People & Leadership

What is a contract of employment?

Find out why every employee should have a contract of employment, the legal implications of a contract, and what details they need to include.

A contract of employment is a legal agreement that establishes the terms and conditions directing the relationship between an employer and an employee.

This document serves as a foundational framework, setting out the respective rights and responsibilities of both parties involved in the employment arrangement.

Each one typically includes detailed information about the job, including the start date of employment, any probationary period requirements, as well as salary and benefits, and other details we’ll delve into below.

Here’s what we cover in this article:

Why are employment contracts important?

One of the primary reasons for having contracts is the clarity they bring to the employment arrangement.

By clearly setting out the roles, responsibilities, and expectations of both parties, contracts help communication, prevent misunderstandings and create a shared understanding of the working relationship.

In addition to defining workplace conduct and rules, the contract may address intellectual property issues, clarifying the ownership of work created during the employment period.

Confidentiality and non-disclosure clauses are often included to safeguard sensitive company information and prevent its unauthorised disclosure by employees.

Dispute resolution mechanisms are also established, specifying how conflicts between the parties will be resolved, which may involve arbitration or mediation.

Legal protection is another crucial aspect provided by employment contracts.

Serving as legally binding documents, these contracts offer a foundation for resolution in the event of disputes, ensuring the rights of both employers and employees are protected.

Beyond the legal implications, employment contracts contribute to fair and consistent treatment of employees.

By establishing standardised terms and conditions, these contracts help prevent inconsistent practices or discrimination in the workplace.

What kind of situations should an employment contract be requested?

Whenever a new employee is offered a job, it is standard practice to provide an employment contract.

This document outlines the terms of the employment, including job responsibilities, compensation, and other relevant details.

If there are changes to the terms and conditions of employment, such as a promotion, salary adjustment, or change of job responsibilities, a new contract or an amendment to the existing contract should be made.

For temporary or consulting arrangements, having a clear written contract is also advisable.

This includes details about the duration of the engagement, compensation, and any specific terms related to the temporary nature of the work.

What are the legal implications of a contract of employment in the UK?

In the UK, a contract of employment is a legally binding agreement between an employer and employee, and must align with the UK’s employment laws aimed at protecting workers’ rights and promoting fair and lawful practices in the workplace.

An employment contract doesn’t need to be written down, but employers are required to provide employees with a document (known as a written statement of employment particulars) stating the main conditions of employment.

Failing to provide one within two months of the start of employment may result in legal consequences.

Employee statutory rights include minimum wage, paid holidays, and protection against unlawful discrimination.

Whether or not they are explicitly stated in the contract, these statutory rights must be followed and form an integral part of the employment relationship.

For example, employers must ensure that employees receive at least the statutory minimum wage as stated in the National Minimum Wage Act, and follow the working hours, breaks, and holiday requirements in the Working Time Regulations.

Notice periods for termination are also typically included in a contract.

Even if not explicitly stated, employees in the UK are entitled to statutory notice periods based on their length of service.

Straying from these statutory notice periods is allowed only in cases of gross misconduct.

The employment contract often sets out the grounds for termination and the procedures to be followed, offering protection against unfair dismissal.

Dismissing an employee without valid grounds or without adhering to proper procedures can lead to legal repercussions.

Constructive dismissal is another legal implication where an employee resigns due to a breach of the employment contract by the employer.

This occurs when the employee can demonstrate that the employer’s conduct seriously breached the implied terms of trust and confidence.

In situations of redundancy, employers must follow fair and transparent procedures, as outlined in both the employment contract and statutory redundancy requirements, including proper consultation with affected employees.

Provisions related to health and safety in the workplace are commonly found in employment contracts, highlighting both the employer’s obligation to provide a safe working environment and the employee’s corresponding duty to adhere to safety rules.

What kind of information should be specified in a contract of employment?

Here are the types of details that should be included in all contracts of employment:

