20 FAQs about employment contracts
- Do I have to give every employee an employment contract?
- Surely there can't be an employment contract if there is nothing in writing?
- Can I make a job offer conditional - for example, on taking up references or a medical?
- Can I make a job offer subject to successful completion of a probationary period?
- What does the written statement of terms and conditions cover?
- Apart from the written statement, what else forms part of the employment contract?
- How can I minimise the risk of being bound by contractual terms which I do not want?
- Are employment contracts the same for part-time employees?
- How do I handle short-term or contract employees - people I'm taking on for a couple of months or less?
- Can I change the terms of an employment contract?
- What can I do if employees will not agree to a change in their employment contracts?
- Under what circumstances might an employee claim breach of contract or constructive dismissal?
- What would my potential liability be if an employee claims breach of contract or constructive dismissal?
- If a change to employment contracts is essential for the survival of the business, would it reduce any compensation for constructive dismissal?
- How are claims for breach of contract or constructive dismissal handled?
- At what point does an employment contract become binding?
- If employees belong to a trade union, who do I negotiate changes to employment contracts with?
- What can I do if I discover that an employee is offering to do work for our customers independently?
- How can I use the employment contract to protect the company against an ex-employee who has resigned or been dismissed?
- Are there any special terms I need to consider for senior employees and directors?
1. Do I have to give every employee an employment contract?
You don't 'give' an employee a contract - a contract will exist, whether you like it or not, as soon as someone accepts your job offer.
You are, however (with one exception, set out in 9) legally required to give every employee a written statement covering specified terms and conditions, within two months of the employment beginning. If you fail to provide such a statement, the employee may (at present) refer the matter to an Employment Tribunal to decide what terms and conditions they are working under.
The penalty for non-compliance (ie failure to provide a written statement) is either two or four weeks' pay (capped at the normal maximum of £508 per week), unless 'there are exceptional circumstances which would make an award or increase unjust or inequitable'. This is not, however, a free-standing right to compensation. It is an increase in compensation if, and only if, a Tribunal finds in favour of the employee under another type of claim, eg unfair dismissal or underpayment of wages.
The contract should be checked to ensure that it is relevant to the employee otherwise there is a risk that an Employment Tribunal will infer terms and conditions, if a dispute should arise.
2. Surely there can't be an employment contract if there is nothing in writing?
Yes there can. A verbal contract (particularly where the employee has already done some work in return for pay) will be equally binding - though it may be more difficult to prove what the precise terms of the contract are.
As well as providing the legally required written statement, make sure that you have written evidence of any other important contract terms. Do not leave things to chance, or you might regret it later.
3. Can I make a job offer conditional - for example, on taking up references or a medical?
Yes, this would be advisable. Otherwise you will be bound by the contract even if the reference is unsatisfactory, and will have to give full notice to terminate.
Be careful that your requirements are not discriminatory, particularly as regards the medical evidence, otherwise you could fall foul of equality legislation. Under the Equality Act you can only ask health-related questions of a job applicant under specific circumstances, for example to decide whether you need to make any reasonable adjustments for the person to attend the selection process or to decide whether an applicant can carry out a function that is essential to the job. You must ensure that the level of fitness required is not in excess of the requirements of the job, and if you are thinking of taking on someone who has a physical or mental impairment that may amount to a disability, consider the issue of 'reasonable adjustments' under the Equality Act.
Note, too, that the 'default' retirement age for all employees (both men and women) has been abolished - which means that it is illegal to require anyone to retire, unless you can justify it by showing why early retirement is appropriate or necessary.
Do not ask for excessive information when checking on the applicant's work history and ensure that you have their consent to take up references otherwise you could fall foul of data protection rules.
You can check if a new employee has the right to work in the UK on the Start Up Donut website.
4. Can I make a job offer subject to successful completion of a probationary period?
Yes. Three to six months is typical, and should be long enough to allow you to judge whether the employee is willing and able to do the job. Employees can only claim unfair dismissal, if dismissed, after two years of continuous service.
