Legal Article - Employment Law

The Contract of Employment

The legal foundation of the relationship between the employer and the individual employee is the Contract of Employment.

All employees have a contract of employment, which is made when an offer of employment is accepted. These contracts need not be in writing to be legally valid and an oral agreement can be sufficient.

However it can be difficult to prove the terms of a verbal contract. An oral contract exists as soon as an employee begins work.

Certain terms of the contract must be confirmed in writing. If the terms and conditions of employment are in writing they are called express terms of a contract, but terms of substance (e.g. number of days holiday) if agreed orally are also express terms.

It is unusual for all the terms of an employment contract to be expressly agreed, and the courts have established that all employment contracts have the following implied terms:

- to maintain trust and confidence through co-operation
- to act in good faith towards each other
- to take reasonable care to ensure health and safety in the workplace
- employers should reasonably and promptly give employees an opportunity to obtain redress of grievances.

The Contract of Employment (or one of service) is different from a Contract for Services. Only employees can enter into the former, as the latter (i.e. for services) is between the company and an independent party (e.g. a consultant or contractor).

The rules that decide whether a person is entitled to be classed as an employee or a self-employed person under employment law are complicated and courts will often come to a different interpretation on whether a person is an employee on the same facts. Below are a list of factors, which helps to decide employee status.

       Employee Status                                                                Self Employed Status

Employer dictates work done and the hours
Worker is in business on own account
Employer provides tools and equipment
Worker provides own tools and equipment
Employer pays tax and national insurance
Worker pays own tax and national insurance
Employer pays benefits such as holiday pay, sick pay, pensions, etc
Worker free to choose whether or not to work and when
The function performed is an integral part of the business
Worker free to engage others in addition or substitution to himself
As a broad rule of thumb a person is only considered to be self-employed if they can demonstrate that they are in 'business on their own account'.
In other words the person is not obliged to work for one employer only, but can in fact work for several employers and is free to negotiate their own payment for each specific job and to accept work or not as they see fit.
The factor of least importance in deciding whether a person is an employee or not is 'who pays the tax and national insurance'.

Statement of Terms and Conditions of Employment

Statement of Terms and Conditions of Employment

Although the entire Contract of Employment need not be written, certain information must be provided in writing. It is also good practice to clearly define the Employment relationship, as this can minimise later disagreements as outline within the Employment Relationship Act 2000.

Under the Employment Rights Act 1996, all new employees whose employment continues for a month or more, are entitled to receive a written statement of particulars of employment specifying important information.

The employer must provide a statement no later than two months after the employee starts work. An employer is only required to provide a new written statement to existing employees if they request one. This request can be made up to three months after the employee’s employment ends.

The following details must be given together, in a single document, and is known as the “Principal Statement of Employment”. These details are:

a) the names of the employer and employee
b) the date when employment began
c) the date on which the employee’s period of continuous employment began, taking into account any employment with any previous employer, which counts
d) the scale or rate of pay, or the way pay is worked out
e) the pay intervals (hourly, weekly, monthly etc)
f) any terms and conditions relating to hours of work (including normal working hours)
g) any terms and conditions relating to holiday entitlement including public holidays and holiday pay (including rules on entitlement to accrued holiday pay on termination of employment).

These rules must be sufficiently specific to allow the entitlement to be precisely calculated.

h) job title or a brief job description
i) place of work, or, if the employee is required or permitted to work at various places, an indication of that fact and the employer’s address.

The employer must also provide the following details, either with the Principal Statement of Employment or separately (but within two months)
• Any sickness/injury scheme

• Rules on pension and pension schemes (e.g. whether it is contacted out or not)

• Length of notice to be given by both employer and employee

• If it is a temporary contract of employment

• If it is a fixed term contract of employment

• Particulars of any collective agreements which directly affect the terms and conditions of the employment including, where the employer is not a party, the person by whom they were made

• The name or description of the person with whom the employee can raise a grievance and the manner in which such applications should be made (see “implied terms” above)

• Any disciplinary rules and procedures applicable and the name or description of the person to whom an employee can apply if dissatisfied with a disciplinary decision and the manner in which such applications can be made (companies employing fewer than 20 employees do not have to provide these details on discipline)
• where the employee is required to work outside the U.K. for a period of more than one month, details of the length of posting, the currency in which payment will be made, details of any additional benefits arising from the posting and any terms and conditions relating to the employee’s return to the U.K.

