Why Employment Contracts are important

Written by Kevin Murphy
11 March, 2022

Employment Contracts are important 

Have you googled ‘Employment contract template’?  We know you have.

When was the last time you read or updated your employees’ contracts?

It’s especially important in any business to get the contract right.  We’re sorry but a google employment contract template won’t cut it.

Let us tell you why.

The purpose of an employment contract is to ensure the relationship between an employer and employee is clearly set out and everyone understands what is expected during employment. Employment contracts also serve to eliminate any disputes which may arise at a later date, as well as understanding rights that are covered under the law. Unfortunately, this cannot be replicated by getting the answer from the almighty Google and downloading the first template contract of employment you come across.

Employment contracts are important and should be specific to your place of business.  A full contract review should be carried out and they should be legally drafted to ensure no unsolicited breaches of the contractual terms. Whilst Google might be the answer to a lot of life’s problems, unfortunately, employment contracts should not be one of them.

The importance of having each employee’s contract legally drafted instead of using a sample employment contract is crucial.

 

Changes to Employment Contracts

In April 2020 the contents of an employment contract and handbook were expanded under the ‘Good Work Plan’ to help provide clarity of an employee’s rights and employers’ obligations.  There is a list in the Employment Rights Act 1996  detailing exactly what a contract of employment must include.  Any employer who issues a contract that does not include the full list can face a claim for between 2-4 weeks’ pay from that employee, even whilst they are still employed!

 

pregnant lady

Every April, new Employment Law changes are issued, whether this is National Minimum Wage increases or increases in the amount of statutory sick pay. These changes affect contracts of employment, requiring a variation letter to be issued to all employees the changes may affect.  Any changes to terms must be confirmed in writing within 1 month to meet the minimum legal requirements!

Contracts for new recruits

All new recruits must now be issued with a contract of employment on or before day 1 of their employment.

As well as with existing employees, it is important when recruiting to issue any new employees at the same level of seniority with the same or a similar contract and to not discriminate (or face claims of discrimination).

Employment Law Solutions offer Employment Law advice and can assist with your contracts and handbooks. By offering a monthly retainer service you are able to benefit from legal advice and employment contract reviews 24/7, 365 days, all while spreading the cost over 12 monthly payments.

 

Our Top 5 Google employment contract  danger warnings :

  • Terms of contract
  • Reliability upon the clauses
  • Restricted terms
  • Specific custom and practise
  • Wages, Bonus & Commission, deductions

1) Terms of  a employment contract

It is important that an employment contract is made up of:

Express terms: such as the employee’s pay and working hours

Express terms should include any pay entitlements, bonus entitlements, car allowances, mobile phone provision or other general entitlement.  Albeit working hours are an express term, employers should ensure that they have the right to reasonably vary or to include that some additional hours may be necessary for the proper performance of duties.

All employee benefits should be detailed in the contract!  The danger in using a sample employment contract is that it does not set out the correct agreed express terms.

Statutory terms: terms that are part of employment law 

Statutory terms are inferred by the law and imply certain rights and minimum standards in favour of the employee, for instance paying the national minimum wage.  

 

TOP TIP

If the contract of employment doesn’t meet the minimum statutory terms or is not issued on or before day 1 of employment, the employee can bring an employment tribunal claim for between 2 – 4 weeks’ pay.

Implied terms: terms too obvious to be written

Implied terms are used to deal with the employer and employee’s respective rights and duties.  A question arises over when an implied term should be added to a contract of employment.  For example, is it implied that the employee has a responsibility to hold confidentiality over documents and customer information?  Sadly – no, this should be a written express term in the contract. 

Incorporated terms: terms put into the contract from other sources, such as a staff handbook or an agreement affecting many employees

Most small to medium businesses do not recognise a  collective agreement through a union but it’s important that the contract states this. However, some incorporated terms may be present if two or more businesses have merged or if a handbook was drafted to be contractual in years gone by.  Inconsistency between contracts, handbooks, implied terms and even verbal promises creates huge problems for employers.  

 

We, therefore, recommend that employment contracts are reviewed annually to ensure there are no other incorporated terms that need to be considered.

2) Reliability upon the clauses

As an employer, you should feel confident that you can rely upon the clauses in every section of the contract. A contract of employment, when drafted properly can protect your business profits, goals, and aims…

 

WARNING: A clause drafted poorly may not be reliable!!

For example, where an employee is continuously late for work, employers may be able to deduct payment for any time not spent working before their recognised start time.

If the clause is drafted wrongly and is a “penalty clause” rather than a “non-payment for time not worked” clause, it might be that the employer cannot rely on it.

a close up of someone signing a contract

The ability to rely on a clause also includes being able to take action against an employee who is not working within the bounds of their contract. This could be a member of staff using work documents to carry out private work at home.  If employers do not have a  properly worded confidentiality provision written in the contract you may be unable to take action. Employers must ensure that it is worded to protect your business properly.

