A written employment contract is not necessary to establish an employment relationship in law. However, there are many good reasons why employers will want to have in place well-drafted terms of employment.
Fundamentally, like all written agreements, employment contracts help to provide the parties with certainty. Staff are more likely to feel that they are part of a well-run business if the terms of their employment are set out in a sensibly drafted contract. The sense of security which this provides should not be underestimated.
Here are some of the tangible benefits for businesses of investing in the preparation of a written employment contract.
The legal obligation
Subject to some very limited exceptions, all employers are required to provide their employees with a written statement of employment particulars setting out certain key terms including:
- the names of parties
- the date of commencement of the employee’s employment
- the rate of pay
- terms relating to hours of work
- the place of work
- terms relating to holiday entitlement
- the length of notice required by either party to terminate the contract
Where an employer fails to provide the employee with written particulars, a complaint can be made to an employment tribunal and the tribunal will then determine what particulars ought to have been provided.
In addition, compensation can be awarded if the employee also succeeds in one of a number of other specified claims such as unfair dismissal. Although the amounts which can be awarded are not huge, up to four weeks’ pay (capped at £538 per week), if there are no written terms this is an easy win for the employee.
In the absence of agreed terms as to notice it can be difficult for an employer to know how much notice to give to terminate. A baseline entitlement is set by statute; however, where there is no evidence of an agreed notice period employees might argue that they are entitled to more notice than the statutory minimum, relying on the implied right to receive reasonable notice of termination. A director level employee, for example, might seek to argue that they should receive three, or even six, months’ notice.
Payment in lieu of notice
Another important term which would usually be included in a written contract is the employer’s right to make a payment in lieu of notice. For a variety of reasons, it might be preferable to terminate an employee’s contract immediately and pay them in lieu of notice rather than have them work their notice period. Terminating without notice and making a payment in lieu of notice will amount to a breach of contract unless the right to do so is included in the contract.
Disputes relating to remuneration will generally be more difficult for the employer to deal with where there is no written contract. In the early days of a start-up business, it is sometimes the case that rather vague promises are made to staff about things like future pay increases or an award of shares. It is important that any such commitments are spelled out clearly to minimise the risk of disputes arising. An employment contract would be the obvious place to document what has been agreed.
It would also be sensible to include an entire agreement clause in the contract. The effect of such a clause is to reduce the risk of either party being able to rely on earlier promises not included in the contract.
Garden leave and suspension
Where either party gives notice to terminate, the employer might wish to place the employee on garden leave for some or all of their notice period. This can be a useful tool to prevent the exploitation of valuable confidential information or client relationships by the departing employee. However, if there is no contractual right to implement garden leave, requiring an employee to refrain from work could amount to a breach of contract, particularly if some element of their remuneration (such as commission) is dependent on their being able to work.
Similarly, suspending an employee risks placing the employer in breach of contract if there is no contractual right of suspension. This is an important consideration given that suspension can sometimes be seen as essential to enable a fair disciplinary investigation to be carried out while safeguarding the interests of the business and/or other staff.
Much harm can be done by departing employees who exploit their relationships with clients or disclose confidential information for the benefit of competitors.
Although an employer might be able to rely on implied obligations of good faith and fidelity to prevent such behaviour during the employment relationship, once the employee has left their options are more limited if there is no written contract with well drafted restrictive covenants and confidentiality provisions.
Although former employees are under an implied duty not to disclose information which can properly be categorised a trade secret, there is inherent uncertainty where there is no written contract setting out what sort of information the employer regards as highly confidential and wants to protect. Other benefits of written confidentiality terms are that they draw an employee’s attention to their secrecy obligations and are unlikely to be ignored by an adviser if the employee takes advice about what they are entitled to disclose.
Breach of contract
Generally, employees are free to engage in competitive activities after they leave if such activities are not prohibited by express post-termination restrictions in their contracts. A well-drafted contract can be used to prevent former employees from soliciting clients, poaching other staff or even joining a competitor, for a certain period of time. Although pursuing proceedings to enforce these kind of provisions can be a costly business, their mere presence in the contract is often enough to deter ex-employees as well as their new employers, who are likely to be concerned about being sued for inducing a breach of contract.
Preparing written employment contracts is sometimes a task that gets pushed onto the backburner for a business in its infancy. When growth starts to happen it can feel as though there are many other tasks that have to take priority. However, most employers recognise that the success of the organisation is driven by its people. Establishing well-drafted terms of employment ought really to be viewed as essential in managing risk and promoting good employee relations.
Alex Bearman is a partner in the employment team at Russell-Cooke