Friday, 12 April 2013

Contracts of employment: all the way up to eleven

Following a conversation this morning and a client getting a strong reminder of the value of a good employment contract in recent days, I've set out 11 top tips on contracts of employment (yes, like Spinal Tap, we go up to 11.) If you have any questions we don't address below, get in touch. We'd be happy to help. 

1. Do I have to give every employee a contract? 

It's a legal requirement and damned good business sense to set out terms and conditions for permanent employees before you hire anyone. Even without a paper document in place, a contract will exist, whether you like it or not. If you don't write it, the employees can pretty much assume their own based on what's become common practice.

You are legally required to give every employee a written statement covering specified terms and conditions, within two months of them starting work for you. If you don't, the employee may seek support from the Employment Tribunal to determine their terms and conditions.

The penalties for not providing the statement an be pretty high for a business, with financial awards in the thousands.

A contract must be checked and confirmed as relevant to the employee- if not, an Employment Tribunal will infer terms and conditions, if you enter into dispute.

2. "There isn't a contract if I haven't put it in writing."

Often those that believe this also believe in a verbal contract being good enough when it's in their favour! It's WRONG. A verbal contract (particularly where the employee has already done some work in return for pay) is just as binding as a written one - though it is often difficult to prove the exact terms of a contract... and that's true for both parties.
So you know you have to provide employees with the written statement- we recommend that you make sure you have written evidence of any other contract terms. This is too important to cut corners on and places a business at risk if you don't take the time to do this right.
3. What does the written statement of terms and conditions cover?

You must include:

  • the employer's name and the name of the employee
  • the date their employment began
  • the date on which the period of 'continuous employment' began (if, for example, the employee previously worked for a company acquired by you)
  • pay and when it will be paid
  • information about working hours
  • entitlement to holidays and holiday pay
  • their job title or a brief description of their work
  • their place of work
  • details of disciplinary, dismissal and grievance rules and procedures

All employers, regardless of size, have to provide written details of disciplinary rules and procedures to employees and these must be fair and reasonable. There is an Acas Code of Practice that offers guidance and help- and be warned, if you unreasonably fail to follow it, an Employment Tribunal can increase any award made against you by up to 25%.

You must also include, or make readily available (e.g. on a Company intranet):

  • terms and conditions relating to sickness and injury, and sick pay (other than statutory sick pay)
  • terms and conditions relating to pensions, including whether a contracting out certificate is in place or whether your business is already enrolled in NEST)
  • the notice period the employee is obliged to give and entitled to receive for termination of the employment contract (and if you reserve the right to give payment in lieu, it would be sensible to say so)
  • how long the employment is intended to last (unless permanent)
  • any collective agreement which directly affects the employment

4. I want the employee to complete a probationary period. Is this OK and how long can this be? 

Yes. Three to six months is the normal timeframe and is usually long enough to allow you to judge whether the employee is going to work out- and for them to decide if they want to stay, of course! Don't worry unduly about terminating employment during this period- the law seems firmly on the side of the business here. Since 6 April 2012, employees have only been able to claim unfair dismissal after completing two years of continuous service. For employees who started their job before 6 April 2012, the qualifying period before an employee can claim unfair dismissal remains at one year.

5. Before I give them a contract I want to take up references and complete a medical. Can I do this?

Yes, of course. In fact, al contracts we prepare for clients include such a clause, else they are bound by the contract even if a truly shocking reference comes back, and will have to give full notice to the employee that they are dismissing them.

Take care that your medical criteria do not discriminate against any particular condition or disability. Under the Equality Act 2010 you may only ask a job applicant about their health under specific circumstances, such as helping you to decide about making reasonable adjustments for the person to attend interview, or to decide whether an applicant can complete tasks that are essential to the job. 

You must ensure that the level of fitness required is not in excess of the requirements of the job (do you really need a Jessica Ennis-a-like to run your IT?) If you're considering taking on someone who has an impairment that may amount to a disability, please make sure you consider ‘reasonable adjustments’ under the Equality Act.

