For employers, they provide clarity, setting out the employee’s obligations and entitlements and help to minimise the potential for conflict arising from uncertainty once employment is underway and the vague “handshake” of agreement a dim and distant memory. Importantly they can also provide effective business protection – preventing exiting employees from setting up in competition, soliciting customers, and making use of confidential information, intellectual property and trade secrets (for more information on this please see our section on Breaches of Contract). That said, contracts of employment only offer protection if the applicable provisions are appropriately tailored and well drafted such that they can be enforced (or at least so that employees think they can be enforced and so are dissuaded from “trying their luck”).
For employees, they set out the duties your employer owes you and the entitlements you have. Contract terms will provide clarity around your place of work, travel obligations, holiday entitlements and benefits. Those glib promises that may be made at recruitment stage about sabbaticals and remote working may well be worthless if not contractually binding.
As a minimum, a contract of employment must contain certain information set out in law (s1 Employment Rights Act 1996). This includes the identity of the employer, the date on which employment will begin and terms relating to pay. Certain other information, such as provisions relating to sickness absence and notice, must be contained either within the contract of employment or a reasonably accessible document such as a policy or procedure in an Employee Handbook.
In addition to containing the minimum information required by law, employers should ensure that their contracts of employment are drafted to fit business requirements, taking into account the role and duties of the relevant employee and the sector in which the business operates. For example, if, in order to legally perform his role, the employee must be registered with a professional body, it would be sensible for his contract to require that he holds and maintains that registration (justifying termination of employment if he does not). Confidentiality clauses, post termination restrictions and intellectual property provisions can all be used to protect an employer’s business interests. For the employee, contractual incentive based schemes may also be included within the body of an employment contract. Frequent examples include bonus and commission schemes.
Whilst employers may be tempted to have lengthy contracts which include all provisions to cover almost every eventuality, some caution is to be advised. For example disciplinary and grievance procedures should never be contractual (although reference should be made to them to where the non-contractual policies can be found in order to comply with section 1 ERA 1996) as contractual procedures leave no wriggle room and are easily breached. The last thing an employer wants when trying to dismiss an employee for misconduct is to find that by failing to follow a procedure they have themselves breached the employment contract giving rise to potential claims by the employee.
Changing material terms and conditions of employment once a contract has been signed can be a challenge (see our section on Restructuring) so employers should give careful thought to contract terms at the outset, and review templates regularly.