  • Parties to the contract: Clearly state the names and addresses of both the employer and the employee.
  • Job title and description: Specify the employee’s job title and provide a detailed description of their duties and responsibilities. For example, a sales executive might be responsible for client acquisition, meeting sales targets, and maintaining customer relationships.
  • Type of employment: This could be permanent full time, part time, contract, etc.
  • Work hours and location: Outline the standard working hours, including any variations, and specify the regular work location. For example, the standard work week might be 40 hours, Monday to Friday, from 9am to 5pm, at the company’s main office.
  • Salary/wages and benefits: Clearly state the agreed-upon salary or hourly wage, payment frequency, and any additional benefits, such as health insurance, retirement plans, or bonuses. For example, an employee might receive an annual salary of £36,000 before tax, paid monthly on the 20th of each month, and be eligible for an annual performance bonus.
  • Probationary period: If applicable, define the duration and terms of any probationary period during which the employee’s performance will be evaluated. Three months is typical for entry-level employees in roles where little or no previous experience is required, and a six-month period is common for more senior positions.
  • Start date: Set out the agreed start date for employment. If there is an end date to the employment, that should also be included in the contract, plus details of any opportunities for extension.
  • Leave and time off: Detail the employee’s entitlement to holidays and any other types of leave (e.g., sick leave, maternity/paternity leave). Employees in the UK have the right to 5.6 weeks’ paid holiday per year, including bank holidays.
  • Termination terms: Clearly outline the notice period required by both the employer and the employee for termination. Specify the grounds for termination and any severance or notice pay provisions.
  • Confidentiality and non-disclosure: Include clauses requiring the employee to maintain the confidentiality of sensitive company information and prevent its unauthorised disclosure.
  • Code of conduct: Establish expectations regarding workplace behaviour, ethics, and adherence to company policies.
  • Intellectual property: Define the ownership of intellectual property created by the employee during the course of employment. For example: “The Employee acknowledges and agrees that all Intellectual Property created, conceived, or developed by the Employee in the course of employment and within the scope of the Employee’s duties shall be the exclusive property of the Employer. This includes any modifications or improvements made to existing Intellectual Property owned by the Employer.”
  • Dispute resolution: Specify the mechanism for resolving disputes between the employer and the employee, such as arbitration or mediation.
  • Health and safety: Outline the employer’s commitment to providing a safe working environment and the employee’s responsibility to comply with health and safety rules.
  • Training and development: Detail any provisions for training and professional development opportunities provided by the employer. For example: “The employer agrees to provide access to relevant training programs, workshops, and seminars that contribute to the professional development of the employee. The employer will cover associated costs, including registration fees and materials, for approved training activities.”
  • Policies and procedures: Reference the company’s policies and procedures, either within the contract or as an attachment.
  • Restrictive covenants (if applicable): Include any restrictions on the employee’s activities after termination, such as non-compete or non-solicitation clauses.

What are some different types of employment contracts?

There are various different types of contracts and the choice of contract depends on the nature of the agreement and the specific terms the parties wish to establish.

Here are some common types of contracts:

  • Permanent or open-ended contracts: This is the most common type of employment contract. It has no fixed end date, and the employment relationship continues until either the employer or the employee gives notice to terminate. These contracts can cover full or part-time hours, with part-time employees being entitled to the same employment rights and benefits on a pro rata basis as their full-time counterparts.
  • Fixed-term contracts: A fixed-term contract specifies a predetermined end date for the employment relationship. These contracts are often used for temporary or project-based work. Employees on fixed-term contracts have the same rights as permanent employees for the duration of their contract.
  • Temporary contracts: Similar to fixed-term contracts, temporary contracts are designed for short-term employment. They are commonly used for seasonal work or to cover a specific period of increased workload.
  • Zero-hours contracts: These contracts do not guarantee a minimum number of working hours. Instead, the employer offers work as and when needed, and the employee can choose whether to accept the offered hours. These contracts provide flexibility for both parties.
  • Freelance or self-employed contracts: Freelancers or self-employed individuals work on a contract-for-service basis. They are not considered employees and are responsible for their taxes and National Insurance contributions. Freelancers often work for multiple clients and must manage their own accounts and finances.
  • Agency contracts: Individuals working through employment agencies may have agency contracts. In this arrangement, the agency acts as the employer, and the worker is engaged to provide services to a client. Agency workers have specific rights, including access to the same basic employment conditions as permanent employees.
  • Casual contracts: Casual contracts are often used for irregular or sporadic work. Employees on casual contracts are not guaranteed regular work and are typically employed as needed.
  • Apprenticeship contracts: These contracts are designed for individuals undergoing a structured training programme to develop specific skills, e.g. electricians, chefs, mechanics, IT technician. These contracts combine on-the-job training with classroom learning and follow a specific framework.

Final thoughts on employment contracts

Employment contracts are critical for establishing a healthy and transparent professional relationship.

They provide the rules, expectations, and protection necessary for both employers and employees to navigate the workplace.

A well-crafted contract ensures fairness, legal compliance, and a clear understanding of rights and responsibilities.

Whether starting a new job or undergoing changes in employment terms, a reliable employment contract serves as a crucial guide, fostering a positive and flexible working culture.