6. So what else is part of the contract?

Other documents may provide evidence of the contract- for example, the job description, correspondence, collective agreements or company policies if they are considered contractual terms. (We recommend that it is made clear what is and is not considered to be of contractual status.)

What is 'Custom and practice' in your company can become part of the contract. For example, if employees come to have 'reasonable' expectations of receiving a benefit, an Employment Tribunal is likely to interpret it as a contractual entitlement.

All contracts also include implied terms, whether written or not. Examples are:

  • your obligation to provide a secure, safe and healthy working environment
  • mutual obligations not to do anything that might undermine the relationship of mutual 'trust and confidence' between employer and employee
  • the employee's obligation to serve the business honestly and faithfully, obeying reasonable instructions and working with due diligence and skill
  • the employee's obligation not to undermine your business
Employees have statutory rights, such as the right to a minimum period of notice, protection against discrimination, the right to be (or not to be) a member of a trade union, and rights under working time and minimum wage legislation. The employment contract cannot override these statutory rights.

7. At what point does an employment contract become binding?

Once an unconditional offer of employment has been accepted by the employee, a contract exists. This may be considered to happen before the employment commences.

8. Are employment contracts the same for part-time employees?

Yes. Part-time employees have the same rights as and are entitled to be treated no less favourably than full-time employees. For example, they have rights to the same benefits and terms of employment (pro rata if necessary) as full-time employees, unless the failure to provide this benefit can be objectively justified- and that must be taken on a case-by-case basis.


9. Can I change an employment contract?

If you have reserved the right to amend the terms of the contract, then yes, provided you are not acting in an arbitrary or unreasonable manner.

If you have not reserved the right to amend the terms, then no, unless you obtain the employee's agreement or consent. The outcome, however, will depend partly on how serious the change is. For example, a cut in pay rates would normally justify an employee resigning and claiming constructive dismissal- although he or she would probably raise a grievance first because if they fail to do so, they could see a large reduction in any Tribunal award- up to 25%.

If a change is introduced and employees do not object, even if there is no formal agreement to the change, they may be taken to have agreed to it by carrying on working, particularly where the change has an immediate impact. But if they carry on working 'under protest', take advice, this can be damaging and create long-term problems.

Whatever the circumstances, the best approach is to discuss it with them and consult on changes. Explain why you want to make the change, and invite their suggestions and ideas.

10. What can I do if an employee won't agree to a change in their employment contract?

You could terminate the contract on full notice and offer to re-engage the employee on new terms of employment, beginning at the end of their notice period. There would be no breach of contract in this situation but there is a risk of employees claiming unfair dismissal, so seek good advice before commencing this course of action.

(Remember, that since 6 April 2012, employees have only been able to claim unfair dismissal, if dismissed, after two years of continuous service. For employees who commenced their employment before 6 April 2012, the qualifying period remains at one year.)

Dismissals can be fair if you can justify changes by clearly shoing that there is a business need. You must be able to show that the needs of the business outweigh any disadvantages to the employees, explain the business reasons fully and warn and consult employees over the required changes.

11. Are there any special terms I need to consider for senior employees and directors?

It tends to be harder to recruit a replacement for director's post or other senior role. It's a good idea to put a longer notice period in their contracts of employment so everyone can properly prepare for their departure, and allow for a handover period. You may also want to reserve the right to place the employee on 'garden leave' during the notice period.

Given their seniority, and access to commercially sensitive and confidential information and customer contracts, it is sensible to consider whether 'restraint of trade' clauses such as non-solicitation of clients and/or staff and confidentiality clauses should be included within their contract. Make sure you take advice.

There may be agreements on commission or bonus payments which need careful drafting. For directors, you also need to think about provisions relating to their position as directors- it is legally possible to sack a director as an employee but for them to remain in office as a director. What could this do to your business or morale?

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