What is a contract of employment?
If you want to hire someone to work for your business as an employee, rather than a freelance contractor, you will need to draw up an employment contract. Read solicitor Joanna Tall's guide to find out what you should include.
- Why do I need to create an employment contract?
- When do I need an employment contract?
- What should be included in a contract of employment?
- Offer letter vs. employment contract
- A contract that works for both you and your employee
- The employment contract template
Why do I need to create an employment contract?
By taking on an employee, your business will be subject to various legal duties, such as having to offer maternity leave, not unfairly dismissing the employee and accounting to HMRC for PAYE and National Insurance on behalf of the employee.
The employment contract is between the business and the employee. It can either be for a fixed term, to carry out a specific project or provide maternity cover, or it can be left open-ended with an option to terminate the contract after giving a set amount of notice.
Employment contracts can cover full time or part-time working hours and there is also the option of 'zero-hours' contracts whereby the employer does not commit to providing a specific number of hours to the employee and only pays for hours actually worked.
When do I need an employment contract?
There is no legal requirement for an employee to have a written contract of employment.
However, section 1 of the Employment Rights Act 1996 requires an employee to be given a statement of certain statutory particulars within two months of starting employment.
In practice, most employers will produce the contract (rather than the employee) at the outset, either by way of a formal contract or letter before the employee starts.
What should be included in a contract of employment?
As mentioned above, there are certain terms that must be included in an employment contract by law, but you can also add to those terms.
Terms that must be included are:
- The name of the employer and employee, and the employment start date
- Job title
- Place of work
- Salary
- Hours of work
- Holiday entitlement, including public holidays available and holiday pay
- Incapacity arrangements due to sickness or injury, and any sickness pay
- How to terminate the contract and the notice required to do so
- Disciplinary and grievance procedures
- Any terms relating to pensions and pension schemes
- Whether any collective arrangements apply, e.g. as between the company and a trade union.
There are endless optional clauses that you may see in a contract of employment, but some of the most common ones are as follows:
- Probationary period clauses, whereby the employee is on probation for a certain period and, if they do not perform, they can be dismissed at the end of the period.
- Non-competition clauses, which prevent the employee from competing with the business for a certain period after they have left the business.
- Mobility clauses allowing the employer to change the employee's place of work within a particular area.
- Payment in lieu of notice clauses, which entitle the employer to let go of an employee right away rather than have them work their notice. Instead the employer pays them what they would have been entitled to.
- A salary review clause whereby the employer is obliged to review the salary every year and consider an increase.
- Clauses covering employment benefits such as a company car, private medical insurance etc.
Offer letter vs. employment contract
Once they have identified the successful candidate, the employer is likely to write to the candidate to make an offer of employment or, where they have initially spoken to them, to confirm the offer.
In doing so the employer is likely to address the following matters:
- The title of the job that is being offered, any particular features of the job, such as it being for a fixed-term or a part-time position, and the starting salary.
- The terms of employment, either as set out in the offer letter and/or in an enclosed contract and/or in an enclosed staff handbook.
- If there have been any discussions or negotiations about the job - in order to avoid any confusion, the employer may wish to state that the offer on the terms provided supersedes any previous discussions.
- Any conditions to which the offer is subject, for example, receipt of satisfactory references.
- Any time scale within which conditions need to be satisfied and the employee needs to confirm acceptance of the offer (often by returning a signed copy of the letter and/or enclosed employment contract).
A contract that works for both you and your employee
To conclude, if you are an employer seeking to put together an employment contract, make sure that it not only includes all of the clauses required by law but also those specific to your business. The more detail the better as this will lead to fewer misunderstandings and happier employees.
If you are an employee, remember that all of the optional clauses are negotiable and you do not have to accept them all. Be bold and negotiate!
The employment contract template
If you take out a small business insurance policy with Direct Line for Business, you'll get access to our legal documents service, as standard.
You will be able to choose from a library of legal documents, including employment contract templates, which you can download and use for your business. You can also get these documents checked by a solicitor for no extra charge.
Joanna Tall is a solicitor and founder of Off to see my Lawyer, a law firm specialising in providing advice to entrepreneurs and SME's. As an entrepreneur herself, she understands the challenges of running a business.