What are Smart Employment Contracts? Smart Employment Contracts are digital agreements that use blockchain technology to automate and enforce employment terms without human intervention. By using distributed ledger technologies, these contracts can automatically and immutably execute terms expressed, wholly or partially, in computer code. A smart contract is “trustless” because, in theory, it removes the need for trusted middlemen and is capable of enforcement without human intervention.
How do Smart Contracts work? Distributed Ledger Technologies Distributed ledger technologies ('DLTs') are systems that allow multiple parties to have a synchronised copy of a digital ledger across different locations. A digital ledger is an electronic record-keeping system that logs transactions or data entries to make them secure, transparent, and immutable.
A key feature of DLT is decentralisation. Unlike traditional ledgers maintained by a single central authority, DLTs are distributed across multiple nodes, making them resistant to central points of failure. DLTs are consensus mechanisms, allowing parties who may otherwise disagree to agree on the state of facts they register.
Blockchain The most well-known iteration of DLT is blockchain, which is used to store transaction history. Blockchain is a list of linked blocks connected using hash codes, where each lock references the previous block in the chain. This decreases the possibility of anyone tampering with block content since this would invalidate all successive blocks. The blockchain maintains a stable record of each party’s obligations and performance over time, executing any necessary payments as conditions are met.
How can Smart Contracts be used in Employment? Traditional employment contracts (TECs) bind employers and employees and outline the terms of employment, including salary, duties, and termination conditions. TECs are typically written and flexible, allowing for human judgement and adaptation when circumstances change. Contrastingly, Smart Employment Contracts use code and DLT to automate employment terms and enforcement. In theory, this promotes transparency and efficiency.
How would Smart Employment Contracts work? Currently, Smart Employment Contracts are largely experimental and lack widespread use.
Academics from the Department of Information Systems, College of Computer and Information Sciences at King Saud University propose a framework for using Smart Contracts and DLTs to manage employment contracts.
The framework enables employers to create contracts and employees to agree to terms in a decentralised manner, particularly when employers and prospective employees are geographically separated. This results in transparent, traceable employment contracts stored in a tamper-proof ledger.
Under their framework, a contract template specifies job responsibilities, benefits, terms, rights, and obligations. This template contains details specific to each employment contract and is stored as objects within the blockchain. Employers initiate Smart Employment Contracts by adding contract objects to the blockchain, which employees must approve to establish the agreement. Transactions within the Smart Employment Contract allow for extending, updating, or terminating the contract, with approval required from both parties.
Employees can raise disputes through the blockchain, which employers can respond to, capturing the quality of the employer-employee relationship. Storing disputes on the blockchain ensures transparency and accountability, though verifying claims may require human investigation.
The framework also facilitates viewing job candidates' working history and employers' hiring history, supporting informed employment decisions. Each Smart Employment Contract is tailored to specific templates, such as those for construction workers or medical practitioners, ensuring that relevant terms and conditions are captured and managed effectively.
The Legal View of Smart Contracts Various assessments of Smart Contract legal character exist. One view is that Smart Contracts are legal actors. A radical view is that Smart Contracts create closed technological legal systems that operate as alternatives to existing legal systems. Some commentators suggest that Smart Contracts are not enforceable contracts but merely software that enables the performance of predetermined obligations. However, this approach disregards the parties’ intention for the code to be legally binding.
Ultimately, it is preferable to view Smart Contracts as bargains operating within the existing frameworks of contract law.
How does the Law Enforce Smart Contracts? Australian courts have applied orthodox contract law principles to other forms of electronic agreements, such as “clickwrap” and “browsewrap” agreements. Hence, an examination of the existing requirements for a valid contract can demonstrate that Smart Contracts are, in their typical form, capable of being enforceable between contracting parties.
Agreement, Intention to contract A Smart Contract offer and acceptance must be effectively communicated to their addressee. DLTs provide a mechanism for party communication. Each user has a pair of cryptographic keys (a public and a private key) to conduct secure transactions. Public keys are hashed versions of a cryptocurrency's private keys, digital signatures used to provide proof of ownership and create a public address. An offer is made as a message referencing the offeree’s public key and is displayed via the program used to access the DLT. Like other online communication methods, this transmits an offer with requisite certainty and intention.
