What SME owners should put in an employment contract

Carol Smith, senior employment consultant at Croner, explains what a contract of employment is and what it should contain.

A contract of employment is regulated by the same basic law that governs all other contracts. Its purpose is to set out the rights, duties and obligations of each party.

For an employment contract to exist there must be:

  • an obligation on the employer to provide work and an obligation on the employee to carry out work
  • an obligation on the employee to provide his or her services personally, and
  • a reasonable degree of control and direction over the employee’s work.

It’s worth pointing out that a contract of employment doesn’t have to be written. It comes into existence as soon as the following four elements are present:

  • There is offer and acceptance.
  • There is an intention to create legal relations.
  • The terms agreed by the parties are sufficiently certain to be enforceable.
  • The agreement is supported by “consideration”, i.e. benefits to each party.

Offer and acceptance

The offer and acceptance do not need to be made in any formal way, for example it could be made during an employment interview. An offer may be withdrawn while the candidate is considering it, however if the offer is open for a stated period (eg. “I can give you until noon tomorrow to decide”), it cannot be withdrawn until after that time. Once the offer has been accepted, the employer will not be able to withdraw it, terminate the contract or change any of the terms, except by following the usual procedures otherwise they may be at risk of breach of contract.

A binding agreement

In order for an agreement to be binding, the terms must be sufficiently certain for them to be enforced by the courts. In practice, where the contract is unwritten, the terms that are not fixed in law (eg minimum periods of notice) will be implied from the conduct of the parties and from custom and practice. Therefore it is a good idea for employers to put the main terms in writing for the sake of clarity and in order to avoid dispute.

Contract terms

Contract terms fall into three categories; express terms, implied terms and statutory rights. Express terms are those that the employer and employee have specifically agreed. These are usually noted in the employee’s offer letter or contract, stated in other documents or agreements or agreed verbally.

A term may be implied in a contract by conduct or by custom and practice. However, implied terms cannot override express terms. An example of an implied term is the giving of three days holiday between Christmas and New Year. It would not be in the contract but it is customary to give it.

Discretionary terms are ones that an individual employer includes, e.g. additional sick leave pay. These must be exercised on a genuinely discretionary basis rather than on a consistent or guaranteed basis. Where a discretionary term is exercised in employees’ favour on a consistent basis, this will eventually have the effect of converting it into a contractual entitlement.

Statutory rights

Employees have certain statutory rights (eg the right to be paid no less than the appropriate national minimum wage or entitlement to paid annual holiday). With limited exceptions, any term in a new, extended or renewed contract that purports to exclude a statutory right is automatically void.

Common law

Common law implies into employment contracts a series of duties on both the employer and the employee. The employer’s main implied duties are the duty to pay and care. The employee’s main implied duties, encompassed within the common law duties of service and loyalty, are to:

  • provide the personal services agreed
  • exercise due competence and skill in the exercise of his or her duties
  • exercise care in the performance of his or her duties
  • obey lawful and reasonable instructions
  • act honestly and in good faith towards the employer.

The common law duty of trust and confidence implies into employment contracts a mutual obligation to:

  • treat each other with trust and confidence
  • give due co-operation
  • not act in any way that is likely to fundamentally damage or destroy the working relationship without reasonable or proper cause.

Preparing contracts can be difficult for those owners or managers with little or no knowledge of employment law. If businesses are in any doubt about what they have prepared they should seek expert advice.

Related: The seven key types of small business employment contract

Related Topics

Employment Contracts

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