What is a contract of employment?
This sounds like a very basic question and in many ways it is. A written contract of employment between an employer and an employee sets out the terms on which the employee is employed. It will set out the rights the employee enjoys, such as salary, holiday entitlement, etc, but will also set out the employer’s rights, such as identifying the employee’s job title and duties and requiring the employee to comply with confidentiality obligations.
Does a contract of employment have to be in writing?
A contract of employment can be formed even when nothing is documented in writing. If the reality of the relationship between the parties is one of employer and employee, there will be a contract of employment. However, this does not mean an employer can choose to avoid giving an employee a written statement of terms without breaching their legal obligations.
What is a written statement of terms and what happens if we don’t give one?
Section 1 of the Employment Rights Act 1996 requires an employer to provide an employee with a statement of the employee’s main terms of employment. This includes, amongst many other things: the rate and frequency of pay, hours of work, holiday and sickness entitlements, job title, length of notice and details of where to find the disciplinary procedure.
An employer must provide this statement within two months of the employee commencing their employment. A failure to do so will allow a tribunal to award up to 4 weeks’ pay as an additional award should the employee ever successfully take the employer to an employment tribunal on separate grounds. An employee can also apply to an employment tribunal for a determination of their terms of employment if the employer has failed to provide a statement of terms, although this rarely happens in practice.
Do I have to provide both a statement of terms AND a contract of employment?
Not necessarily. Most employers give their employees a contract of employment that incorporates all of the minimum requirements of a statement of terms. A well drafted contract of employment will make sure all the statutory requirements are covered but will also go further to cover optional clauses that are advantageous to employers, such as confidentiality, post-termination restrictions on poaching clients, customers or employees and the right to lay-off an employee when there is insufficient work.
Why else does it matter if we don’t give our employees contracts of employment?
A contract of employment usually acts as the main document governing the relationship between employer and employee. A failure to provide this document is likely to lead to uncertainty as to the actual role of the employee and the rules they are expected to follow. Imagine a scenario in which you tell an employee that they are expected to fulfil certain duties only to be met with a response from the employee along the lines of “that does not form part of my job”. A contract of employment incorporating or attaching a job description would have avoided any uncertainty.
Without properly drafted confidentiality clauses or post-termination restrictions, an employer has surprisingly little protection against an outgoing employee who might copy customer lists or sensitive data, or who might contact clients or customers shortly after they have left their employment encouraging those clients or customers to move with them to their new business.
How can it affect us as a business?
A failure to provide a written employment contract (or statement of terms) removes the employer’s ability to set a minimum period of notice from the employee to end the contract. This means that an employee without a written contract only has to provide one week’s statutory notice of their resignation, irrespective of how long they have been in the job. Obviously this can seriously impact on the staffing and future planning of a business. Just imagine what you would do if one of your key personnel were to give you notice that they were leaving in a week’s time and if there was nothing you could do about it. Yet that is reality for many employers who do not issue employment contracts.
Is it ever too late to implement employment contracts?
No. Whilst it is preferable to provide a contract at the start of the employment relationship, it is possible to implement employment contracts at any point with the appropriate HR and legal support. If you only introduce a written contract at a later stage, many months or years after the employee began employment, you have to be careful to make sure you don’t create a dispute with your employee. The contract should reflect the common understanding of the employment relationship to date. You also need to bear in mind that when you introduce new terms that give you extra protection, to the employee’s detriment, you have to be able to show a mutual benefit. This is what we call in legal terms the requirement of “consideration”.
Does a failure to issue contracts of employment to my staff make me a bad employer?
No. Many small business owners are so busy focusing on what they do best that they simply run out of time to deal with contracts of employment. When the business grows and new people join, much is left to trust rather than set out in lengthy documentation. Of course, some small business owners make sure that their contracts are drafted and issued as they go along, but their example is not followed as widely as might be expected. Unfortunately, some business owners learn the hard way and only try to address the problem once it is much too late.