A contract of employment exists as soon as an applicant accepts your offer of a post. A clear, reasonable contract helps ensure the employee understands what is expected and minimises the risk of disputes. At the same time, you need to understand what your contractual obligations are, and what terms you can (and cannot) enforce. This briefing outlines:
- The basics of employment contracts.
- The content of the written statement.
- What else forms part of the contract.
- Key issues to consider.
1 The basics
1.1 A contract of employment exists as soon as an applicant accepts your job offer regardless of whether it is in writing.
- The written statement provides evidence of the contractual terms (see 1.2) and
- other terms (see 1.3 to 1.5).
- The contract can be conditional upon an employee providing you with evidence of suitability, such as adequate references.
1.2 You are legally obliged to provide every employee (full-time or part-time) with a written statement within the first two months of employment, covering a number of specified terms and conditions (see 2).
- If employment is to terminate within two months, the written statement must be issued before termination, unless the employment is for less than one month.
- An employee may complain to an employment tribunal if you fail to issue the statement on time, or if it is incomplete.
- There is no penalty for failing to issue a statement unless the failure is established in the course of other tribunal proceedings. A tribunal may award two or four weeks’ pay.
1.3 Other documents may provide evidence of contractual terms. For example:
- a job offer letter or job description (but see 4.1 and 4.2)
- company handbooks and policy documents.
1.4 Company custom and practice may form part of the contract, even if it is not written down. To protect yourself, ensure that everything important is in writing.
- Make it clear what is not part of the contract (see 4).
1.5 There are legal constraints on the content of the contract (see 3).
- Some implied terms are included in every contract, even if they are not written down.
- Contracts cannot override certain statutory rights. However, employees adopting employee-owner or employee-shareholder status forego some of their statutory employment rights in exchange for shares in the company. See box, page 3.
1.6 You cannot change the employment contract unilaterally.
- Consult employees and get their agreement before changing their terms and conditions.
- Altering terms and conditions without the employee’s consent is a breach of contract. This could lead to a complaint of constructive dismissal (unless the change is clearly advantageous to the employee).
- If you wish to change any of the terms and conditions, you must notify the employee in writing within a month of the change.
If an employee will be required to work outside the UK for more than one month, the written statement must also include:
How long the employee will be required to work outside the UK.
What currency the employee is to be paid in.
What additional remuneration or benefits (if any) will be paid or provided.
Any terms and conditions relating to the employee’s return to the UK.
Employees must be given a written statement before leaving the UK, if they are due to work abroad within two months of taking up their post.
Employees working outside the UK can, in some circumstances, have employment relationships so closely connected with the UK, that they are entitled to the same rights (eg unfair dismissal) as UK-based workers.
2 Written statement
You can provide a single written statement covering all the terms; or a ‘principal statement’ (see 2.1), together with further instalments covering the other specified terms and conditions (see 2.2–2.4). The statement must cover all the specified terms and conditions, even if they do not apply.
2.1 The principal statement must contain:
- The names of the employer and employee.
- The date when the employment began.
- The date on which the period of continuous employment began (this may include previous employment with a related employer).
- The employee’s scale or rate of pay (or how it is calculated) and the intervals at which wages or salary will be paid.
- Information about working hours (start and finish times, shifts patterns, meal breaks, rest days, overtime, etc).
- Holiday entitlement (including bank and public holidays) and holiday pay.
This must provide enough information to work out the employee’s entitlement to accrued holidays and holiday pay on the termination of employment.
- The employee’s job title (or a brief description of the work for which the person was employed).
- The employee’s place of work.
If the employee is required or permitted to work in various places, the statement should include an indication to that effect and a note of the employer’s address.
2.2 The principal statement or some other readily accessible documents must also include:
- information on discipline (see 2.3) and grievances procedures (see 2.4)
- any terms and conditions relating to incapacity for work, including any provision for sick pay (other than statutory sick pay)
- any terms and conditions relating to pensions, including whether or not the pension scheme is ‘contracted out’
- the length of notice which the employee is obliged to give and entitled to receive to terminate the contract of employment
- the intended period of employment or the end date (unless the post is permanent)
- any collective agreements which directly affect the terms and conditions of employment.
2.3 The statement must include a note on disciplinary rules, including:
- What the procedures are. These must be fair and reasonable - it is advisable to follow the Acas Code of Practice.
2.4 The statement must include a note on your grievance procedure, including:
- The individual (by name or job title) the employee should contact with any employment grievance, and how to do so.
