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Drafting tips for contracts of employment
- This guide looks at what you should think about before beginning to draft an employment contract, including the often overlooked but vital information gathering stage, and considers briefly some optional (‘nice to have’) but not legally required elements which may be included in an employment contact.
- A contract of employment should not be confused with the written statement of employment particulars (s. 1 of the Employment Rights Act 1996) - which must be given to an employee no later than two months after he or she starts work. A contract of employment will exist from the moment an unconditional job offer is made and accepted. Usually an employment contract will contain all the s. 1 information, but not always.
- Before putting pen to paper, you will need basic information relating to names, addresses, commencement dates, remuneration package, hours and place of work, etc. Examples are likely to include:
Names and addresses of both parties
- If the employer is a group company, ensure that the right group company is named - and clauses include references to the entire group where appropriate, e.g. the confidential information of both the employing business and also all group companies should be protected.
- Date of commencement of employment (and, if different, date of commencement of continuous employment).
- How long will the employment last?
- Indefinite or for a fixed term (e.g. 12 months or until the occurrence of a specific event)?
- Do you want to include a probationary period to allow easier dismissal at an early stage if it doesn’t work out? How long should it be? Can you extend it?
Job title, description of duties and reporting lines
- Is there a particular geographic territory?
- Can other employees be appointed to perform the same role within the same territory?
Directorship and shares
- If the employee will be a director of the company (i.e. a statutory director who is registered with Companies House) or a very senior manager with the title of ‘director’ or similar, you are likely to need a service contract not a simple employment contract. This would include details of directors’ duties, etc. Consider including a clause requiring them to resign from the directorship if their employment ends or if the board demands it.
- Consider if they will hold shares and whether that affects their employment and/or reference needs to be made to the shareholder agreement.
- How much will the employee be paid and in what period, e.g. monthly in arrears?
- On what day will it be payable?
- What about salary reviews? When do they happen and what factors will be taken into account in any review?
- Do you want to consider a deductions from wages clause entitling you to make specific deductions when required (note that such clauses must be operated with extreme caution to avoid tribunal claims).
- What other benefits apply, e.g. company car, private healthcare, etc?
- Specific details can be included in the contract but it is often easier to keep the reference in the contract brief and link to a separate non-contractual policy (e.g. company car policy to include terms relating to insurance, servicing, etc).
- It’s often a good idea to include some flexibility in case the benefits change from time to time.
- Do you need the ability to relocate the employee under a mobility clause?
- Will the employee need to travel or work from home?
- If the employee is required to work outside the UK for a period of more than one month, the s.1 statement must state this, the currency in which he/she will be paid while working outside the UK, any additional remuneration or benefits payable during that period, and the terms applicable upon his/her return.
Hours of work
- What are the normal working hours (if any)?
- Is any overtime paid or unpaid?
- Where the pattern of hours is not standard, consider alternatives including part-time working, shifts systems, zero hours contracts, etc.
- Is it necessary to ask the employee to sign an opt-out agreement under the Working Time Regulations? Ideally this should be separate from the contract, not included within it, so that the employee’s decision whether or not to consent is freely given.
- Bear in mind statutory minimum periods of annual leave (5.6 weeks per year including bank and public holidays, pro-rated for part-timers).
- When does the holiday year run from?
- Specify procedures for taking holiday (e.g. reporting requirements).
- Are public holidays included?
- Where contractual holiday entitlement exceeds statutory annual leave entitlement, can he/she carry-over of non-statutory annual leave to the next holiday year?
- Will the employee be required to take a period of holiday at a certain time, e.g. two weeks over the summer or certain days over the Christmas week?
- Consider notification requirements.
- Sick pay over and above statutory entitlement? A contractual entitlement or a discretion?
- Consider including a requirement to attend a medical examination when required to do so.
Termination of employment
- What will the notice period be? Note this is subject to statutory minimum notice periods which increase over time up to a maximum of 12 weeks’ notice after 12 years’ service.
- Include a list (stated to be non-exhaustive) of circumstances which merit summary dismissal without notice. This list may vary depending on the nature of your business.
Confidential information/intellectual property (IP) rights
- Do you need protection for confidential information or intellectual property (IP) rights? This will be more relevant for some roles and industries than others.
- Do you need a power of attorney clause regarding the IP rights? A power of attorney simply means the business can sign any patent etc paperwork on the employee’s behalf, rather than needing the individual to sign those documents personally. Don’t forget the contract must be executed as a deed by the parties if you do insert this.
- Consider your use and storage of the employee’s personal data. Is consent required?
