Contracts of employment - guide (V482d8fddeb055)

In summary, a contract is an agreement you enter into with someone else, giving rise to obligations on both parties that are recognised or enforced by law. Contracts do not have to be made in writing to be legally binding. Even if there is no written agreement, once you have offered a job to someone on certain terms and conditions ("consideration") and they have accepted it, an agreement is reached and a contract of employment is in existence.

It is always advisable to put contracts in writing - not just for employees, but also for associates and self-employed contractors - as then the terms of the agreement and the rights and obligations which both parties have undertaken towards each other are clearly recorded - for both parties. The contract sets out the ground rules governing the employment relationship - it is therefore the most important document you give to your employees. It is important that terms are set out as clearly as possible to avoid confusion and disputes in the future as to what was agreed or meant. If the terms are ambiguous, they will normally be construed to the detriment of the person who seeks to rely on them (usually the employer). A well-drafted contract does far more than minimising grounds for legal action however - it can provide positive benefits as well!

It is a legal requirement that all employees whose employment will last for one month or more are issued with a statement of the main terms and conditions of their employment. The only exceptions are where the employee works wholly or mainly outside Great Britain, but even these employees are entitled to a statement if they ordinarily work inside Great Britain and the work outside is for the same employer, or if the law which governs the contract is the law of England and Wales or Scotland. Independent contractors or freelance agents are not entitled to a statement.

The Employment Rights Act 1996 stipulates the essential minimum information which must be included in the statement, which must be provided within two months of the employee joining you. This is as follows (items marked with an asterisk MUST be included in one principal document, other items may refer the employee to a separate document(s), which must be easily accessible, or may be issued separately - within the two month period):

It is usually simpler to include all of the above in a single document. A statement will not necessarily cover every aspect of the contract, but can provide important evidence of the main terms and conditions.

Failure to have an up-to-date, complete statement can lead to a financial award of 2-4 weeks' pay being given to an employee who successfully brings another claim to an employment tribunal.

"Express terms" are those which are agreed explicity with the employee and which are spelt out in the statement of terms and conditions. Express terms always take priority - an implied term will never be applied which is in conflict with an express term.

"Implied terms" are ones which have not necessarily been agreed, but which neither you nor the employee can ignore.

Both employer and employee have a duty to maintain a relationship of mutual trust and confidence.

Sometimes a term of the contract may be changed if a different practice is used often enough and becomes established. This may be the case even if not confirmed in writing and can apply to any of the terms of the contract. Common custom and practice terms include different (usually additional!) breaks during the working day, different start/finish times, additional payments made over a period of time such as Christmas presents, regular bonuses, enhanced redundancy payments made to those who leave, the practice of paying in lieu of notice instead of requiring the employee to work this out. A single incident is not enough to establish a custom and practice, but a practice that has gone on for a long period of time and is generally recognised to have become the established custom is likely to have become an implied contractual term.

To prove that a custom and practice exists, three things need to be established:

With regards to implicit terms and custom and practice, you may wish to consult our advice on managing the psychological contract

which explores this subject further.

Collective agreements are negotiated between trade unions and the employer, or an employers' association, and are generally presumed, unless otherwise stated, not to be legally binding on either party. This does not however prevent the terms of a collective agreement from becoming a binding part of individual employees' contracts.

If any of the terms of a collective agreement are intended to become part of an individual's contract of employment, that should be stated expressly in the agreement and in the affected contract. It is also advisable to make the contract of employment subject to variations in the collective agreement which may be made from time to time.

The difference between a written employment contract and a statement of terms and conditions

A statement of terms and conditions is a document issued by the employer and whilst it may be evidence of the terms of the contract, and whilst the employer is required to record some of the main terms and conditions of the employment (see above), a statement is not necessarily contractual unless the employee has signed to clearly indicate his/her agreement to the terms (as opposed to signing to indicate receipt of the statement). This means that a tribunal would use a statement as evidence in considering what the terms are, but would also consider custom and practice, statutory obligations, memos and emails etc - and if your offer letter is inconsistent with the statement, then the former would usually prevail.

A written contract of employment however is legally binding on both employer and employee, and is presumed to be complete - ie no external evidence is allowed to determine the terms of the agreement. A contract may include everything required to be included in a statement of terms and conditions - in which case there is no need to issue both.