- What procedures are. These should be fair and reasonable - it is advisable to follow the Acas Code of Practice.
The Government has launched a new form of employment status - known as employee-shareholder or employee-owner contracts.
Employers give employees shares in the business worth between £2,000 and £50,000.
Employee-shareholders give up a range of employment rights in return for the shares. They:
- are not entitled to statutory redundancy pay
- do not have the right to request flexible working (except on return from parental leave) or for time off for training
- do not have ordinary ‘unfair dismissal protection’
- must give 16 weeks’ notice to return early from maternity or adoption leave (instead of the usual eight).
Companies can opt to give employee-shareholders more generous employment conditions.
Employee-shareholder contracts can be used by companies of any size.
- They are optional for existing employees.
- Companies can choose to offer only employee-shareholder contracts for new employees
3 Other contractual terms
Every contract includes implied terms, whether they are written down or not (see 3.1 and 3.2). In addition, no contract can override certain statutory rights (see 3.3). Employers have a duty to provide employees with information concerning their rights.
3.1 Employers must:
- provide a secure, safe and healthy working environment which includes provision for safe working methods and appropriate health and safety training
- not take any action which may undermine the relationship of ‘trust and confidence’ with their employees
- ensure that an employee’s grievances will be dealt with promptly and properly.
3.2 Employees must:
- serve the employer honestly and faithfully
- not compete with the employer’s business
- not divulge confidential information (see 5.7)
- obey reasonable and lawful instructions
- work with due diligence and skill and take reasonable care of the employer’s property.
3.3 Employees’ statutory rights include:
In addition, various laws restrict who you can employ. For example, there are restrictions on employing non-EU workers and children. If you are in any doubt, ask your legal adviser.
4 Non-contractual terms
4.1 Any job offer can become a contractual obligation.
- Make it clear at interview that you are not offering a job at this stage.
- Ensure that any job offer letter states the contract will be governed by written terms and conditions
- Include the written statement of terms and conditions
4.2 Provide job descriptions which allow you the maximum flexibility.
- Include a statement that you reserve the right to amend or add to job descriptions.
For example, to accommodate any restructuring of the business.
- Reserve the right to change the employee’s place of work. If you do not, you may be in breach of contract if the business is relocated and you try to get employees to move to new premises.
Even if you do this, an employee may be able to claim a ‘place of work’ redundancy.
4.3 Make it clear if you intend benefits to be non-contractual (and therefore easier to amend or withdraw).
For example discretionary bonuses.
- Identify them as ‘non-contractual benefits’ in the written statement. Explicitly state that you reserve the right to alter or withdraw them.
- If employees come to have ‘reasonable’ expectations of receiving a benefit, an employment tribunal or court is likely to interpret it as a contractual entitlement.
- It is good practice to give notice of your intention to withdraw or alter any benefits, and to discuss your plans with employees.
4.4 Give yourself some flexibility on disciplinary rules and procedures.
- It is advisable to follow the Acas Code of Practice.
- Make it plain you intend to be consistent in dealing with problems, but reserve the right to enter the discipline process at different stages, depending on the offence.
- Give some examples of how offences might be handled, but make it plain they are only examples.
5 Common issues
5.1 There are legal restrictions on working hours.
5.2 Entitlement to annual holiday must be set out in the written statement.
- Employees are entitled to a minimum of 5.6 weeks’ paid annual leave pro rata. A minimum of four weeks’ holiday must be taken. The remainder can often be rolled over to the next year.
5.3 In general, you are not entitled to make deductions from an employee’s pay without a prior written arrangement, or you are required to do so by law.
5.4 Dismissing an employee may give rise to a claim for unfair dismissal, breach of contract, or both.
5.5 Benefits must be provided on a basis that does not discriminate, either directly or indirectly, between employees on a wide range of grounds including sex, age, or between part-time and full-time employees. This applies whether they are contractual or non-contractual.
- The terms and conditions on which benefits are provided should be spelled out clearly.
- Even discretionary payments can lead to a claim of unlawful discrimination.
5.6 The employer normally owns the rights to any intellectual property created by an employee in the course of employment. This should be written into the contract.
5.7 Confidentiality clauses should be included in the contracts of those with access to sensitive information.
5.8 Preventing ex-employees from competing with you is difficult.
You will not be able to enforce any ‘post-termination clauses’ if you are in breach of contract.
Take legal advice if you have any specific concerns.