The matters contained in the Principal Statement of Employment must be given in detail to the employee in one document.

For the other matters the written statement can refer employees to another document for details providing the employee has a reasonable opportunity to read the reference document in the course of their employment or where the document is made reasonably accessible in some other way (e.g. a Staff Handbook).

Any changes to the details described above must be given to each employee in writing at the earliest opportunity and in any event no later than a month after the change is made.

If the change is to one of the matters specified in the Principal Statement of Employment the change must be given in full; otherwise the written notification may refer the employee to another document provided it is reasonably accessible.

Changing the Terms of the Contract

Changing the Terms of the Contract

Any changes of terms of the contract should not be implemented without prior discussion and, where possible, agreement with the employee.
Disagreement over the changes may lead to the ending of the contract and employers may face claims for unfair dismissal and/or wrongful dismissal.

Alternatively the employee may carry on working under protest and sue the employer for breach of contract, or bring a claim under the Employment Rights Act 1996.

If the employee suffers a financial loss as a result of the change and the problem is not resolved for several months or years, this could be expensive to the employer in back pay, especially if large numbers of employees are involved.

Changes in any express terms of the contract can be made in the following circumstances:

i. Where the contract expressly provides for a specific change (e.g. a person is obliged to work in any part of the United Kingdom; the company reserves the right to increase or decrease working hours to meet urgent customer requirements).

These terms must not be vague or ambiguous and should be implemented in a reasonable way and sufficient weight given to the employee’s personal circumstances. For example, the tribunals have stated that a clause allowing the employer to rearrange hours of work to suit the requirements of the business did not entitle him to place a 58-year old long serving female employee in poor health on a night shift. Again, the tribunals have said that the introduction of a mobility clause is subject to an implied term that the employee is entitled to reasonable notice of the move.

ii. Where an employee voluntarily agrees to a change or continues to work in accordance with the new terms without objecting to the changes. This only applies where the change comes into effect immediately.

Where a change is made to the contract but has no immediate practical effect (e.g. a mobility clause that will only operate in the future) it should not be automatically assumed that the employee has accepted the change, but attempts should be made to clarify the employee’s views towards the change prior to its implementation.

iii. Where the employer believes the changes to be made are crucial to the effective operation of the business, they may unilaterally impose the change.
This should be done by notifying the employee that their original contract will end on a specified date with an offer of alternative employment made under different terms and conditions.
The employee should be given the notice to which they are entitled to receive to terminate the original contract.

The employee may then either accept the change by continuing to work without further protest, or to raise a grievance.  Following the completion of the grievance procedure the employee can make an application of unfair dismissal to the Employment Tribunal provided they have sufficient service i.e. one year. 
There is always a risk that the employer could lose at tribunal however this risk can be minimized if the employer can substantiate that there is an important business reason for the change, has genuinely consulted with the employee prior to the change and the employee is not put at a significant financial or personal disadvantage.

For example, a tribunal said the dismissal of a salesman was fair when he refused to accept the reorganisation of contracts to include a reasonable restrictive covenant preventing him from soliciting his employer’s customers for 12 months after leaving the job.

The employer had been losing business to some of its former salesmen who had inside knowledge of customers and call schedules.

If the majority of the other employees affected accept the change, or a recognised trade union has accepted the need for the change, then the risk to the employer is minimized further.

For example, any collectively agreed terms and conditions will bind all employees even those who are not members of the union if the terms are incorporated into the contract of employment.
Any variation, whether the contract provides for it or not, must not be discriminatory. For example, a company that applied new rostering arrangements for a single mother was held to have discriminated against her.

Previous shift arrangements had enabled her to be at home, in the evenings, which enabled her to look after her child.

The new rosters would have allowed this, but only if she worked much longer hours at other times. The employer could, without significant harm to its aim of achieving savings, catered for those who could only work social hours.

In another case, a variation that prevented employees from taking annual holidays during the employer’s busiest time of the year, resulted in an Asian employee being disciplined  for taking a day off to celebrate an important Muslim religious festival.

This was unlawful racial discrimination as inconvenience and loss of production did not justify the variation, particularly when the workers affected were prepared to do additional hours to compensate.