 

3) Restricted terms in a employment contract

In an employee’s contract, employers might want to state that an employee cannot take certain actions during their employment or once it ends. These terms are known as ‘restrictive covenants’. It is important to be clear, specific, and time-restricted for them to be legal, however, this area of law can be complex, and is important to seek legal advice.

 

The basic premise is that you have to protect a legitimate business aim but you can’t stop a person from earning a living. This requires a tight balancing act of the two.

It is unlikely that you can stop a basic-level employee from working for a competitor for more than 3 months but you can stop them from taking your clients, confidential information and employees with them.

Or, in comparison, you can restrict a Senior Sales Manager from working for a competitor within a set mile radius where the employe has multiple competitors with the geographical region.

 

These restricted terms need to be specific per employee and cannot be copied from one to another.  They should not be deemed too restrictive to allow the employee to be faced with long-term unemployment as this would be unenforceable and it must protect a legitimate business aim of yours.

 

Further, restricted covenants, unless signed on day 1 are only enforceable if some form of consideration is offered when signed.  

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A perfect opportunity to implement new restrictive covenants is also on confirmation of a promotion.

4) Specific custom and practice

It is important for employers to understand any specific custom and practices they implement overtime per employee.

This type of behaviour can become part of the contract if it’s generally well known in the business or industry, or per employee and it’s reasonable and it’s certain. It is important to have clarified terms rather than relying on acts of custom and practice to prevent any misunderstandings in the workplace. 

Here are a few basic specific custom and practise terms that you should watch out for and could be dangerous areas:

  • The employee may assume they will receive a Christmas bonus because they have on years going by or because everyone does.  If they only started work on 1 November or have performed poorly that year, you can write a clause to state that bonuses are discretionary and 12 months service is required.
  • The employer pays full pay when sick everytime even if the employee has no contractual right.  This creates a question mark over whether the employee becomes entitled to full pay when they’re sick due to custom and practice. There is no set timeline but having been paid is 3 times over 3 months (for example) may create an expectation to full pay in the future from that employee.   It could also imply more favourable treatment over one member of staff which can result in staff fallouts/ grievances or discrimination claims.
  • Time off for child care reasons should be unpaid, if employers decide to pay it, they enter the same grey area of customer practise and the question of whether it should be paid every time?  Further, it can leave other members of staff who don’t have children feeling disgruntled that they are not being paid for time off.

5) Wages : Bonus and commission

Bonus and commission schemes ALWAYS lead to staff fall outs and it’s important to have a correctly drafted legal contract for each employee that is able to clearly identify how the bonus and commission scheme works. Or else you will be left with some or all for these questions:

  • When is commission paid?
  • What if someone is off sick?
  • Do you pay commission in an employee’s notice period?
  • Is there a sliding scale of commission due to value?
  • Do you pay commission if someone is facing disciplinary procedures?
  • Is it based on Net or Gross revenue?
  • Who has the final decision over disputes?
gifts wrapped

A bonus and commission scheme should have the right to vary to enable you to change the entitlement in the future.  If you don’t have the answers to all of the above written down then there’s scope for argument. Each individual commission scheme can be a different rate so long as it’s not based on a protected characteristic such as age. 

Deduction of wages

An employer may want to make a deduction from wages for many reasons and often think they can do so if they have an express contractual right (see terms of contracts) or it is obliged by statutory order.

 

In order to make a deduction from wages employers either need:

  1. the employees consent at the time you want to make the deduction (in reality, why would an employee agree to this?), or
  2. previous written consent in the employment contract (legally drafted of course).

 

If the employee agrees to the contract on day 1 and the deduction clause is worded properly employers can make deductions for lots of claw-backs, including but not limited to:

  • Parking fines
  • Damage to property
  • Damage to vehicles
  • Overpayment of commission (fall through sale)
  • Cost of unreturned property such as uniform, company phone
  • Discretionary sick pay where the absence wasn’t genuine

All deductions MUST be organised adequately on an itemised pay statement.

Employment Law Solutions can help!

Unfortunately, we would like to say they are the only 5 things that could possibly go wrong by using a template contract of employment but boy are we only scratching the surface!

We can’t express enough the importance of making sure that your contracts are drafted by a legal professional and an annual contract review takes place to ensure that changes are properly reflected.

Employment Law Solutions offer Employment Law advice and can assist with your employment contract.

Offering free employment contract reviews or  a monthly retainer service that enables you to benefit from legal advice and employment contract drafting 24/7, 365 days.   Your contracts and handbooks will be provided in month 1 but you can spread the cost over 12 monthly payments.

Call us on 01270 781 006

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