EMPLOYMENT

CONTRACTS

The importance of drafting contracts of employment is often overlooked by businesses. However, it is not just the drafting of contracts that is important but the comprehension of the content of each of the clauses drafted.

At the same time, companies need to understand their relevance and potential implications to determine what is required to protect your business as no two organisations are the same. Hence, there will be different requirements for each business.

As employment legislation is constantly changing it means that your existing contracts of employment need to be reviewed and updated on a regular basis to ensure they are effective.

This is especially the case when businesses have changed as a result of a change of ownership or sale/purchase as well as the constant changes in Employment Legislation.

We will talk you through the basic legal requirements and then recommend a range of additional clauses with the objective of creating a contract of employment that works and is tailored to meet the needs of your business.

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REASONS TO ENSURE YOU GIVE CONTRACTS TO YOUR EMPLOYEES

There are many hundreds of different types of claims an individual can bring against their employer. The business merely has their contract to rely upon which is one of the first documents an Employment Tribunal would expect to see.

Therefore, it is vital to ensure that you gain as much protection as possible from the outset. When defending claims a business may struggle and could find itself in difficulty in the event of there being either no contract, contracts from the internet or poorly drafted contracts being used, or even standard contracts provided by a provider of legal services where a monthly premium is being paid for contracts that have not been properly customised.

Some examples are as follows but this is by no means an exhaustive list:

  • There is no right to deduct payments from an employee’s pay unless they have agreed to it in writing. No employee will agree to this after the event, careful drafting will ensure this is not an issue.
  • There is no right to reclaim overtaken holiday pay or training fees that have been paid to or on behalf of the employee were they to leave part way through the holiday year or before the benefit of the training had been obtained by the business. Special provisions in the contract can mean this no longer becomes an issue.
  • If you do not have a contract your employee can potentially claim compensation for such failure. They are entitled to receive details of certain legal provisions within 8 weeks of them starting work.
  • There is no reason why an employee cannot set up in a competing business and take your clients and cause you loss of revenue as a result.
  • Unless you have very carefully and tightly drafted provisions in your contract, merely inserting that the employee is unable to poach your clients will be unenforceable.
  • A view is often taken that the contract is not worth the paper it is written on. This is often the case unless the above is adhered to.

GENERAL CONTRACTUAL PRINCIPLES APPLY

The terms of a contract are the rights and obligations that bind the parties to the contract. They can be express, implied or incorporated from other sources. The basic principles of contract law are that there must be:

  • An intention to create legal relations
  • Offer and acceptance
  • Consideration between the parties

These principles apply to the employment contract in the same way that they apply to any other type of contract.

However, there are some important differences between employment contracts and other commercial contracts, largely due to their personal nature. This difference is illustrated in the field of remedies.

FURTHER INFORMATION

THE FORMALITIES

There are no particular formalities that have to be observed for entering into an employment contract. A contract may be express or implied, oral or in writing.

There is no legal requirement for an employee to have a written contract of employment. However, section 1 of the Employment Rights Act 1996 (ERA 1996) requires an employee to be given a statement of certain specified terms within two months of starting employment.

SECTION 1 STATEMENTS AND EMPLOYMENT CONTRACTS

A section 1 statement is not necessarily a contract of employment in itself. It may simply be a statement of what has already been agreed orally or in writing.

If there is no separate written contract, the section 1 statement will be persuasive evidence as to the terms of the contract of employment between the parties.

However, if there is a separate written contract, the section 1 statement cannot override a term recorded in that contract. The contract itself always takes precedence.

If an employment contract is in writing it usually only requires simple signatures in the employment context; this will usually mean that there is one signature for the employee and one for and on behalf of the employer without the requirement for either to be witnessed.

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WHEN SHOULD A CONTRACT BE SIGNED AS A DEED?

Sometimes it will be necessary for the employment contract to be signed as a deed, rather than as a simple contract.

The most common reason for signing the employment contract as a deed is because it contains a power of attorney (to be effective, a power of attorney must be signed as a deed). Power of attorney clauses will be necessary:

  • If there are intellectual property rights that the company wants to protect
  • To procure transfer of shares or resignation of offices after termination

The contract should also be signed as a deed where there may not be any consideration.

In the employment context, the absence of specific consideration for a change introduced once employment has commenced will rarely be an issue, since consideration can readily be found in the employee’s continued employment.

However, there may be issues if the change will not take effect immediately. So, for example, restrictive covenants introduced during the employment relationship should have specific consideration allotted to them, either expressed as a lump sum or expressed as being linked to a pay rise.

As most employers are cautious about restrictive covenants they may decide to execute such a variation as a deed.

UNSIGNED CONTRACTS

An employment contract need not be in writing, and may be express or implied; so there is no strict requirement for a contract to be signed.

However, it is clearly in the employer’s interests to obtain a signed agreement, otherwise it may be difficult to establish what the terms are. It may be inferred that an employee has accepted the terms offered by the employer by conduct (in effect by turning up for work), even if the contract has not been returned and signed by the employee.

However, a court or tribunal may not always be prepared to infer consent to particular terms from the employee’s performance of the contract.

This is particularly true where an existing employee is offered new terms and their consent to a particular term cannot be inferred from the employee continuing to perform the contract. As an example, because the relevant term does not have an immediate practical impact. An example of this is a restrictive covenant.

CONTRACT SPECIFICATIONS AND HELP

DIFFERENT TYPES OF EMPLOYMENT CONTRACT

There are many different types of employee each of which calls for a different type of contract, for example:

  • Director’s service agreement
  • Employment contract for a senior employee
  • Employment contract for a junior employee
  • Employment contract for a salaried partner

However, employers should not assume that such distinctions are watertight and should decide which clauses may have to be tailored, omitted or added, according to the particular situation. Care is needed, for example, when it comes to the distinction between “senior” and “junior” employees.

The above types of contract may be adapted to reflect the fact that the employee may be fixed-term, part-time or casual.

WHAT IS THE STATUS OF OTHER DOCUMENTS REFERRED TO IN THE CONTRACT?

The parties may want to refer to other documents in the written contract, for example:

  • A pension scheme
  • A staff handbook, or certain aspects of it
  • A life assurance or other policy
  • A share option plan.

The employer should make clear whether these are contractual or not and which document prevails in the event of a conflict. If the written contract contains an entire agreement clause, it should make clear whether documents referred to are also intended to form part of the entire agreement between the parties.

WHY CLEAR DRAFTING IS IMPORTANT AND HOW WE CAN HELP

It may seem obvious to point out, but clear drafting of employment contracts is exceptionally important as it helps:

  • To minimise the chances of a dispute between the parties about the true meaning of a term.
  • To avoid the application of the contra proferentem rule, which is usually operated to the detriment of the employer.

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