independent contracting, focusing on the terms of any written contract first.
4. Determine whether the employer is a constitutional corporation (national system) or, exceptionally, a Western Australian employer outside that description (state system), since this affects which statutory protections are available.
5. Only then move to the statutory questions covered elsewhere in this module — unfair dismissal, discrimination, and work health and safety.