If your written contracts of employment refer to other documents, unless stated to the contrary, it will be assumed that these documents are a part of the contract - this is known as "incorporation by reference" and normally applies to such documents as disciplinary and grievance procedures.

We normally advise that your procedures and your employee handbook are non-contractual to prevent breach of contract claims if the former are not followed precisely, and also to enable easier updating/changing - but in which case it should be made clear in both the contract which refers to them, and the documents themselves, that they are non-contractual. Similarly, terms which are discretionary should be clearly identified as such in both the handbook/policy and the contract.

Whilst the legal requirement is to issue at least a statement within the first eight weeks of employment, we would always advise you to send a copy to the employee before he/she joins you - then if there are any queries or problems with the terms of the contract these can be resolved before the first day. If the statement or contract is given far in advance (eg in graduate recruitment activities), do bear in mind that the terms must be correct as at seven days before the employment starts. (So you may for example need to review and update the contracts of graduate recruits if these have been sent out some time prior to the joining date.)

An employee who is not issued with a statement of terms and conditions within two months of starting work, or who is given an incomplete or inaccurate statement, may complain to an employment tribunal.

The tribunal must then decide what terms were agreed or are to be implied into the contract.

The general approach of the law towards contracts is that both parties are free to agree whatever they like, provided it is legal. Contract law is not concerned with "fairness" or "reasonableness". However, where the terms of a contract of employment have been negotiated with a representative body or are incorporated into the employee's contract by reference, this must be drawn to the employee's attention; equally where there is a particularly onerous clause in the contract, the party seeking to rely on the clause (in this case usually the employer!) must make sure that the clause has been brought to the other party's attention.

However, there are lots of employment protection rights which all employers must observe - an example is the right to the minimum wage, or to annual leave under the Working Time Regulations. A host of legislation impacts on the employment contract, including the following:

Contracts of employment may include flexibility clauses which enable the employer to change some of the terms within the contract, eg job duties or title, location or work or shift arrangements. Any changes to the contract agreed between the employer and employee must be confirmed in writing within one month of the change.

Employment rules and policies, provided they are non-contractual, can be changed unilaterally by the employer without there being any breach of contract. Collectively agreed terms can only be changed by agreement.

If you are wanting to change the current contracts of existing employees, bear in mind that consultation is the key here - you cannot simply force a unilateral change to the contract. If the employees have been properly briefed on the reasons for the changes, and understand the need for this, it is much easier to gain acceptance than if the changes are simply presented as a "fait accompli".

Where directors have written contracts of employment, a copy must be kept available for inspection at either the company's registered office, principal place of business or at the place where the register of members is kept.

Under the terms of the Apprentices Act 1814, contracts of apprenticeship must be in writing and signed. It is also normal for the apprentice's parent or guardian to be joined as a party to an apprenticeship contract, as there are limitations on how far minors can be bound by contracts.

If I want to make changes to the contract, can I simply issue a new one?

No! If you are considering making significant changes to the terms of the contract, then unless these changes are made with the voluntary agreement of the employee (in which case, either write and confirm them or issue a new contract if the changes are sufficiently substantial), you run the risk of a claim of constructive dismissal and/or breach of contract. See our guide to changing contracts

If the employee raises an objection you need to deal with it and have good business reasons for rejecting the objections raised. If you are seeking to change contracts because of a TUPE transfer then care needs to be taken as any changes resulting from the transfer and not due to commercial, economic, reorganisation reasons etc would also be a problem for you.

What happens if an employee refuses to sign the statement?

Legally you are under an obligation to issue the statement, not to get the employee to sign it, and if the employee starts work under the terms and conditions as set out in the statement it will be broadly assumed that he or she has accepted these and any tribunal would look at custom and practice to see what happens in practice. However, you will not know which terms have been accepted until they are tested - for example, if you include a relocation clause in your statement you will not know whether the employee is agreeable to this unless and until you try to enforce it. This is not quite as straightforward as it sounds and we would always advise finding out why the employee refuses to sign the statement, and to sort out and resolve any potential disagreements over the terms and conditions before a dispute arises, taking advice from our helpline as you proceed.