- This issue will become more important once the General Data Protection Regulation takes effect.
OPTIONAL ISSUES (‘nice to haves’)
- You should also consider what other terms might be beneficial to include. For example, do you need the protection of restrictive covenants after termination? When should you include a pay in lieu of notice clause? Do you need provision to recoup training costs if the employment ends?
- Not all clauses will be appropriate in every situation – and many will depend on the seniority of the employee concerned - but some common ones are discussed below.
- Restrictive covenants can be included where you think you will need to protect your business interests when the employee leaves.
- Restrictive covenants can take various forms but the most common include non-competition clauses (which prevent the employee from working for a competitor for a period of time), non-solicitation clauses (which prevent the employee from soliciting clients of the employer or other staff) and non-dealing clauses (which prevent the employee from dealing with specified people, e.g. suppliers/clients).
- Restrictive covenants are notoriously difficult to enforce and accordingly they must be extremely carefully drafted.
- Always seek legal advice before including restrictive covenants. Never be tempted to use ready-made/off-the shelf restrictive covenants – they must be tailored specifically to your business and the individual’s duties at the time the restrictions are entered into.
Garden leave clause
- A garden leave clause allows you to place the employee on garden leave (i.e. still employed but not at work) during his/her notice period.
- This is often used to protect customer contracts and confidential information during the notice period.
- Where both garden leave and restrictive covenant clauses are present it may be appropriate to dovetail them so that any period of garden leave is deducted from the duration of the restrictive covenants. This may help the enforcement of the covenants.
Payment in lieu of notice (PILON) clause
- A payment in lieu of notice (PILON) clause allows you to terminate the employment immediately by paying in lieu of the notice period instead of allowing the employee to work it.
- Careful drafting is required, for example, to determine which sums are payable (is the payment limited to basic salary only or the value of salary and benefits?).
- The downside of a PILON clause is that its inclusion often makes the notice pay taxable, whereas this can sometimes be tax free if the employee is dismissed without notice where no PILON is present. Bear in mind that HMRC will expect you to deduct tax and NICs from a PILON if you regularly make PILONs even though there is no contractual right to do so, these are called ‘auto PILONs’.
- It is important to include a PILON clause if the employment contract contains restrictive covenants or other clauses which continue post-termination – otherwise dismissing summarily without the right to do so under a PILON clause could render such covenants and restrictions unenforceable.
- More complex PILON clauses can provide for payment in instalments, subject to the duty to mitigate by looking for other work, but this is unusual.
Recouping training costs
- If you intend paying for the employee to undertake some formal training (e.g. an NVQ related to the job) you may want to provide in the contract that a proportion of the training cost should be repaid if the employee leaves within a certain period.
- Such clauses must be carefully drafted, usually including a sliding scale (so that the amount repayable decreases as time goes by), to avoid the term being unenforceable as a penalty clause or in restraint of trade.
- You may wish to leave leeway to alter a specific element of the employment contract in the future – for example, to allocate a different role, impose additional travel commitments or change working hours.
- Even where an express flexibility clause is included it must not be exercised arbitrarily, capriciously or inequitably. If it is, it will likely amount to a breach of your implied duties and so equate to a breach of contract.
- Such clauses are not always enforceable but those which are both reasonably drafted and reasonably enforced stand the best chance. Tribunals will construe such clauses strictly against the interests of the employer seeking to exercise the power.
- Draft and exercise such clauses with caution and consider whether proposed changes could discriminate against a particular section of your workforce.
It would be possible to fill a whole textbook with complex case law about entitlement to bonus payments. Such clauses need very careful drafting, usually in conjunction with a separate bonus policy. Common issues to consider include:
- Will bonus payments be guaranteed or discretionary (discretion cannot be used arbitrarily to remove entitlement to a bonus)?
- Will bonus payments be payable only in defined circumstances?
- When will the bonus payment be payable?
- In relation to what period is it payable?
- How is it going to be calculated? Are objective measurement criteria available?
- Will bonus payments be made to employees who’ve left employment before the payment date or have given/been given notice?
- Is service throughout the whole, of the preceding year financial year essential or is payment pro-rated?
- Will a bonus payable where an employee is dismissed for misconduct?
- You may want to consider setting out an internet/e-mail clause in the contract and/or policy, specifying to what extent, if any, access is permitted on the employer’s IT equipment.
- The contract and policy can also make clear that damaging commentary about the employer (or other members of staff) being made on such sites may lead to disciplinary action.
- This may help defend tribunal claims if disciplinary proceedings end up resulting from inappropriate comments.