The Principal Statement of Employment

The Principal Statement of Employment

Although it is not legally necessary for employees to confirm that they have received the Principal Statement of Employment, or other written documents, (work rules etc become part of the contract of employment once they have been given to the employee).

 It is advisable to invite the employee to sign a statement saying they have read and understood the rules, which apply in their case in order to prevent disagreement between the parties in the future. If they refuse to sign, simply make a note in a diary, or in their personnel record file, giving the date the employee was given the statement.

Written Terms and Conditions of Employment

Written Terms and Conditions of Employment

We recommend that in addition to the Principal Statement and the disciplinary and grievance procedures, that must be given, the employer should provide a clear written document expressing all important terms and conditions of employment, works rules and procedures for resolving problems (e.g. in the form of an Employment Handbook).

To leave terms and conditions of employment on the basis of oral arrangements or custom and practice is a recipe for problems and disagreements. If a dispute should arise between the employer and an employee a clear written document will often settle their differences.

This would also be of immense help if a claim for unfair dismissal was made by an employee, or the employer wished to make deductions from wages of any sums of money as under the Employment Rights Act 1996 such deductions can normally only be made legally if prior written authorisation exists.

Many employers use wide or flexible terms to help avoid the practical and legal difficulties inherent in changing contract terms. For example “we reserve the right to vary your hours of work”, or “we reserve the right to relocate you to any other premises within the boundaries of the M 25”.

These contractual clauses give the employer a degree of flexibility to alter the terms of the contract without the employees consent. Such clauses must be clearly expressed and be in writing.

When implementing the contractual clause the employer should act reasonably, otherwise the implied duty of mutual trust and confidence may be breached which could lead to a successful claim of constructive dismissal. The following procedure should be followed:

• Show why the discretionary power is being exercised

• Consult the employees concerned and assess the impact it may have on them and their work

• If one employee is affected out of several, show why they have been selected

• Give reasonable time for the employee to adjust before implementation

• Provide any reasonable help to smooth the changeover.

A written contract is also of value in enabling the employer to distinguish clearly between terms and conditions of employment they wish to treat as discretionary and those definitely contractual in nature.

The former could include such benefits as bonuses, cars, private medical insurance, share options etc. This means that an employer can change or even remove these benefits without being in breach of contract.

To provide these benefits without documentation stating they are discretionary will make it difficult to have this flexibility. Any disagreement, of course, would have to be settled by an Industrial Tribunal or other Court.

A full written contract can also deal with many other issues, which can protect the employer’s interests. These can range from terms restricting employees’ activities during and after employment through to health and safety regulations. Examples of rules that it would be helpful to put in writing are:

• The authority of management to vary normal hours of work after due notice has been given.
• The need to work overtime when required by management after due notice has been given.
• Timekeeping and time recording systems
• Statutory sickness pay which is made at the discretion of the management and a contractual term
• The duty of the employee to obey all lawful and reasonable work instructions given by a representative of management.
• The duty of the employee not to conduct himself during working hours in any manner which can be construed as;

(a) Detrimental to the interests of the employer,
(b) Offensive behaviour towards the employer or other workers in the establishment
(c) A safety hazard in the workplace which may affect the employer themselves or the workers

• The duty of the employee to take all reasonable steps to prevent loss of or damage to the employer’s premises, plant, monies, equipment and tools.

• Disciplinary, grievance and appeal arrangements.

• Competition in the employee’s own time (for example, as a self-employed vehicle repair worker) by the employee with the employer.

• The acceptance of customer’s instructions (especially in relation to bribes and other inducements).

• The conditions on which tool kits and other personal possessions may be left on the employer’s premises.

• The employer’s right to search the employee’s person, vehicle and hand baggage or parcels

• The purchase of vehicle spares or accessories by the employee and work done on a vehicle owned by the employee on the employer’s premises.

• The circumstances in which vehicles owned by the employer or his customer may be driven.

• The use and misuse of trade plates.

Unless they form part of existing custom and practice to the extent that their committal to writing implies no change in management practice (and this is unlikely), the introduction of company and workshop rules and regulations should always be prefaced by explanatory discussions with employees or their site representatives (for example, shop stewards).

