Employees not only form the core of a business, they are also one of the biggest fixed costs it will have. With access to the innermost corporate secrets and the ability to make or break a firm, having properly drafted contracts in place is critical to success – and survival.
Take some of the issues that Andrew Rayment, a partner in the employment department of law firm Walker Morris has come across in his years in practice. He’s seen brazen attempts by ex-employees attempting to poach staff or customers to a competitor; and “without an employment contract containing clauses specifically preventing this, there was very little that could be done”.
In another situation, a client was owed money (from a loan advance) by a departing employee but was unable to lawfully recover it by making a deduction from wages; employees did not have a clause in their contracts to allow this.
The legal background
For John Cadman, an HR advisor for the BPIF, the starting point to putting in place solid employment contracts is to realise that they don’t have to be written: “In common law there is no need for a contract to be written. A verbal contract is just as binding but may be harder to prove; a written contract is merely evidence of what was agreed between the parties.”
He says that unhelpfully, custom and practice can become part of a contractual arrangement: “In theory a two-hour lunch break tolerated by an employer over a period of time could become a contractual right. And it can be fairly usual for BPIF HR advisers to receive calls on Maundy Thursday enquiring as to what overtime or calls out rates apply over the Easter period.”
Importantly, Rayment advises that employment contract issues aren’t just something for big companies to worry about. He says they are central to the operation of even the smallest of businesses. He notes that the law requires that employers provide employees with a written statement of terms and conditions. “The information that must be given in the written statement is prescribed by the Employment Rights Act 1996 (ERA), is fairly basic and is focused on setting out the employee’s entitlements (such as wages, holiday, disciplinary and grievance procedure, etc.). But most employers choose to go one step further and use a proper written contract of employment rather than just the basic written statement.”
Why do employers go further? Because, as Amanda Trewhella, a senior associate at law firm Freeths, explains, “from an employer’s perspective it ensures certainty as to what has been agreed.”
Both she and Rayment consider that additional provisions can protect a company’s business interests. Rayment says that a contract “can deal with protection of confidential information and intellectual property and can include terms restricting the employee from trying to poach customers or colleagues if they leave”.
Here, Trewhella specifically identifies senior employees and those who work closely with key clients of the company, “as the employer is likely to want to include post-termination restrictions preventing the employee from soliciting their clients or setting up in competition with them immediately after they leave”.
Employers should also consider the notice period required if a key employee wants to resign. Rayment says that written properly, employment contracts allow employers to ‘lock in’ key staff by using longer notice periods than the statutory minimum notice period, which can be as short as one week. “Ignoring this issue,” adds Trewhella, “could really leave the company in the lurch, especially if it involves a long-standing employee who is an integral part of the business and cannot be quickly replaced.”
She also advises clients to include a probationary period at the beginning of the employment and a right to pay an employee their basic salary in lieu of notice, or to place them on garden leave during their notice period.
The BPIF, looking at the issue industrially, has, says Cadman come up against union representatives referring to a mythical house agreement. “But when the employer has no copy of any such written document it can certainly lead to the employer commencing sometimes fraught negotiations on the back foot.”
But fundamentally, as Rayment comments, one good reason for providing a written contract is that “most employees nowadays expect to receive [one] because it clarifies things for both parties. If nothing else, it is always easier to get employees to agree to restrictions like this when they start employment rather than during the employment.”
Form, content, timing
Looking at the statute, the ERA prescribes certain basic information that employers must provide to employees in the written statement. Even so, employers should design contracts to fit each category of employee – junior, middle-management, senior executives, and company directors – to more carefully reflect their importance to the business and risks they pose if unrestricted when they leave.
One way doing this, according to Rayment, is via a separate staff handbook which contains the employer’s policies and procedures on subjects such as disciplinary and grievances, equality and diversity, anti-harassment and bullying, family friendly policies, IT and data protection policies.