Alternatively, the Smart Contract may be formed after written or oral communication between parties, with both offer and acceptance off-ledger. In this case, transmitting the contract code would be a unilateral act of performance.
Through analogy to other forms of electronic communication, such as email, aspects of the Smart Contract agreement, including mode of acceptance and time of formation and receipt, can be deemed adequate.
Certainty and completeness Code is inherently certain. Two compatible systems will always ascribe the same result to a given string of code. In that sense, computer code, in theory, carries greater certainty than natural language contracts. In the case of complex code, Australian courts have consistently accepted expert evidence regarding its operation.
Capacity While the identities behind keys in a public network will typically remain anonymous if parties have agreed to engage on this basis, the positive presumption of capacity means that concealed identities do not prevent contract validity and enforceability. Even so, parties are advised to negotiate off-ledger identification.
Consideration The doctrinal validity of Smart Contracts requires consideration flowing between parties under the bargain theory. Smart Contract code is self-enforcing. If a gratuitous promise expressed in code is committed to a distributed ledger, it will execute automatically. Hence, promises not recognised as consideration being enforced by Smart Contracts create the possibility of circumstantial Smart Contract invalidity.
Evidently, Smart Contracts are capable of enforcement.
Are Smart Employment Contracts a Good Idea? Potential Benefits of Smart Employment Contracts Smart Contracts potentially allow for automated onboarding and offboarding, enhanced efficiency by cutting administrative overheads, accountability and transparency provided by the immutable record, and timely payments through automated triggers upon milestone completion. Moreover, Smart Employment Contracts can use oracles to automatically trigger terms based on seasonal needs, ensuring timely hiring and termination. Smart Employment Contracts could automatically disburse a bonus to an employee meeting specified performance goals.
Limitations of Smart Contracts in Employment The inherent limitations and inflexibilities of Smart Contracts make them unsuitable in Employment law.
Employment relationships are often very fluid. In preparing a contract to describe and regulate that relationship, employers often reserve considerable discretion over important aspects of the relationship, such as what duties are to be performed, when and how. They rely on the employee’s obligation to cooperate in pursuing the employer’s business interests rather than spelling out duties in intricate detail in a written document.
Rigidity in construction: Employers may exploit the preprogrammed, rigid nature of Smart Employment Contracts. Smart Employment Contracts could be designed with terms that heavily favour employers and are difficult for employees to challenge. Making discretionary decisions: Employers may use the rigidity of Smart Employment Contracts to avoid making discretionary decisions that could benefit employees. Employers exercising discretion requires having a rational and honest opinion or satisfaction about the matter. Moreover, Smart Employment Contracts cannot assess the employer’s rationality or honesty in the manner required by common law. Consequently, inflexibility could prevent fair negotiation, heightening power imbalances and opportunities for employee exploitation in ECs.Performance assessment and termination: Smart Employment Contracts cannot handle the subjective assessments required for effective performance management and discipline or reflect conditional processes in ECs. Certain powers and discretions of an employer are conditioned on certain processes being completed. An example of this would be the right to terminate conditional on the employer giving the employee a chance to rectify a breach or improve their performance. Smart Employment Contracts cannot make this kind of subjective assessment, particularly not in a way that observes the employer’s obligation to act honestly and for a proper purpose in such situations.Conditions of employment that are invariably subject to change: Employees' salaries, entitlements, leave allowances, scope of duties, and other similar conditions invariably change with time. Changes to employee rights and obligations will, prima facie, be incapable of inclusion within their Smart Employment Contract once they are added to the digital ledger. The Smart Employment Contract will perpetually operate as it was originally coded. As such, Smart Employment Contracts would need to be continuously terminated and replaced to reflect variable employment conditions. Raising and resolving disputes: Smart Employment Contract automation inhibits employees' ability to effectively raise and resolve disputes, reducing accountability and transparency. Moreover, Smart Contracts may be susceptible to coding errors and malfunctions, potentially advantaging employers and allowing for the avoidance of contractual obligations.Considering implementing Smart Employment Contracts? Our team of expert solicitors provide clear, practical advice tailored to your unique circumstances. To discuss your situation, contact our friendly team at info@wadlow.com.au or call +61 8 8212 2955 .
