Contracts of employment
17 May 2023
A contract of employment can be a written document, a verbal agreement, or a mixture of the two. Even where the employer and employee have agreed express terms, certain terms are always implied into every contract of employment. Understanding the full effect of the contract of employment is important because it forms the basis of many of the legal rights and obligations which govern the employment relationship.
InsideWhat is a contract of employment?
Sources of contractual terms
Written statement of terms
Other terms to consider
What is a contract of employment?
A contract of employment is a legally binding agreement between an employee and their employer which forms the basis of the employment relationship. The contract sets out both parties’ rights, responsibilities and duties - collectively called the “terms” of the contract.
Sources of contractual terms
A contract of employment is not necessarily one set of written terms in a single document. Many contracts consist of a patchwork of terms from different sources. These can include:
- express terms (either verbal or written)
- implied terms
- terms incorporated from other documents
Express terms are terms that have been specifically agreed between the parties. Although a contract can be oral only, in practice it is best to put a contract in writing. This provides certainty and will help to prevent disputes as to what was agreed. It also helps to make sure that a proper written statement of terms has been provided by the employer (see below).
Extra terms that have not been expressly agreed can be implied into an employment contract in a number of ways.
- Terms implied by law: Some terms are implied in every contract of employment. The most important implied term is the mutual duty of trust and confidence between the employer and employee. If an employer acts in a manner likely to destroy or seriously damage the relationship of trust and confidence, this can form the basis of a constructive dismissal claim by an employee. Other implied terms include duties of flexibility, loyalty and confidentiality.
- Terms implied by statute: Some statutes set minimum terms that are implied into every employment contract. Examples include the right to a minimum notice period and the right to be paid the national minimum wage.
- Terms implied in fact: Terms may be implied to fill a “gap” in the contract’s drafting, or because the parties' conduct clearly shows that the term must have been intended at the time the contract was entered into.
- Terms implied by custom and practice: This may happen when the terms represent an established practice (e.g. repeatedly paying enhanced redundancy payments of a certain amount). In practice this is difficult to show, as the term needs to be "reasonable, notorious and certain”.
Terms incorporated from other documents
Terms can be incorporated from other documents. These could be from the offer letter or from an employer’s policies and procedures. Terms from these types of documents are not always incorporated into the contract – often they will expressly state that they are non-contractual (see below).
Terms may also be incorporated from a collective agreement (a negotiated agreement between an employer and a trade union or staff association). The contract will normally state if any terms are set by a collective agreement.
Written statement of terms
Although the contract of employment does not have to be in writing, every employer must give each employee a written statement setting out their main terms and conditions at the start of the employment relationship (often known as a “section one statement” because the requirement is found in section 1 of the Employment Rights Act 1996).
The written statement is not necessarily the full contract of employment, but it provides evidence of the express terms agreed between the parties.
The penalties for non-compliance are limited. If an employer fails to give a section one statement, or gives an inaccurate or incomplete statement, the employee can ask an employment tribunal to determine what particulars ought to have been included. The employee cannot, however, claim any compensation unless they also succeed in a separate tribunal claim (e.g. for unfair dismissal or deduction from wages). Compensation is limited to 2-4 weeks’ pay and there is a statutory cap on a week’s pay for this purpose.
Most of the particulars must be given in a single document by day one of employment, but some can be contained in a reasonably accessible separate document and others can be given in instalments within two months. If there are no particulars on a topic, that fact must generally be stated.
The following particulars must be given in a single document by day one:
- name of the employer and employee
- date the employment began
- date the employee’s period of continuous employment began
- rate of remuneration
- intervals at which remuneration is paid (weekly, monthly etc)
- hours of work
- entitlement to holidays and holiday pay
- any other contractual benefits
- any non-contractual benefits
- length of notice required to terminate the contract
- job title or a brief description of the work
- place of work and address of employer
- non-permanent employment details (period and end date)
- probationary period details (conditions and duration)
- arrangements if required to work outside the UK for one month or more
- any training entitlement that the employee is required to complete
- any other required training where the employer will not bear the cost
The following particulars can be given in a single document or a reasonably accessible separate one (such as a staff handbook):
- sickness terms including sick pay
- other paid leave (e.g. maternity, paternity, time off for dependants)
- disciplinary rules and procedure (can be given within two months)
- details of pensions and pension schemes (can be given within two months)
- any training entitlement (can be given within two months)
And the following particulars can be given in a single document or within two months of starting employment:
- any collective agreements which directly affect the terms and conditions of employment
- how and with whom to raise a grievance
- person to whom employee can appeal any disciplinary decision
In practice, many employers will not set out all of these particulars in the main written contract, because it can make the contract seem unclear or too legal. Some employers will add an annex to the main contract which sets out the non-core particulars. Others may simply rely on policies set out in a staff handbook, as although this may be a technical breach the penalties for non-compliance are limited.
