In theory, employer and employee freely agree the express terms of an employment contract. In practice, it is usually the employer who decides what the express terms will be, although a job applicant with substantial bargaining power, such as an applicant with scarce and highly desirable skills or experience, may be able to influence or even dictate the terms.
Since a company is usually in a strong position to decide the express terms of the contract, it should take advantage of this and draft the contract terms carefully. If the company later finds that the contract's terms as originally drafted do not meet its business needs, it will need the employee's consent to alter them (contractual changes). Companies can obtain advice on drafting their contracts of employment from their Association (EEF Associations).
In drafting the contract, two guiding principles may be useful:
- The terms should be clear. Legal terminology should be avoided unless both employer and employee fully understand the words and phrases used. If an employee's rights depend upon the employee meeting certain conditions, such as eligibility criteria or notification requirements, that should be spelt out.
- The terms should reflect the company's current and future operational needs. A draft contract obtained 'off the shelf' from a legal or personnel publication can be a useful starting point. (A model statement of main terms and conditions that could be used as the basis for drafting a written contract can be found elsewhere in this Guide (model documents). But each company and employee is unique, and the drafter must identify the issues that his or her particular company needs to cover in the contract. A broad range of issues may need to be addressed, from payment systems through to the organisation of working time, disciplinary issues and the protection of confidential information. In particular, the drafter must ensure that the contract gives the company the flexibility it needs over the content of the employee's work and where and how it is to be performed. (This issue is explored further below in the context of specific terms that may be included in the contract.)
A company may want certain benefits in the contract, such as sick pay and bonuses, to be payable at the company's discretion. Making a benefit discretionary means that the employee cannot insist upon receiving it as a matter of right. It is therefore important for the contract to make clear when a benefit is discretionary.
The drafter should consider whether or not to specify the factors that the company will take into account when exercising that discretion. The advantage of doing so is that both employer and employee are clear about how the discretion will be used, which should reduce the likelihood of a dispute if the benefit is withheld. The disadvantage is that the company must then exercise its discretion by reference to the specified factors, or it will be acting in breach of the employee's contract. Even where no guiding factors are specified, however, it would be a breach of contact for a company to withold a discretionary benefit irrationally, that is, in circumstances where no reasonable employer would have done so.
Some conditions of employment may be laid out in detail in some other document, such as a collective agreement with a trade union, a company policy or procedure, or an employee handbook. If a company wants to make any of these terms part of an employee's contract, the other document must be incorporated into the contract. This is explained further below (incorporating terms).
Although companies usually have the power to control the express terms of their employment contracts, there are two legal constraints that should be noted:
- Under the discrimination legislation, any term in a contract that directly or indirectly discriminates on the ground of sex, race religion or sexual orientation is unenforceable. A term is indirectly discriminatory if it puts people of a particular sex, race, religion or sexual orientation at a particular disadvantage, unless the employer can prove that the term is necessary to meet its legitimate business needs (indirect discrimination). For example, contract terms requiring employees to be prepared to change their working hours or work location may be potentially indirectly discriminatory against women, because a much larger proportion of women than of men have responsibility for childcare and are less flexible in their hours or place of work as a result. A company using those contract terms would therefore need to be able to show that the flexibility was needed for operational reasons and could not be achieved in another, less discriminatory way.
- Every contract of employment contains implied terms that can in some circumstances limit the way in which an employer uses its express contractual powers. In particular, an employer is under implied obligations not to act in a way that breaches the trust and confidence that is integral to any employment relationship, and to take reasonable care for the health and safety of its employees ( Employer's implied obligations ). For example, an employer could be acting in breach of contract if it used an express power to relocate an employee without giving the employee any opportunity to make the necessary personal arrangements for the move, or used an express power to require an employee to work overtime to such a degree that it damaged the employee's health.
Many employment conditions, particularly those offered by larger employers, are complex. They may, for example, involve benefits that are dependent on employees meeting certain eligibility criteria or notification requirements, or they may involve procedures with several different steps or stages. Because they are complex, these terms are likely to be set out in detail in a document of their own, such as:
- a sick pay or company car policy;
- a disciplinary or grievance procedure;
- the rules of a pension scheme; or
- an employee handbook.
In a company that negotiates terms and conditions with a trade union, there may also be collective agreements that deal with terms and conditions of employment (incorporation).