He adds: “Since the introduction of the GDPR in May 2018, it has become important that employees are provided with a ‘privacy notice’ setting out how the employee’s personal data will be processed.” It is now no longer enough to rely on the employee’s consent to data processing; the employer must have a lawful basis for processing the data.
And whatever is included, employment contracts should be always be agreed and signed by both parties prior to the employment commencing.
Relationships do go awry and if an employer has the misfortune to defend an employment tribunal claim, “the absence of a written contract of employment,” says Cadman, “will be a black mark for the respondent and the tribunal panel will already have the perception of an employer that is far from using best practice.”
And penalties can follow. Rayment cites an example: “Where a business fails to provide an employee with the minimum written statement of terms and conditions within two months they can make a claim to an Employment Tribunal.” He warns that if successful, “the tribunal – not the employer – will determine what particulars should have been given to the employee and what they should have said.”
To pour more fuel on the fire Trewhella adds another concern for “if an employee successfully brings an additional claim in the Employment Tribunal, say for discrimination or unfair dismissal, and they did not have a statement of terms of employment at the same time, the employee can claim compensation of between two and four weeks’ pay for the failure to provide them with that statement.”
But there’s more for print to consider: contracts can effectively become outdated. As Cadman explains, there is no legal requirement to review contracts, “but as a general rule of thumb an annual check would be advisable or when there is a key statutory change”. He recalls the situation when in 2011 employers lost the ability to give employees intended notice of retirement when approaching the age of 65: “This was certainly a change that necessitated the removal of set retirement ages from individual contracts of employment.”
Practically speaking though, Trewhella has seen contracts not reviewed over the years that have led to a situation where an employee has had significant amount of knowledge about the company, has had close contact with its clients “and without written restrictions, seen that there was nothing stopping them from leaving and setting up in competition down the road.”
The solution to this thorny problem is a restrictive covenant, which prevent this. But legally, as Cadman acknowledges, the default position is that these terms are unenforceable because they often restrict the individual’s ability to find work “unless reasonable in all the circumstances,” adding, “an employer should ensure that any such clauses are fit for purpose and relevant for those who rise through the ranks.”
As to frequency of contract reviews, Rayment says best practice would be to check contracts once a year or whenever there is a significant change in the law such as May’s GDPR – a point made earlier by Cadman. He adds: “Key employees’ contracts should be kept under regular review to ensure that any restrictive covenants, or business protection provisions, remain relevant and reflect the individual’s position and the potential damage they could cause if things went wrong.”
A review, reckons Trewhella, should also be carried out when an employee is promoted or moves into a different role “as the contractual provisions which they signed when joining the company may not now be appropriate as they become more senior or their role changes and develops.”
Other common clauses to insert can relate to the location of work so that the employer retains discretion and can require the employee to work from a different location within a reasonable distance of their original workplace. “However,” Trewhella says, “these types of clauses may only be used if the amendment to the contract is only very minor. Otherwise, to amend an employment contract the employer needs to obtain the employee’s consent to the change. The contract may also state that any changes may only be agreed in writing... and it is in any event good practice to ensure that any changes are set out in writing.”
But no matter the driver of change, “the law requires,” says Rayment, “for there to be some consideration – ‘payment’ – for new restrictive covenants negotiated during employment and this might take the form of a promotion, pay rise or one-off bonus. Naturally, it is important to make sure the discussions, agreement and any benefit provided in return for the new restrictions are well documented.”
And the best time to insert new clauses? The same time that they are provided with a pay rise, says Trewhella, “as the employee will understandably more likely to agree at that point.”
It’s a fact that businesses get sold or operations transfer. In these circumstances the Transfer of Undertakings (Protection of Employment) Regulations – TUPE – demand that, on the transfer of a business or in an outsourcing deal, existing employees of the transferring business (or incumbent service provider) will automatically transfer to the new employer with their employment terms and conditions intact.
But as Rayment points out, “it is not possible for the parties to a transaction to agree that TUPE won’t apply. However, it is normal for them to agree commercial terms to apportion risk and liability. TUPE is a complex area of law and employers should always seek advice if they believe that it might apply.”