It is important to make it clear if particular terms or documents are intended to be non-contractual.
Non-contractual terms can be changed more easily. This gives an employer some flexibility if, in particular circumstances, it is not possible to follow a particular policy or procedure to the letter. For example, if a grievance policy is contractual, an employee could argue that the employer has breached their contract by failing to provide a response to a grievance within the time period set out in the policy.
Examples of policies or procedures which should normally be non-contractual include: maternity, paternity, and other family-friendly leave policies; disciplinary and grievance procedures; whistleblowing procedures; data protection, communications and IT policies; and travel, expenses and anti-bribery policies. It is common for employers to put these types of documents in a staff handbook or similar, which makes clear that the policies/ procedures are not contractual, do not create rights or obligations, and can be amended at any time.
Other terms to consider
Although an employer is not legally obliged to provide any additional information beyond the section one statement, it is wise from a commercial perspective to include other clauses which can provide greater protection and flexibility for an employer’s business. Typical additional terms include:
- Right to make deductions from wages: Employers are not generally allowed to make deductions from wages without prior written agreement, so these clauses are included to make clear that employers can do so (for example where the worker is repaying a loan).
- Payment in lieu of notice (often referred to as a “PILON clause”): This type of clause allows an employer to lawfully terminate the contract of employment immediately provided that the employee receives payment for their notice period. Without this, the employee must be allowed to work out their notice period or the employer is liable to pay damages.
- Garden leave: A garden leave clause allows an employer to require an employee to stay away from the workplace during the notice period. The employee continues to be employed during the period of garden leave and so cannot start work for a competitor. A garden leave clause may be used alongside restrictive covenants in order to maximise protection for the employer’s business.
- Restrictive covenants: These terms restrict an employee’s activities after employment has ended. For example, non-solicitation covenants (prohibiting the employee from actively trying to take customers or employees away from the ex-employer) or non-compete covenants (prohibiting the employee from working for a competitor). These clauses must be drafted very carefully to ensure that they can be enforced. (See our Inbrief on Protecting your business for further information).
- Confidentiality: An employee has a duty to keep the employer’s affairs confidential. However, after employment has ended the implied duty of confidentiality only protects “trade secrets”. It is common, therefore, for employers to expressly extend an employee’s confidentiality obligations beyond the termination of the employment relationship.
- Return of property and passwords: It is useful to include an explicit requirement to share passwords as an employer’s implied duties are unclear. Employees have no rights to hold on to employer property after employment ends but it can be helpful to have a clause being explicit about the need to return property.
- Intellectual property clauses: Intellectual property rights created by employees during the course of their employment automatically belong to the employer, but such clauses are typically included to make this clear – and may go further to cover rights in work that wasn’t created entirely during employment. If the employee might invent something patentable then this requires specialist clauses.
- Right to suspend employee during any investigation: Without this clause employees may argue that they have a right to keep coming to work. Such clauses often provide for conditions to be attached to suspension, which can help to prevent arguments about what is appropriate.
- Mobility clause: Employees have a limited implied duty of flexibility, but employers often want to agree a greater degree of flexibility to move the employee’s workplace. Mobility clauses are heavily restricted by implied terms to stop employers exercising them unreasonably.
- Expenses: It is useful to have a clause that clarifies what expenses will be reimbursed and any essential process for claiming them.
- Any other terms which are orally agreed: If there are any extra terms which have been agreed (for example during the recruitment process) it is always best to put them in writing as this provides certainty and helps prevent disputes.
The relevance, value and effectiveness of these additional terms should be assessed on a case by case basis. Particular consideration should be given to the nature of the business and the employee’s responsibilities and seniority. Other additional terms might also be advisable, especially for senior employees or specialised roles.