If agreement on their introduction cannot be achieved, it is open to the employer to consider the use of his management prerogative by posting a copy of the rules he wishes to introduce with a notice to say that they will apply with effect from a given date (which must lie beyond the terminal date of notice which could properly be given to the longest-serving employee covered by them).

There is still a risk of the employee leaving and claiming unfair constructive dismissal. Rules should also provide for their own alteration - again, after discussion and with due notice.

Some Special Contractual Terms

Some Special Contractual Terms

i. Probationary Periods of Employment: If the offer of employment is made “subject to satisfactory completion of a probationary period”, which may be for three months, six months or any other period of time, the contract can be terminated at the end of the probationary period without giving rise to any legal problem providing the employer takes all reasonable steps to give adequate instructions, training and supervision during that period.

ii. Mobility clauses in Employment Contracts : A clear unambiguous written statement such as “the company reserves the right to require any member of their staff to work at any of their establishments in the UK”, or “at the discretion of the company, you may be transferred at any time during the period of your employment from one location to another” will protect the employer from redundancy claims and breach of contract claims.

The actual enforcement of the term must be done in a reasonable manner to avoid losing an unfair dismissal claim. If it is not really necessary to insert such clauses (i.e. it is not essential to the effective operation of the business) a woman may be able to make a claim of indirect sex discrimination.

iii. Moonlighting and Competition: There is an implied obligation on all employees to work loyally and faithfully for their employer during normal working hours. Thus, an employee who works either for themselves or for another during those hours, or soliciting the employer’s customers, will almost certainly be acting in breach of their contract.

There is no need for any written statement banning such work, unless the employer wishes to emphasise the employee’s obligations to themselves. However, simply indicating that they are seeking other work, even for a competitor, or giving notice to work for one, would not be a good reason for dismissal, unless there are grounds for believing that the employee was abusing their confidential position and information.

Taking a job outside working hours, however, is not in itself a breach of this implied term even where that job involves competition, unless significant harm is done to the employer’s business, or the extra work undertaken by the employee affects his/her job performance.

 It is advisable to have a written term in the contract that restrains the employee from undertaking any work for a competitor, or competing directly against the employer, for the duration of employment. The contract clause should not be unenforceable as being in unreasonable restraint of trade and therefore contrary to public policy.
Even where there is clear breach of a term of the contract of employment, before dismissal occurs the employer must act fairly (i.e. carried out a proper investigation, have reasonable grounds for believing there was a breach of contract and given the employee a chance to explain).

iv. Employee Confidentiality Agreement : There is no need for a written contract clause as there is an implied duty on all employees not to disclose to third parties their employer’s confidential information and trade secrets obtained in the course of their employment.

 A written contract clause may, however, have a strong deterrent effect and is useful if it specifies as precisely as possible what information the employer considers confidential (e.g. price to be charged for a new model of car). Information would not be confidential where it is already public knowledge, or easily obtainable from another source, or which forms part of an employee’s general “know-how” or “stock-in-trade”.

v. Restrictive Covenants in Employment Contracts: Generally, all contractual restraints on a former employee’s freedom to work where or for whom they please, are void as being in restraint of trade. If it can be shown the restraint clause is necessary to protect a legitimate interest of the employer, however, and is reasonable both in relation to the interests of both parties concerned and the interests of the public, it may be enforceable.

Forms of restraints commonly found in employment contracts are clauses relating to confidentiality, non-competition and non-solicitation of the employer’s customers. Clauses prohibiting the poaching of other employees may also be included.
Restrictive covenants should be kept as narrow and specific as is necessary to protect the company’s interests in terms of the following...

• Subject matter (e.g. a salesman specialising in selling Mercedes cars may be restricted from selling those of another company, but not from selling new cheaper cars of other makes)

• Duration (e.g. restricted for no more than one year maximum from selling Mercedes cars)

• Geographical area (e.g. if the franchise only operates in Yorkshire, a prohibition extending beyond Yorkshire would be invalid).

If the employer breaches the contract of employment of the employee concerned (i.e. wrongful dismissal by dismissing without notice or insufficient notice, or in breach of the contractual disciplinary procedure, they cannot enforce a restrictive covenant. Summary dismissal for gross misconduct would not be wrongful dismissal.

Published: 24 Mar 2011


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