Many employment disputes could be avoided if a properly drafted employment contract had been put in place at the start of the relationship. “One size fits all” drafts are often not appropriate but, without proper guidance, knowing what to include can be daunting. The Keystone Employment Team has put together this Keynotes publication to highlight the main issues.
Before drafting an employment contract, there are a number of things to consider:
- Information gathering: The contract will need to include basic information relating to names, addresses, commencement dates, remuneration package, hours and place of work, etc;
- Required terms: S.1 Employment Rights Act 1996 ("ERA") contains a list of the minimum information which must be given to an employee in a statement of employment particulars. You must ensure that all of these are included and provided to the employee no later than 2 months after employment commences. A full list is available at http://www.legislation.gov.uk/ukpga/1996/18/contents. Usually this information is contained in the employment contract; and
- The 'nice to have's': What other terms would be beneficial to include? For example, do you need the protection of restrictive covenants after termination? When should you include a payment in lieu of notice clause? Do you need provision to recoup training costs if the employment ends? Not all clauses will be appropriate in every situation but some of the most common are considered below.
The exact extent of the information gathering excercise will depend on each contract. Set out below are the customary requirements.
Names and addresses of both parties
(NB: if the employer is a group company, care is required to select the right group company)
- Dates - Date of commencement of employment (and, if different, date of commencement of continuous employment)
- Duration - How long is the employment intended to last? Is it for an indefinite or for a fixed term (e.g. 12 months or until the occurrence of a specific event)?
- Probation - Does the employer want to include a probationary period to allow quicker dismissal at an early stage if it doesn't work out? How long should it be? Can the employer extend it?
- Role - What is the intended job title, description of duties and reporting lines? Is there a particular geographic territory? Can other employees be appointed to perform the same role within the same territory?
- Directorship - If the employee will be a Director of the company, the employer is likely to need a service contract not a simple employment contract. This would include details of directors' duties, etc.
- Pay - How much will the employee be paid and when e.g. monthly in arrears? On what day will it be payable? What about salary reviews? When do they happen and what factors will be taken into account in any review? The employer should consider a deductions from wages clause entitling them to make specific deductions when required (nb: such clauses must be operated with extreme caution to avoid Tribunal claims).
- Benefits - What other benefits apply? E.g. company car, private healthcare etc. Specific details can be included in the contract but it is often easier to keep the reference in the contract brief and link to a separate policy (e.g. company car policy to include terms relating to insurance, servicing, etc) Often a good idea to include some flexibility in case the benefits change from time to time
- Work place - Will the employer need the ability to relocate the employee under a mobility clause? Will the employee need to travel or work from home? If the employee is required to work outside the UK for a period of more than one month, the s.1 statement must state this, the currency in which he/she will be paid while working outside the UK, any additional remuneration or benefits payable during that period, and the terms applicable upon his/her return
- Hours - What are the normal working hours (if any)? Is any overtime paid or unpaid? Where the pattern of hours is not standard, consider alternatives including part-time working, shifts systems, zero hours contracts, etc. Is it necessary to ask the employee to sign an opt-out agreement under the Working Time Regulations? Ideally this should be separate from the contract, not included within it, so that the employee has the option whether or not to consent
- Holiday entitlement - Employers are reminded of the statutory minimum period of annual leave (5.6 weeks per year - 28 days for full-timers) When does the holiday year run from? Procedures for taking holiday to be specified (e.g. reporting requirements) Are public holidays included? Where contractual holiday entitlement exceeds statutory annual leave entitlement, can he/she carry-over non-statutory annual leave to the next holiday year? Will the employee be required to take a period of holiday at a certain time e.g. two weeks over the summer or X days over the Christmas week?
- Sickness absence - Consider notification requirements Sick pay over and above statutory entitlement? A contractual entitlement or a discretion? (NB: be careful about exercising such discretion. Ensure any decision is not unreasonable or tainted by discrimination) Include a requirement to attend a medical examination when required to do so
- Termination of employment - What will the notice period be? (NB: this is subject to statutory minimum notice periods which increase over time up to a maximum of 12 weeks' notice after 12 years service) A list should be included (stated to be non-exhaustive) of circumstances which merit summary dismissal without notice. This list may vary depending on the nature of the employer's business
- Pension arrangements - What scheme is available to the employee? Does the employer contribute? Is there a contracting-out certificate in place?