5. What does the written statement of terms and conditions cover?
You must include:
- the employer's name and the name of the employee
- the date on which the employment began
- the date on which the period of 'continuous employment' began (if, for example, the employee previously worked for a company acquired by you)
- pay (or how it is calculated) and when it will be paid
- information about working hours
- entitlement to holidays and holiday pay
- the employee's job title or a brief description of their work
- the employee's place of work
- details of disciplinary, dismissal and grievance rules and procedures
All employers, regardless of size, have to provide written details of disciplinary rules and procedures. These must be fair and reasonable. There is an Acas Code of Practice that gives guidance on what is fair and reasonable and, if you unreasonably fail to follow it, an Employment Tribunal can increase any award made against you by up to 25%.
You must also include in the written statement, or make available in readily accessible documents:
- terms and conditions relating to sickness and injury, and sick pay (other than statutory sick pay)
- terms and conditions relating to pensions, including whether a contracting out certificate is in force
- the notice period the employee is obliged to give and entitled to receive for termination of the employment contract (and if you reserve the right to give payment in lieu, it would be sensible to say so)
- how long the employment is intended to last (unless permanent)
- any collective agreement which directly affects the employment
6. Apart from the written statement, what else forms part of the employment contract?
Other documents may provide evidence of the contract - for example, the job description, correspondence, collective agreements or company policies if they are in the nature of contractual terms. It is advisable to make clear what is and is not considered to be of contractual status.
Custom and practice in your company can become part of the contract. For example, 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.
All contracts also include implied terms, whether written or not. Examples are:
- your obligation to provide a secure, safe and healthy working environment
- mutual obligations not to do anything that might undermine the relationship of mutual 'trust and confidence' between you and the employee
- the employee's obligation to serve you honestly and faithfully, obey your reasonable instructions and work with due diligence, skill and care
- the employee's obligation not to undermine your business
Employees also have statutory rights, such as the right to a minimum period of notice, protection against discrimination, the right to be (or not to be) a member of a trade union, and rights under working time and minimum wage legislation. The employment contract cannot usually override these statutory rights.
7. How can I minimise the risk of being bound by contractual terms which I do not want?
The key is to ensure that you retain flexibility, while establishing certainty. For example:
- Avoid producing a job description which is too detailed, and include a statement that you reserve the right to amend or add to the employee's duties, or change their place of work, according to the needs of the business.
- Make it clear if benefits such as bonuses and health insurance are discretionary and/or can be withdrawn. Consider taking advice if you wish to offer discretionary benefits as the courts have, in several instances, decided that benefits described in documents as 'discretionary' are, in fact, contractual entitlements.
- Ensure that employees do not come to have a reasonable expectation of a non-contractual benefit. For example, if you always give a Christmas bonus, make it clear under what circumstances you will (or will not) pay it.
8. Are employment contracts the same for part-time employees?
Yes. Part-time employees have the same rights as and are entitled to be treated no less favourably than full-time employees. For example, they have rights to the same benefits and terms of employment (pro rata if necessary) as similar full-time employees, unless the failure to provide this benefit can be objectively justified.
9. How do I handle short-term or contract employees - people I'm taking on for a couple of months or less?
Make it clear in your job offer, and in any written statement, how long the employment is intended to last. Employees who are taken on for less than one month are not entitled to a written statement of terms. However, if you take someone on for more than one month they are entitled to a written statement.
The Fixed Term (Prevention of Less Favourable Treatment) Regulations are, as the name suggests, aimed at preventing less favourable treatment of fixed term employees. No minimum limit as to what constitutes a fixed term employee has been set, so it could include employees on very short-term contracts.
Be aware that if a temporary worker is employed for long enough, he or she may be able to claim permanent status, and if so may be entitled to compensation when the employment comes to an end. But if the worker is employed through an agency, and:
- the provision of work by the employer to the worker
- the employer's payments to the agency
- the performance of work for the employer by the worker
are all explained by the contracts between (1) the worker and agency, and (2) the employer and agency, the courts will not imply the existence of another contract - an employment contract between the worker and the employer - unless it is necessary to do so to give business reality to the relationship between the parties.
The Agency Worker Regulations 2010 give all agency workers the right to the same, or no less favourable, treatment as comparable employees with respect to basic employment and working conditions, if and when they complete the qualifying period of 12 weeks in the same job. Visit the Acas website to find out more about the Regulations and how they could affect you and your business.