As a first step, an employer will need to decide whether it wants all or any of the terms set out in these documents to be part of an employee's contract. The employer may decide, for example, that it does not want its disciplinary or grievance procedures to be contractual, since it could then face a breach of contract claim if it did not follow them or changed them unilaterally.
Even if an employer does not want its disciplinary procedure to be contractual, it would be well advised to include in the contract a power to demote or suspend the employee, if these are disciplinary sanctions it may want to impose.
If any of the documents are to be contractual, then it is advisable for the employee's contract expressly to incorporate them, by referring to them. This process is sometimes called 'incorporation by reference'. It is also possible for a document to be incorporated into a contract by implication, where the employer and employee act in a way that indicates that they accept the document's contents as a legally binding part of their relationship. Nevertheless, it is preferable to include an express term in the employee's contract dealing with incorporation, to avoid any uncertainty or dispute.
If the employer wants to change the content of the document that is incorporated, the term incorporating the document should make clear that the contract will include any amended version as well. For example, a clause incorporating permanent health insurance cover might read: 'You are entitled to the benefit of a permanent health insurance scheme. The current terms of the scheme are set out in the booklet which has been given to you, but the rules and benefits of the scheme may be altered from time to time.' A clause incorporating a collective agreement might read: 'Your hours of work are as set out in the collective agreement on working time between the company and the ABC Union that is in force from time to time'. It is worth noting that an individual's contract can validly incorporate a collective agreement, even if the individual is not a member of the union.
Particular care is needed when incorporating only part of a document. A company may wish, for example, to incorporate into an employee's contract the sections of an employee handbook that deal with sick pay and parental benefits but not the section that deals with disciplinary rules and procedures. If so, the contract must make that clear. If it refers to the employee handbook in general, the employee could argue that the whole of the handbook is incorporated, including the disciplinary procedure, so that if the employee is disciplined or dismissed without the procedure having been used, he or she could claim breach of contract or wrongful dismissal (damages) (notice rights).
Some documents are not capable of being incorporated into an individual's contract because they do not deal with individual terms and conditions of employment. For example, an agreement between an employer and a union that the employer will give the union certain facilities or information cannot be a term of an individual employee's contract. The courts have accepted, however, that equal opportunities policies and redundancy selection procedures are capable of being incorporated, although whether they have in fact been incorporated in a particular case will depend on the issues discussed above.
In order for the employee's job performance to be effectively managed, the employee will need to be aware of the main duties and responsibilities of the job. It is not essential, however, for these details to be given in the contract, which could simply state the job title. Alternatively, the contract could incorporate a job description (drawing up a job description) by reference (incorporation by reference). It is important, however, to ensure that any contractual term or job description is not overly detailed, as it may then limit the company's power to ask the employee to change what he or she is doing in even minor ways. In addition, the company may wish to consider whether it needs to include within the contract a power to ask the employee to move to different work temporarily or permanently, or to take on duties that are reasonably incidental to the main job but have not been expressly listed in the job description. Your Association (EEF Associations) can advise on drafting job descriptions.
When drafting the contract terms on job location, the company should consider whether it needs the power to move the employee to a different place of work. If it has that power, then it will not have to pay a redundancy payment if it needs to relocate the employee but the employee refuses to move. On the other hand, a relocation clause for which the employer has no business need could be indirectly discriminatory against women and so unenforceable (sex discrimination). If a relocation clause is included, it should set out the area within which the employee may be expected to move. Thought should also be given to the terms on which an employee may be asked to move. The company may want to leave this to be decided at the time. Alternatively, it may be prepared to commit itself in the contract to giving a specified period of advance notice and relocation expenses, or at least commit to considering these.
Certain parts of an employee's wages or salary may be payable only if certain conditions are met. If so, the conditions need to be made clear. If, for example, a bonus is dependent upon the employee meeting certain targets, the contract may need to specify what those targets currently are and how they will be set in the future. If the employee is given an entitlement to an annual pay review, the company may wish to confirm that this will not necessarily result in a pay increase. Where relevant, it is advisable for the contract to state that deductions may be made from an employee's pay in certain circumstances, to enable the company to make those deductions without facing an allegation that it has made an unlawful deduction from the employee's wages (deductions from pay).
If the company intends to provide occupational sick pay, the contract should make clear the amount and duration of the pay and what conditions apply. It may be, for example, that employees are not entitled to company sick pay unless they notify the company that they are ill by a certain time or in a certain way and provide certain evidence of their incapacity. The company may want to retain the right to refuse to pay occupational sick pay if it considers that there are grounds for believing that the employee is not ill. It would also be advisable to specify what happens if an employee is ill during a holiday.
