Andreja Okamgba, HR Consultant at CBW, discusses the importance of employment contracts and how they ultimately protect you and your business.
Employment contracts mainly protect the employer
Some employers may feel that employment contracts are unnecessary. Perhaps they are seen as a piece of compliance paperwork to be tackled later on, or they struggle to justify the cost of getting proper templates drafted. Employment contracts don’t seem to make it very high on business agendas of start-ups and small businesses in particular. Employers may even take the approach of not introducing the contracts at all, as long as employees are happy to work without them.
There is a misconception that contracts will restrict the business from growth and agile change, and it is therefore much better not to give employees contracts at all. This is perhaps the biggest HR myth and it is simply not true. There are no advantages to not having written employment contracts in place, in fact, having a contract in place protects the employer more than anything else.
Apart from the benefits outlined below, providing the statements of the main terms and conditions of employment to the employee is also a legal requirement outlined in section 1 of the Employment Rights Act 1996. From April 2020 it must be provided from day one of employment (until then the timeframe is within the first 2 months of employment; you can read more about the upcoming changes in our insight ‘Changes to the statement of employment particulars – how will this impact your business?’) There is really no case for delaying this and the sooner the terms are made clear, the better.
Benefit for the employers
Statutory legal provisions
Even where there is no written document in place, the contract between the two parties will still exist. The terms of such undocumented contract will follow statutory employment legislation. This is undesirable because most of the statutory legislation is quite heavily weighted in the favour of the employee, not the employer. Some examples of this are:
• Notice periods – if an employee wants to leave and they haven’t had a contract, they are only obliged to give the employer one week’s notice. This can cause significant problems to the business as the timeframe might not even be enough for a comprehensive handover, let alone replacing the employee. An employment contract can specify a longer notice period, commonly 1 month or 6 weeks or even 3 months for more senior positions. This puts the business in a much stronger position by allowing more time to find a replacement and smoothly transfer the workload
• Working times – legislation put a limit on working hours and no employee should be required to work more than 48 hours per week; in the UK employees are allowed to opt out from this requirement, however this must be put in writing and without proof of employee’s agreement the legal limit of 48 hours will be in place
Employers can also include additional protections for the business in the contract, as long as these are legally acceptable. Some examples are:
• Restrictive covenants – employers can put in place reasonable restrictions on employees after they leave the business, such as not working for competitors and not enticing away clients of the business or poaching employees
• Payment in lieu of notice (PILON) – the ability to require the departing employee to not work their notice and be paid instead, can be very useful in certain situations, yet doing so will be considered a breach of contract unless a relevant clause in included in their terms and conditions
• Garden leave – in this case the departing employee remains an employee during their notice period but is prevented from entering the workplace, doing any work or interacting with their colleagues; again this can be useful in some cases but it will be a breach of contract if there is no explicit right to do so written down
Finally, not having a written document in place, makes it notoriously difficult to track employees’ entitlements and obligations and is very likely to lead to misunderstandings and mismatched expectations. Providing transparency regarding the terms and conditions by having everything clearly written down will prevent potentially costly disagreements later in the employment relationship. For example:
• When an employee falls ill, they may expect to be paid company sickness pay (which allegedly their previous line manager assured them was part of their benefits), whereas the employer did not budget for providing anything above the Statutory Sickness Pay. Potentially a very costly Employment Tribunal claim could be avoided by simply stating the entitlements in the contract from the outset
• Employees may be unclear about their entitlements and feel confused about what other employees are known to have received; it might be something completely innocent such as employees’ annual leave increasing with length of service (therefore longer serving staff receive more annual leave days); this not being written down can fuel the feeling of unfair treatment and potentially even affect the morale in the workplace
Our HR Consultancy team recommends that employment contracts are carefully drafted before you start employing staff. This will build a great foundation which will give your business the necessary protection and structure as you grow, and also keep you legally compliant at all times.
We can help you with reviewing your existing contracts or draft a tailored template for your business. If you would like to get started on any of the above recommended actions, or have any questions on the topic of this article please get in touch with our HR Consultancy team.