Employment contracts
Q. Do I have to give every employee a contract?
A. 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 question 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 refer the matter to an Employment Tribunal to decide what terms and
conditions he (or she) is working under. The Employment Act also introduces a
financial penalty for failure to provide the written statement.
Q. Surely there can’t be a contract if there is nothing in writing?
A. 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.
Q. Can I make a job offer conditional – for example, on taking up references or a
medical?
A. 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 the disability discrimination
legislation. 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 Disability Discrimination Act.
Be careful, too, that you do not ask for excessive information, and that you have the
applicant’s consent to take up references and obtain medical data. Otherwise you
could fall foul of the Data Protection Act 1998.
Q. Can I make a job offer subject to successful completion of a probationary period?
A. 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. It will also give you time
to take remedial action if the employee’s performance declines during or after the end
of the probationary period. Employees can claim unfair dismissal if you dismiss them
after one year’s continuous service.
Q. What does the written statement of terms and conditions cover?
A. You must include:
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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);
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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;
a note on the procedure for handling grievances;
disciplinary rules or reference to another document containing these. (At the
moment you do not need to worry about this if you have less than 20
employees, but the new Employment Act is to remove this exemption.)
Certain minimum standards in respect of disciplinary and dismissal procedures are to
be implied into all employment contracts by new legislation, sometime in 2004. You
may have to spell them out in your written statement, so take legal advice if you are
drawing up a new one or revising an existing one.
You must also include, or make available in readily accessible documents:
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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;
how long the employment is intended to last (unless permanent);
any collective agreement which directly affects the employment.
Q. Apart from the written statement, what else forms part of the contract?
A. 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:
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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.
Commitments in respect of disciplinary, dismissal and grievance procedures will also
be implied into contracts as a result of new legislation, probably towards the end of
2003.
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
trades union, and rights under working time and minimum wage legislation. The
employment contract cannot usually override these statutory rights.
Q. Apart from the written statement, what else forms part of the contract?
A. 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:
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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.
Commitments in respect of disciplinary, dismissal and grievance procedures will also
be implied into contracts as a result of new legislation, probably towards the end of
2003.
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
trades union, and rights under working time and minimum wage legislation. The
employment contract cannot usually override these statutory rights.
Q. How can I minimise the risk of being bound by contractual terms which I do not
want?
A. The key is to ensure that you retain flexibility, while establishing certainty. For
example:
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avoid producing a job description which is too detailed. 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;
given that some minimum disciplinary procedures are to be implied into
employment contracts (see question five) stress that your other disciplinary
and grievance rules are policy guidelines rather than contractual.
Ensure that employees do not come to have a reasonable expectation of a noncontractual benefit. For example, if you always give a Christmas bonus, make it clear
under what circumstances you will (or will not) pay the bonus.
Q. Are employment contracts the same for part-time employees?
A. 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.
Q. How do I handle short-term or contract employees – people I’m taking on for a
couple of months or less?
A. 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 2001 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. These regulations
came into force in October 2002.
Q. Can I change the terms of an employment contract?
A. If you have reserved the right to amend the term 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 term, 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. On
the other hand, requiring an employee to work at a new location half a mile away,
when there is no more than minimal disruption to travel arrangements, would
probably not.
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.
Whatever the circumstances, the best approach is to discuss. Explain why you want to
make the change, and offer incentives if necessary.
Q. What can I do if employees will not agree to a change in their employment
contracts?
A. It is possible to terminate the contract on full notice and offer to 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.
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.
Q. Under what circumstances might an employee claim breach of contract or
constructive dismissal?
A. An employee may treat himself (or herself) as constructively dismissed if you (as
his employer) have committed a serious or fundamental breach of contract.
For constructive dismissal:
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there must be a breach of contract by the employer;
the breach must be sufficiently serious to justify the employee resigning;
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the employee must leave in response to the breach; and
the employee must terminate the contract without undue delay.
It is for an Employment Tribunal to 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 his consent – will almost certainly be held to be
fundamental. So will a breach of the implied term of mutual trust and confidence (see
question 6). 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.
Q. What would my potential liability be if an employee claims breach of contract or
constructive dismissal?
A. 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 £260 at the moment) and subject to a
maximum of £7,500. 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.
A former employee has a duty to minimise the loss by taking reasonable steps to
obtain alternative employment and there can be reductions, for example for
contributory conduct. The maximum compensatory award is currently capped at
£53,500.
Q. If a change to employment contracts is essential for the survival of the business,
would it reduce any compensation for constructive dismissal?
A. 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.
Q. How are claims for breach of contract or constructive dismissal handled?
A. A Judge deals with claims for breach of contract in the County Court. If the claim is
for less than £5,000, 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. The Employment
Tribunal limitation of three months from the date of dismissal will apply in both cases.
Q. At what point does an employment contract become binding?
A. Once an unconditional offer of employment has been accepted by a potential
employee, a contract exists. This may occur before the employment commences.
Q. If employees belong to a trades union, who do I negotiate changes to employment
contracts with?
A. 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 trades 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.
Q. What can I do if I discover that an employee is offering to do work for our
customers independently?
A. An employee has an implied duty of good faith toward his employer. This duty
relates principally to a number of aspects of confidentiality and non-competition.
During employment, the employee must not allow his personal interest to conflict with
his duty of good faith to his employer. It is a breach of this duty to agree to work
personally for customers of the employer, if this places him 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.
Q. How can I use the employment contract to protect the company against an exemployee who has resigned or been dismissed?
A. 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.
For a restrictive covenant to be enforceable the following conditions apply:
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the employer must have a legitimate business interest to protect; and
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.
Q. Are there any special terms I need to consider for senior employees and directors?
A. It would be advisable to put a longer notice period in their contracts of employment
in order adequately to prepare for their departure, and the handover required to 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.
There may also 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, and how you would handle the termination of the office if their
employment were to be terminated.