Most employees are not entitled to be provided with work to do. ( Employer's implied obligations ). They are, however, entitled to their wages or salary, provided that they are ready and willing to work. Therefore if the company wants the right to suspend an employee from work without pay, perhaps as a disciplinary sanction, or to lay an employee off without pay because of a shortage of work, then it must include that power in the contract. (Lay off is discussed at elsewhere in this Guide (alternatives to redundancy).)
The contract should specify what an employee's working hours will be, but can also include flexibility for the employer to change those hours. The contract should also set out any terms on overtime, including whether the employee is obliged to work overtime or has the right to do so (that is, whether the overtime is voluntary, compulsory or guaranteed), and what additional payment, if any, will be made for it.
The contract will need to explain how much holiday entitlement the employee has, including any entitlement to public holidays, and how holiday pay is calculated. There are rules on how holiday pay must be calculated for the minimum holiday to which the employee is entitled under the Working Time Regulations 1998. For the purposes of the Regulations, holiday pay may in some cases need to reflect bonus and overtime payments. If any holidays in excess of the statutory minimum are to be paid on a different basis, the contract will need to say so. It is also advisable to state any restrictions on when and how holiday should be taken, including annual shutdowns and rules on carrying forward holidays into the next holiday year. (Holiday entitlement is discussed in more detail elsewhere in this Guide (holidays). )
During the course of his or her employment, an employee is under an implied legal obligation not to disclose the employer's confidential information ( Employer's implied obligations ). If the information is of such a highly confidential nature that it amounts to a trade secret, the employee remains under a duty not to disclose it even after leaving the company's employment. Nevertheless, where an employee has access to confidential information during his or her employment, it is advisable for the company to identify clearly, in the contract or elsewhere, what that information is, in order to ensure that the employee is aware of his or her duty not to disclose it.
In some cases, an employer may want to restrict the ability of a departing employee to work for a rival company, set up in competition or poach the company's customers, suppliers or employees. These forms of restriction, often referred to as 'restrictive covenants', are legally enforceable only if they are protecting the company's legitimate business interests, rather than merely preventing competition, and the restraints they impose are no broader than is necessary. It is therefore advisable for a company to obtain advice from its Association (EEF Associations) when drafting restrictive covenants. It is also important to bear in mind that if a company dismisses an employee in a way that breaches his or her contract, as, for example, where the company does not give the proper notice of termination, the company will not be able to enforce any restrictive covenants in the contract (wrongful dismissal and enforceability).
A contract should specify what notice the employer and the employee must give to terminate the contract. Minimum notice periods are laid down by law (minimum notice periods) but the contract can lay down longer periods.
In most cases, an employer is entitled to ask an employee not to come into work during the notice period (usually referred to as giving 'garden leave'). There are some employees, however, who have a right to be provided with work ( Employer's implied obligations ). If an employer wants the option of asking these employees to take garden leave, it needs to include a clause in their contracts giving the company that power.
The company may also want to give itself the option to terminate an employee's contract without notice (known as a 'summary dismissal') and instead make a payment to the employee equivalent to the contractual benefits he or she would have received during the notice period. This is usually referred to as a 'payment in lieu of notice' clause. (Reliance on this type of clause is not necessary where the employee is in serious breach of contract, since the employer is then entitled to dismiss the employee without notice or payment in lieu (notice rights).)
The advantage of 'a payment in lieu' is that the company can terminate the contract with immediate effect without being in breach of contract, so enabling it to enforce any restrictive covenants there might be in the employee's contract. The disadvantage of this type of clause for the company is that the employee has the right to his or her full contractual benefits for the notice period, even if he or she immediately gets another job or makes no effort to find alternative employment. That would not be the case if the employee were summarily dismissed without a payment in lieu clause. The disadvantage of the clause to the employee is that the payment made under it is taxable, whereas any payment in lieu that is not made under a contractual term is tax free up to a certain limit (tax and national insurance implications).
There is no need to include within the contract rules of conduct, including disciplinary rules, or methods of working. These are within the area of management prerogative and can be changed at management discretion ( The scope of management prerogative ). For example, an employer that introduces a no-smoking rule or asks employees to move from working on paper-based systems to working with computers is unlikely to be altering employees' contractual terms.