The Need-to-Know Bits When Dealing With Employment Contracts

Employment contracts are not the most exciting topic in the world, but understanding your options and knowing what to do and when to do it, ensures things are managed quickly and efficiently, without exposure to employment claims. It is important to ensure that your employees’ contracts protect your business during their employment, and also at the stage when individuals leave. We’ve tried to condense everything you need to know into digestible chunks, but if you’re short of time scan through to the parts which are applicable to you and come back later.

Management Attitudes

You do need…

  • to understand that the contract forms the basis of your employment agreement with your employee and is not an added extra, but in fact a legal requirement.
  • to issue a written statement/contract of employment to a new starter within eight weeks. HOWEVER, to protect the organisation and provide clarity around expectations and terms, contracts should ideally be issued and signed prior to the start date.

You don’t need…

  • to be a lawyer to grasp the basics of contracts. If you’re confused or worried already, it’s because you are anticipating confusion, rather than actually being confused! You need to clear your mind of these thoughts and focus!

There is always one topic that trumps all others in terms of web visits: Dismissing staff with short service. This is a huge topic, so if you’re thinking of delaying issuing the contract… DON’T. It’s an invaluable document if you want clarity on how to manage, or dismiss someone early on.


If you make a contract verbally, that’s wonderful, but it doesn’t leave you much protection if things go belly up. Plus, you still have to be aware that the employee has a legal right to written statement of terms/contract of employment within eight weeks of them starting work with you. Interestingly, organisations that do things by the book with staff, sometimes mess up and do things verbally when agreeing terms with senior appointments. A big mistake and one that many come to regret!

Contracts do not need to be signed to be valid, but a refusal to sign should be treated differently to a failure to sign. If someone refuses to sign and gives a clear reason then you cannot consider the contract implemented. If they simply fail to sign – sometimes due to an allergy to putting pen to paper, then you can consider the contract you issued in place.

You might find that some terms are considered to be contractual by the employment courts, even if not included in the written contract of employment. These terms come about through custom and practice and can become employment rights without you ever planning that. For something to be considered to be custom and practise it must:

  • Be reasonable
  • Be certain (i.e. be able to be defined precisely)
  • Be notorious (i.e. be long established and well known)

Examples of custom and practice we have encountered include: Christmas bonuses, packing up/closing down 10mins before the end of day siren goes, a bonus day off on your birthday, extra days holiday during a Christmas shutdown.

Zero hours contracts

  • Zero hours contracts should mean that there is no obligation for you to provide work AND there is no obligation for the employee on the zero hours contract to accept work.
  • Zero hour employees have the same rights as other employee, e.g. to NMW and to annual holiday. The fact they will keep having breaks in their contracts will mean that any rights that accrue over time will be affected.
  • Zero hours contracts are permanent contracts. If, over time, you stop using your zero hours employee, be aware that unless you officially terminate their contract, it will still be in place, along with your responsibilities to them.

Permanent contracts

Most of your employees will probably be issued with a permanent contract.

Permanent contracts have no end date and it has been many years since you can force staff to retire at a specific age. The only options for terminating a permanent contract are:

  • The employee resigns.
  • You dismiss on grounds of conduct, poor performance, ill health.
  • The employees right to work in the UK has expired.
  • SOSR – a legal term meaning ‘some other substantial reason’ (too complicated to go into here).
  • Grounds of redundancy.

A word of warning: If a permanent employee goes AWOL, fails to return from long term sick leave, spends a period at her majesty’s pleasure etc. if you fail to properly terminate the contract (if appropriate to do so) you might just find that one day your long forgotten employee walks back in through the door stating they are ready to work!

Fixed term contracts (sometimes referred to as temporary contracts)

Fixed term contracts last for a specific length of time and end when a specific task is completed or when a specific event takes place.

Covering a maternity/adoption leave could be achieved with a fixed term contract – don’t forget to include in the contract that you may wish to give notice prior to the end of the contract if the person on maternity/adoption leave decides to return earlier! Unless, of course, you can afford to pay two salaries for the same role?!

A classic mistake with fixed term employees is to let time drift and all of a sudden you realise time was up several months earlier and they are now effectively working as a permanent employee. Don’t let this happen to you; it’s careless and could cost you dear.

Director’s service agreements and share holder agreements

A director’s service agreement is usually a variation on a theme of the contract of employment. It’s likely to be more prescriptive in terms of responsibilities, obligations and restrictive in terms of restraint of trade and confidentiality clauses.

Sometimes directors (or even employees) are also shareholders. In these instances they will normally be issued with a shareholders agreement as well as a director’s service agreement. The purpose of a shareholders agreement is to protect the shareholders investment in the company, to establish a fair relationship between the shareholders and to govern how the organisation is run.

Owning shares in a business does not in itself give any rights to an individual to manage staff, be involved in the day to day running of the business or generally throw their weight around! Shareholders are not employed by the business unless a specific employment relationship has been set up. It’s not uncommon in small businesses for shareholders to act as though they are employed.

Changing contractual terms

Either the employee or you may wish to vary a contract of employment, e.g. they may want to reduce their working hours or you may want to ask them to change their job to include other things. These sorts of changes to contracts can only be made with both parties agreement and should ideally be put in writing and signed by both you and them.

If you’re only making a small change, it’s often easier to issue a letter that amends the existing contract rather than reissue the whole contract. e.g. “this letter confirms our recent discussions about your contract in that on xxx date your place of work will change to xxx.”

If you unilaterally (without their agreement) vary an employee’s terms and conditions then you could be found to be in breach of contract.

Freelancers, consultants, associates and contractors

If you agree that someone is going to paint your offices, clean your shop, provide support in some way, but on a self employed basis, then they would be issued with a ‘contract for services’.

Anyone on a contract for services must look after their own tax and NI and they may not be entitled to the same rights as workers, e.g. NMW (minimum wage) and holidays, but you are still responsible for their health and safety.

Whilst the self-employed may keep your overheads down, reduce your NI bill etc. be wary of a relationship that overtime morphs into one that is identical to the relationship you have with those you employ. Classic mistakes we encounter are:

  • Asking for sick notes
  • Paying through payroll
  • Giving performance reviews
  • Inviting to disciplinary hearings
  • Paying sickness benefits

So make sure you avoid doing any of these!

Offer letter, but no contract

We are often asked if you can you sack someone if they have an offer letter but no contract has been issued.

If they are working as your employee, even if it’s only day one, then they have rights and therefore there is a process to go through as with any other employee. It doesn’t mean you can’t sack them, but you have to follow the right process.

If you would like any help with any of the above or to talk through any up coming challenges you may have, please do give us a call on 01425 479888 or you can email us.

Line managers in need of some knowledge and confidence building? Why not try these courses:

  • Essential employment law for line managers | View
  • Managing employee performance | View
  • Managing discipline | View
  • Managing absence | View
  • Managing change | View

The information contained within this article is for general guidance only and represents our understanding of employment and associated law and employee relations issues as at the date of publication. Jaluch Limited, or any of its directors or employees, cannot be held responsible for any action or inaction taken in reliance upon the contents. Specific advice should be sought on all individual matters.

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