Employment Contracts & Director Service Contracts

The terms of a contract are the rights and obligations that bind the parties to the contract. They can be express, implied or incorporated from other sources. The basic principles of contract law are that there must be:

• Intention to create legal relations.
• Offer and acceptance.
• Consideration between the parties.
• Certainty.

The general principles above apply to an employment contract in the same way that they apply to any other type of contract.  However, there are some important differences between employment contracts and other commercial contracts, largely due to their personal nature.

There are, broadly, two fundamental choices for an employer when deciding on the term of employment: a fixed-term contract (which may or may not contain a notice period) or an indefinite contract terminable by notice at any time.

There is no formal distinction between the different types of employees, other than any statutory requirements relating to directors.  When drafting a contract of employment, each situation should be considered on the facts and clauses tailored, omitted or added to an employment contract, according to the particular situation.

Caution is required when distinguishing between contracts for “senior” and “junior” employees. Depending on the industry, organisation, and specific role, certain clauses typically reserved for higher-level employees may still be relevant for others. For instance, restrictive covenants may be necessary for individuals who hold positions of influence with clients, even if they are not in managerial roles or highly compensated.

Indefinite contracts, often referred to as permanent contracts, can be full or part time, with no real difference between them, other than certain benefits will be pro-rated and the hours of work will be different.

Fixed-term contracts, however, come in several varieties.  Pure fixed-term, where the employee is employed for a definite period which cannot be terminated early by notice (except in the event of summary termination); Fixed-Term with the option to give notice during the term, where the employee is employed for a definite term which can be terminated early by notice (sometimes referred to as a “break clause”); Initial fixed-term that will not expire unless and until notice is given, such notice to expire at the end of the term or to be served thereafter and if notice is not given on or before the date specified, the contract will become one of indefinite duration terminable on notice; and, Initial fixed-term during which no notice may be given and where after the initial fixed term, notice may be given at any time. Such clauses do not fall within the definition of fixed-term contracts in the Fixed-Term Employees Regulations.

Term time contracts are suitable for an employee working only during school terms in a business or organisation that operates throughout the year. They may also be adapted for use at a workplace (such as a school) that is closed during the school holidays.

Casual contracts may be used in a variety of ways, for example as zero hours workers or zero hours employees, bank staff or casual employees working under an umbrella contract. In a casual working arrangement, there is generally no obligation to offer work and no obligation on the individual to accept work. However, in a casual employment relationship, the individual is ostensibly engaged on a series of separate contracts, and there is an over-arching contract of employment (whether express or implied), referred to as an umbrella contract, that continues even when the individual is not working. This creates an employment relationship. This contract should be used if the employer wants to engage an individual as a casual employee, working for the employer under an umbrella contract as and when required, or for a zero hours employee.

Section 1 of the Employment Rights Act 1996 (ERA 1996) sets out the obligation on an employer to provide employees (and from 6 April 2020, workers) with a written statement of particulars of employment.

This has long been a requirement for employees, however, amendments to section 1 of the ERA 1996 that came into force on 6 April 2020 changed the scope of the particulars that must be provided, the timing of when they must be provided and whether the particulars may be contained in another document.

A section 1 statement is not necessarily a contract of employment in itself. It may simply be a statement of what has already been agreed orally or in writing. If there is no separate written contract, the section 1 statement will be persuasive evidence as to the terms of the contract of employment between the parties. If, however, there is a separate written contract, the section 1 statement cannot override a term recorded in that contract. The contract itself always takes precedence.

To comply with Section 1 of the Employment Rights Act 1996, the written statement must include the following:

• the employer’s name
• the employee’s or worker’s name, job title or a description of work and start date
• how much and how often an employee or worker will get paid
• hours and days of work and if and how they may vary (also if employees or workers will have to work on Sundays, during the ‘night period’or take overtime)
• holiday entitlement(and if that includes public holidays)
• where an employee or worker will be working and whether they might have to relocate
• if an employee or worker works in different places, where these will be and what the employer’s address is
• how long a job is expected to last (and what the end date is if it’s a fixed-term contract)
• how long any probation period is and what its conditions are
• any other benefits (for example, childcare vouchers and lunch)
• obligatory training, whether or not this is paid for by the employer
• For employees, it must also include the date that a previous job started if it counts towards a period of continuous employment.

It is usually not illegal to employ someone without a written contract, however, it is risky, and it could lead to legal issues. An employer will be treated as having met its obligation to provide a section 1 statement where it gives an employee a written contract containing information satisfying the employer’s section 1 obligations and the document is given no later than the beginning of employment (section 7A, ERA 1996).

Here are 6 steps on creating an employment contract:

1. Gather information like employee/employer details, job title, start date etc.
2. Outline terms like salary, work hours, holidays and notice period etc.
3. Include legal clauses like confidentiality, termination, disciplinary procedures etc.
4. Ensure compliance by checking against labour laws.
5. Consult a lawyer for legal accuracy.
6. Finalise and sign – both parties review and sign the contract.

Without a contract, employment laws dictate the terms, but this can lead to disputes, legal risks, and difficulty enforcing specific rights or conditions. In some areas you might also face penalties for not providing written terms.

Using templates to produce contracts of employment carries several risks, including:

• Lack of Customisation: Templates may not be tailored to the specific needs of the organization, role, or industry, potentially missing critical clauses or including irrelevant ones.
• Outdated Provisions: Templates may not reflect the latest legal updates, leading to non-compliance with current employment laws and regulations.
• Inconsistent Terms: Using a generic template can result in vague or inconsistent terms, increasing the risk of disputes or misunderstandings between employer and employee.
• Inadequate Protection: Templates may lack essential protections for the employer, such as appropriate restrictive covenants or confidentiality clauses, leaving the business vulnerable.
• Failure to Address Specific Employee Rights: Templates may not account for varying employee rights based on seniority, role, or location, potentially leading to legal challenges.

Overall, while templates can provide a starting point, they should be carefully reviewed and customised to ensure they are legally sound and fit for purpose.