Despite what some might think, Cadman says changes to employees’ terms and conditions can be made in limited circumstances. “Most commonly,” he says, “this will occur in the context of a wholesale reorganisation of job functions or a change in the location of the workplace.” Even so, he too emphasises that line managers should not make changes to employees’ terms and conditions, for example by changing duties or working hours, or otherwise restructure the service their team is providing in a way that has an impact on employees, without seeking legal advice.
He further adds that companies often want to harmonise terms and conditions post- transfer, “but while waiting for a time after transfer date is considered safer, there is no cut off point when TUPE is no longer deemed to apply... so employers often back away from taking such a risk despite the fact that occasionally a transfer can result in employees undertaking the same work on wildly different terms and conditions of employment.”
Allied to this, it’s worth noting that restrictive covenants (clauses that prevent key employees from poaching staff and customers if they leave) often become unenforceable after a TUPE transfer if the business structure changes. As Rayment notes, “the new employer might only find this out later down the line when the employee leaves to join a competitor and embarks on a customer or employee ‘poaching’ exercise. Worst case, there may be no restrictive covenants in place at all when there really ought to be some in order to protect business interests.”
Either way, he adds that buyers can protect themselves against this risk by negotiating their own restrictive covenants or amending the wording of existing covenants to make sure that business is protected after the transfer.
It’s all well and good having contracts but having them logged and locatable is just as important. As Cadman says, “it is a brave employer that can say hand on heart that they can guarantee that a signed copy of each individual’s employment contract will be found in the company’s personnel files.”
Naturally, staying away from the courts and tribunals should be a key priority for any employer because, as Rayment outlines, “they will interpret any ambiguity in an employment contract in favour of the employee and not the employer – so it is vital that terms are clear. If key terms are missing or if the contract is out of date, they will not ‘assist’ the employer by assuming that the terms should have been included or that the contract should be read in a different way.”
The last word, however, goes to Cadman. “Best practice is what we want BPIF members to aspire to, but we also want them to be profitable and be in a position to retain accounts and win new contracts. Many member companies face ethical audits from customers or potential customers and if they do not get a clean bill of health in terms of being able to demonstrate best practice HR, which would certainly include employees having employment contracts, then they will face an uphill task in terms of retaining clients and winning new customers.”
That alone should be food for thought.
Section one of the Employment Rights Act 1996 lists the information which an employer must provide to an employee. The information does not need to be in any particular form, but it must be in writing in one document – “the principal statement” - and must include the following:
The names of the employer and employee
The date the employment started, and the date the employee’s period of continuous employment began
Pay (or method of calculating it) and interval of payment
Hours of work
Holiday entitlement and holiday pay
The employee’s job title or a brief description of the work
Place of work
In addition, the following can either be included in the principal statement or can be included in a separate statement at a later date within the first two months of employment:
Terms related to work outside the UK for a period of more than one month
Terms as to length of temporary or fixed-term work
A note giving certain information about disciplinary and grievance procedures
Details of any collective agreements directly affecting the employment
The following can either be included in the principle statement, in a separate statement, or it can be referred to in a separate reasonably accessible document that must be referred to in the principal statement, such as in a staff handbook:
Terms relating to absence due to incapacity and sick pay
The notice periods for termination by either side
Information about disciplinary and grievance procedures
Terms as to pensions and pension schemes
Employment contract terms
A contract of employment is an agreement between the employer and employee and will contain some terms such as:
Statutory terms These are imposed, varied or regulated by law such as the minimum statutory notice period.
Express terms These are terms that have been specifically mentioned, either in writing or orally, and have been agreed by both employer and employee.
Implied terms These are terms that are not set out in writing or agreed orally but may be too obvious to need to be recorded. An example of this may be that the employee will not steal from the employer.
Incorporated terms Matters that have been put into contracts from work rules or collective agreements.