- Collective agreements - Are there any relevant to the employee and where can he/she find a copy? Will the employer need protection for confidential information or intellectual property rights? This will be more relevant for some roles and industries than others. Data protection - consider the employer's use and storage of the employee's personal data. Is consent required?
The real value will be the parts of the contract that address issues of particular relevance, for example:
These are included where the employer considers that he will need to protect his business interests when the employee leaves. They can take various forms, but the most common include non-competition clauses (which prevent the employee from working for a competitor for a period of time), non-solicitation clauses (which prevent the employee from soliciting clients of the employer or other staff) and non-dealing clauses (which prevent the employee from dealing with specified people e.g. suppliers / clients). Restrictive covenants can be notoriously difficult to enforce and accordingly they have to be extremely carefully drafted and no wider than reasonably necessary to protect a legitimate business interest of the employer. It is usually necessary to limit their application in terms of time and scope. Always seek legal advice before including restrictive covenants.
Garden leave clause:
This allows the employer to place the employee on garden leave (i.e. still employed but not at work) during his notice period. This is often used to protect customer contacts and confidential information during the notice period. Where both garden leave and restrictive covenant clauses are present it may be appropriate to dovetail them so that any period of garden leave is deducted from the duration of the restrictive covenants. This may help the enforcement of the covenants.
Payment in lieu of notice clause ("PILON"):
This allows the employer to terminate the employment immediately by paying in lieu of the notice period instead of allowing the employee to work it. Careful drafting is required, for example, to determine which sums are payable (is the payment limited to salary only or the value of salary and benefits?). The downside of a PILON clause is that its inclusion often makes the notice pay taxable, whereas this can sometimes be tax-free if the employee is dismissed without notice where no PILON is present. It is important to include a PILON clause if the employment contract contains restrictive covenants or other clauses which continue post-termination - otherwise dismissing summarily without the right to do so under a PILON clause could render such covenants and restrictions unenforceable. More complex PILON clauses can provide for payment in instalments, subject to the duty to mitigate by looking for other work, but this is unusual.
Recoupment of training costs:
Employers who pay for the employee to undertake some formal training (e.g. an NVQ related to the job) sometimes wish to provide in the contract that a proportion of the training cost should be repaid if the employee leaves within a certain period of time. Such clauses have to be carefully drafted, usually including a sliding scale (so that the amount repayable decreases as time goes by), to avoid the term being unenforceable as a penalty clause or in restraint of trade.
Some employers wish to leave leeway to alter a specific element of the employment in the future - for example, to allocate a different role, impose additional travel commitments or change working hours. Such clauses are not always enforceable but those which are both reasonably drafted and reasonably enforced stand the best chance. For example, give as much notice as possible of any change, consult with the employee, compensate financially for any increased travel costs etc. Draft and exercise such clauses with caution and consider whether proposed changes could discriminate against a particular section of your workforce.
It would be possible to fill a whole textbook with complex case law about entitlement to bonus payments. Such clauses need very careful drafting, usually in conjunction with a separate bonus policy.
Common issues to consider include:
- the criteria for meeting the bonus (objective criteria are best as they are easily measured and less likely to end in dispute);
- whether to retain any form of discretion over the award or amount and the circumstances in which such discretion can be exercised (discretion cannot be used arbitrarily to remove entitlement to a bonus);
- the payment terms, and taxation of the payment;
- What happens if the employee leaves part-way through a bonus year or after the calculation period but prior to payment?; and
- Avoiding discrimination (e.g. for staff on maternity leave).
With the use of social media sites at an all time high, an internet/email clause should be considered in the contract and/or policy, specifying to what extent, if any, access is permitted on the employer's IT equipment. The contract and policy can also make clear that damaging commentary about the employer (or other members of staff) being made on such sites (whether or not in work time) may lead to disciplinary action. This may help defend Tribunal claims if disciplinary proceedings end up resulting from inappropriate comments.
Once the contract has been drafted and signed, keep it safe and ensure that it is updated very clearly and in writing to reflect salary increases/promotions from time to time. If substantive changes need to be made to the contract terms after it is signed, always seek advice on the best way to go about this, as employment contracts cannot usually be changed without the employee's consent. If there is any change to any of the required statutory particulars, the employer must give the employee a written statement containing details of the change at the earliest opportunity and, in any event, no later than one month after the change.