If your employees are simply not bothering to sign the contracts (rather than contesting the content of the contracts) then write to them in the first instance (recorded delivery) asking for their return within a reasonable time period and informing them that unless they notify you of a reason for their failure within this time period then you will assume that they accept the conditions therein. You could infer now, from their continued working under the terms of the contract, that they accept the terms but this would not be an entirely satisfactory position and you are best resolving the matter then via a meeting with each employee. A signed contract is legally binding on the employee; an unsigned one is not - therefore it is always best to chase this up and resolve, even if this may mean slightly compromising on the wording in individual cases.

An employee who refuses to sign a new contract, but who continues to work under protest is entitled to continue to receive his/her original terms and conditions.

Many employers tend to issue new contracts at the time of a pay and benefits review - so that there is some incentive for employees to sign up to the new agreement.

I note that all of your template contracts and the statement give the option for a probationary period. Would you recommend this?

There is no legal requirement to have a probationary period, but these are very common at the start of employment or in the event of promotion.

Probationary periods give you the opportunity to assess the suitability of the employee for the post, and give the employee the opportunity to prove to you that he/she can do the job. A performance review shortly before the end of the probationary period provides an excellent opportunity to give positive feedback on the behaviours you wish to enforce and tighten up on any which could be improved.

If you decide to have a probationary period, choose one which is appropriate to the skills and seniority of the job. Any extension to this period should be reasonable and limited. You may wish to stipulate a shorter (often minimum) notice period during the probationary period, except where this is introduced because of someone's promotion within the business.

When the period expires, if you take no action to advise the employee whether he/she has met the required standards, the employee will be automatically confirmed into position. So monitor the period carefully, give appropriate and timely feedback, and use our template letters to either extend the period or confirm its successful completion.

If your disciplinary procedure is contractual, it is also advisable to include provision for a shorter disciplinary procedure for new employees.

I'm looking at the contract for managers and wonder whether I need to include the restrictive covenants? Are these worth the paper they're written on - what happens if the employee just ignores them?

Employers often consider that restrictive covenants are not worth much as guarantees cannot usually be given regarding their enforceability. Any breach of a restrictive covenant would not be dealt with through the employment tribunal system and basically if an employee breaks an agreed restrictive covenent, your recourse would be to the courts to seek an injunction to stop him/her doing this, and to claim damages in respect of the losses you have actually incurred as a result of the breach. You have to prove that the covenant was absolutely and strictly necessary to protect your business, and if they agree, then you would win. Taking such a case is expensive and there is a risk that the courts may decide that your covenants are too broad and therefore not uphold them - which deters some employers from taking action.

However, restrictive covenants can be an excellent deterrent, and a well-drafted covenant, which takes into account the actual needs of the business and the true extent of protection required, can be enforceable and can provide you with a significant degree of protection. Restrictions should be tailored specifically to your business, should go no further than is necessary to protect your business interests, and should not cross into the realm of being a restraint of trade. They should preferably be drawn up individually depending on the seniority and role of the employee concerned.

Whilst you can prevent your employees from working for named competitors, or from approaching your clients for a restricted period, this does need to be reasonable - ie you can't prevent them from earning their living following their particular trade - so you need to be very careful with these clauses and they need to be very tight in order to stand any chance of success in court.

What happens if someone refuses to comply with a clearly specified clause in the contract?

Normally, disciplinary action would result - and if the employee refuses to follow a reasonable instruction, this could amount to gross misconduct and therefore dismissal without notice or pay in lieu of notice.

However, all contractual clauses must be implemented reasonably. So if, for example, you have a clause requiring an employee to work anywhere in the world, and that employee refuses to go on health or safety grounds, or because that country may be hostile to them, should you attempt to force this without giving proper consideration, this could result in both a discrimination and a constructive unfair dismissal claim. Examples would include Jewish employees who may be reluctant to work in certain Muslim countries, or gay employees who may wish to refuse to work in a country where homosexual activities are illegal.

We have offered a job to someone and not heard back from her. Can we withdraw this now?

Offers are subject to a time limit which may be specified in the offer itself, otherwise it remains open for a reasonable time. As ever, "reasonable" is difficult to define, so in future, it may be best to set a time limit for acceptance. In this instance, you may withdraw your offer, but withdrawal is effective only when received by the candidate - so we would suggest that any written withdrawal is sent by registered post.