Most Australian small businesses rely on four main documents. These are terms of trade for customers, employment contracts for staff, a shareholders agreement if the business is a company with more than one owner, and a privacy policy if the Privacy Act covers the business. The law requires some of them and not others. All of them work best when they are written before a dispute starts.
Which contracts does a small business actually need?
No single list of contracts applies to every business. What a business needs depends on how it sells, whether it has employees, how it is set up and what customer information it keeps.
This table gives a quick overview of the four documents covered in this guide.
| Document | Who it suits | Required by law? |
|---|---|---|
| Terms of trade | Businesses selling goods or services | No, but contract law applies |
| Employment contract | Any business with employees | Can be written or verbal |
| Shareholders agreement | Companies with two or more owners | No |
| Privacy policy | Businesses covered by the Privacy Act | Yes, if covered |
What are terms of trade?
Terms of trade set out how a business sells to its customers. Payment terms are the core of them. According to business.gov.au, payment terms are the rules a business sets for how and when customers must pay, and they form part of a sales contract under contract law.
Payment terms usually cover:
- which payment methods are accepted, such as cash, bank transfer or card
- when payment is due, such as up front, in instalments, on delivery or after 30 days
- whether credit is offered, and on what conditions
- how overdue payments and debts are collected
Without clear terms, customers may pay late, dispute the payment or refuse to pay. Credit is common between businesses. The customer gets the goods or services first and pays later, often within 7, 14, 21 or 31 days.
To reduce the risk of offering credit, business.gov.au suggests running credit checks, setting credit limits and making it clear that customers do not own the goods until they have paid in full.
Unfair contract terms rules apply
Terms of trade are often a standard form contract. That means the same document goes to every customer, who has to accept it as written. According to the ACCC, since 9 November 2023 it has been illegal to propose, use or rely on an unfair term in a standard form contract, and penalties apply.
The protections cover consumer contracts and small business contracts. A business counts as small under these rules if it has fewer than 100 employees or less than $10 million in annual turnover. Examples of terms that may be unfair include terms that let only one party end the contract, or let only one party change it.
ASIC notes that each unfair term counts as a separate contravention. These rules work both ways. They protect a small business that signs a larger supplier's standard contract, and they also apply to the small business's own terms.
Does a business need a written employment contract?
The Fair Work Ombudsman says an employment contract can be in writing or verbal. Whatever form it takes, it cannot remove an employee's minimum entitlements or give them less.
Those minimums come from:
- the National Employment Standards (NES), which apply to all employees in the national workplace relations system
- an award or enterprise agreement, if one covers the employee
An award can apply on top of an employment contract. Any term in a contract that gives less than the NES has no effect. Employees who are not covered by an award or registered agreement must be paid at least the National Minimum Wage.
A written contract lets both sides see exactly what was agreed, such as the role, hours and pay, and any benefits above the minimums. It cannot override the award or the NES.
Information statements for new staff
The National Employment Standards include giving employees the Fair Work Information Statement. Casual employees also get the Casual Employment Information Statement. The Fair Work Information Statement must be given before, or as soon as possible after, a new employee starts.
Restraint clauses are changing
Many employment contracts include a non-compete clause, which limits where a person can work after they leave. The federal government has announced that it will ban non-compete clauses for workers earning less than the high income threshold in the Fair Work Act. The government's announcement said the reforms would start from 2027, after consultation and once legislation passes. Treasury has since released draft laws. Contracts drafted now may need to take this change into account.
What is a shareholders agreement and does a company need one?
Every company must be run under either a constitution or a set of default rules called the replaceable rules. These are explained by ASIC. The replaceable rules are in the Corporations Act 2001 and are the default option for proprietary companies. They cover topics such as directors' and shareholders' meetings.
A company that wants to change any of the replaceable rules must have a constitution. The replaceable rules do not apply to a proprietary company with a sole director who is also the sole shareholder.
A shareholders agreement is a separate private contract between the shareholders, and sometimes the company. The constitution deals with how the company operates. The shareholders agreement deals with how the owners deal with each other. It commonly covers:
- each owner's role in the business
- what happens when an owner wants to leave or sell
- how disagreements are resolved
- restraints on owners competing with the business
The replaceable rules do not provide for different classes of shares, and they offer little flexibility for managing disputes. This is why companies with more than one owner often use a shareholders agreement. It should be consistent with the company's constitution.
Does a small business need a privacy policy?
According to the Office of the Australian Information Commissioner (OAIC), most small businesses are not covered by the Privacy Act 1988, but some are. For privacy purposes, a small business is one with an annual turnover of $3 million or less. Turnover here includes all income from all sources, but not assets held, capital gains or proceeds from selling capital.
A small business can still be covered, for example if it:
- has had an annual turnover above $3 million in any financial year since 2002
- provides a health service and holds health information, such as an allied health practice
- is a reporting entity under anti-money laundering laws, for those activities
Businesses covered by the Act must follow the Australian Privacy Principles. APP 1 requires a clearly expressed and up-to-date privacy policy about how the business manages personal information. The business must take reasonable steps to make it available free of charge, usually on its website.
Small businesses can choose to opt in to the Privacy Act, and the OAIC recommends they consider it. The OAIC has also recommended removing the small business exemption, so this area may change.
When is a business lawyer worth the fee?
Templates and free government guidance can cover simple situations. A business lawyer can help in situations where a poorly drafted document could cost far more than legal advice, such as:
- setting up a company with a co-founder, business partner or family member
- writing standard terms that will go to many customers, so they are checked against the unfair contract terms rules
- hiring the first employees, or writing restraint clauses while the non-compete laws are changing
- being asked to sign a large supplier's or landlord's contract
- bringing in an investor, selling the business or resolving a dispute between owners
- working out whether the Privacy Act applies to the business
Before engaging a lawyer, it helps to ask whether they work with small businesses in your industry, and to get a written quote for a fixed scope of work. You can find a business lawyer on FIZO and see whether they appear on the regulator's register.
This guide is general information only. It does not take your situation into account.