If a fixed term worker has their contract renewed, or is re-engaged on a new fixed term contract after a period of four or more years of continued service, the contract takes effect as a permanent contract unless employment on a fixed term contract is objectively justified, or the period of four years has been lengthened under a collective or workplace agreement.
Note that the relevant Acas Code of Practice giving guidance on fair and reasonable disciplinary procedures does not apply where you are not going to renew a worker's fixed-term contract.
10. Can I change the terms of an employment contract?
If you have reserved the right to amend the terms within the contract, the answer is yes, provided you are not acting in an arbitrary or unreasonable manner.
If you have not reserved the right to amend the terms, the answer strictly speaking is no, unless it is with the employee's agreement or consent. The outcome, however, will depend partly on how serious the change is. For example, a cut in pay rates would normally justify an employee resigning and claiming constructive dismissal - although they would probably raise a grievance first because, unreasonably failing to do so, would risk a reduction of up to 25% in any award made by the Employment Tribunal.
On the other hand, an increase in minimum paid holiday entitlement would not justify anyone resigning (although it is certainly a material change in the terms of the contract) and can be done without bothering to amend it, because it is to the benefit of those employees affected. (It does require a letter to inform the employees in question of their new entitlement.)
If a change is introduced and the employees do not object, even if there is no formal agreement to the change, they may be taken to have agreed to it by carrying on working, particularly where the change has an immediate impact. But if they carry on working 'under protest', take advice because this can be problematic.
Whatever the circumstances, the best approach is to discuss it with them. Explain why you want to make the change, and offer incentives if necessary.
11. What can I do if employees will not agree to a change in their employment contracts?
It is possible to terminate the contract on full notice and offer to re-engage the employee on new terms of employment, taking effect on expiry of their notice. There would be no breach of contract in this situation but there is a risk of employees claiming unfair dismissal, so take legal advice before commencing this course of action.
Employees can only claim unfair dismissal, if dismissed, after two years of continuous service.
Dismissals can be fair if you can justify changes by reference to your business needs. You must be able to show that the needs of the business outweigh any disadvantages to the employees, explain the business reasons fully and warn and consult employees over the required changes.
12. Under what circumstances might an employee claim breach of contract or constructive dismissal?
An employee may treat themselves as constructively dismissed if you (as the employer) have committed a serious or fundamental breach of contract.
For constructive dismissal:
- there must be a breach of contract by the employer
- the breach must be sufficiently serious to justify the employee resigning
- the employee must leave in response to the breach
- the employee must terminate the contract without undue delay
There is no longer a statutory requirement to raise a grievance before taking the matter to an Employment Tribunal - although if an employee unreasonably fails to do so, they risk a reduction of up to 25% in any award if they subsequently win in the Employment Tribunal.
The Employment Tribunal will decide what amounts to a fundamental or serious breach of contract. Breach of a written term - such as a unilateral decision to reduce an employee's pay without consent - will almost certainly be held to be fundamental. So will a breach of the implied term of mutual trust and confidence. This includes such things as singling the employee out for unfair treatment, failure to investigate grievances or harassment allegations, failure to prevent bullying, undermining the employee, etc.
13. What would my potential liability be if an employee claims breach of contract or constructive dismissal?
Damages for breach of contract are normally the value of the employee's net salary and benefits (for example loss of any commission, company car, pension rights etc) for the length of the employee's notice period. An Employment Tribunal may only award breach of contract damages up to £25,000, but they can be unlimited in the County Court or High Court.
If a constructive dismissal is also found to be unfair by an Employment Tribunal, then the damages comprise the basic and compensatory award. The basic award is calculated in the same way as a statutory redundancy payment - by reference to age, length of service and weekly wages capped at £508 and subject to a maximum of £15,240. The compensatory award is calculated to compensate for loss of earnings and benefits between the date of resignation and the date of any tribunal hearing. An Employment Tribunal can also make an award for future loss of earnings.
Where a former employee claims compensation for wrongful dismissal (breach of their contract of employment), they have a duty to minimise the loss by taking reasonable steps to obtain alternative employment and there can be reductions, for example for contributory conduct.
However, the position is not so clear-cut in relation to unfair dismissal claims (including constructive dismissal). Currently, the Employment Tribunal has, in at least one case, decided compensation should not be reduced because the employee has found a new job during the notice period - so the employee may get both compensation and their new earnings. However this ruling has been successfully challenged in the Court of Appeal. Take legal advice.
14. If a change to employment contracts is essential for the survival of the business, would it reduce any compensation for constructive dismissal?
The overriding obligation in respect of claims for unfair (constructive) dismissal is to award such compensation as is 'just and equitable'. Generally the tribunal would not reduce compensation in this situation. If the employer can argue that the contracts would have been terminated shortly in any event, then the period of loss may be reduced. It is however very difficult to justify any failure to warn or consult in such situations, with a view to getting agreement to the change, so the employer must follow the correct procedure.
15. How are claims for breach of contract or constructive dismissal handled?
A judge deals with claims for breach of contract in the County Court. If the claim is for less than £10,000, the matter will be dealt with in the Small Claims Court. If the claim is particularly complex, or of a high value, the matter may be dealt with in the High Court. Claims have to be brought within six years of the breach of contract complained of.
Breach of contract claims arising or outstanding on termination may also be brought in an Employment Tribunal for damages of up to £25,000. Claims for unfair constructive dismissal must be brought in an Employment Tribunal. In both cases the matter must be raised as a grievance first, and the Employment Tribunal limitation of three months from the date of dismissal will apply unless the Tribunal has, and exercises, a discretion to extend it.
16. At what point does an employment contract become binding?
Once an unconditional offer of employment has been accepted by a potential employee, a contract exists. This may occur before the employment commences.
17. If employees belong to a trades union, who do I negotiate changes to employment contracts with?
The primary question is whether the employees belong to a trades union which is recognised in the workplace by you (as the employer), as representing the majority of the workforce for collective negotiation purposes. If so, negotiations would be carried out with the trade union.
If agreements are reached with the union this will be incorporated into the contracts of employment of its members and bind individuals even though they themselves do not individually agree to the changes. If employees who are not covered by the recognition agreement are affected, then consultation and negotiation should also be carried out with those individuals.
18. What can I do if I discover that an employee is offering to do work for our customers independently?
An employee has an implied duty of good faith toward his or her employer. This duty relates principally to a number of aspects of confidentiality and non-competition. During employment, the employee must not allow personal interests to conflict with the duty of good faith to their employer.
It is a breach of this duty to agree to work personally for customers of the employer, if this places him or her in competition with the employer and undermines the interests of the business. Technically, such a breach of contract entitles the employer to claim damages for any loss suffered and to terminate the contract.
19. How can I use the employment contract to protect the company against an ex-employee who has resigned or been dismissed?
The inclusion of a restrictive covenant and a clause protecting confidential information in the employee's contract allows you to prevent competition from, or the exploitation of commercially sensitive information by, an ex-employee after employment ends. In the absence of such provisions an ex-employee may enter into competition with you, solicit your customers, use confidential information and poach your staff.
However, for a restrictive covenant to be enforceable the following conditions apply:
- the employer must have a legitimate business interest to protect
- the restraint must be reasonable in time and area, and it must be no wider than necessary to protect the employer's business
Once again, legal advice should be obtained because covenants need careful drafting to ensure their validity and enforceability. The Court of Appeal has found, for example, that a salesman who designed a safety helmet, obtained funding towards getting it into production, and showed it to a consultant who worked for a business competing with his employer, had not done enough to breach a clause in his contract restricting him from competing with his employer, because he was employed as a salesman (so the covenants only stopped him competing in the sales arena), not as a designer.
20. Are there any special terms I need to consider for senior employees and directors?
It would be advisable to put a longer notice period in their contracts of employment in order to adequately prepare for their departure, and the handover period required for a replacement. You may also want to reserve the right to place the employee on 'garden leave' during the notice period.
Given their seniority, and access to commercially sensitive confidential information and customer contracts, it would also be sensible to consider whether restraint of trade clauses such as non-solicitation of clients and/or staff and detailed confidentiality clauses should be included within the contract, and whether there should be a restriction on activities 'preparatory to' setting up in competition. Take advice.
There may be agreements on commission or bonus payments which need careful drafting. For directors, you also need to think about provisions relating to their position as directors - it is legally possible to sack a director as an employee but for them to remain in office as a director - ie how you would handle the termination of the office if their employment were to be terminated.
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