UK Update: Top ten tips on ensuring effective employment contracts

The employment contract is one of, if not, the most important documents in any employment relationship. It should set out the main terms and conditions that apply and document the key details of the employment.

Given its importance, it’s vital that employers have an employment contract which is:

1. fit for purpose when considering the nature of the arrangement
2. legally compliant; and
3. which incorporates current best practice.

With all of this in mind, I’ve set out below my top ten tips for preparing your employment contract.

1. Complying with the good work plan

Following the government’s “Good Work Plan”, several changes came into effect on 6 April 2020 concerning employment contracts.

Firstly, it meant that employees and workers were entitled to a written statement of terms (known as a S1 statement) from day one of their employment.

The changes also extended the information which must be included in the S1 statement meaning that the following additional points should now be included:

• details of normal hours (including breaks) of work, days of the week to be worked, and whether there may be any variation to those;
• terms around other forms of paid leave such as bereavement leave and other family leave;
• details of employee benefits e.g., health insurance;
• terms around any probationary period; and
• details of training provided and any related requirements.

Failure to provide a S1 statement, or a fully compliant S1 statement, can result in a declaration confirming the particulars from the Employment Tribunal with the potential for an award of 2-4 weeks pay too. However, it is worth noting that this compensatory award will not be made where this is a stand alone claim and it must instead be tagged on to another substantive claim (such as unfair dismissal) which also must be successful before any award is made.

The changes only apply to contracts being issued after 6 April 2020, so there is no legal requirement to update existing contracts to incorporate these. However, an existing employee can request that their terms are updated to reflect the legal requirements.

2. Notice provisions

You should ensure that the notice provisions included are fit for purpose. For junior staff, a notice period of 1-3 months is usually appropriate. Where staff are more senior and integral to the business, notice periods of anywhere between 6-12 months may be used. There is a balancing act when considering notice. Employers want to avoid being left in the lurch should a senior employee have a short notice period and resign. However, this needs to be assessed against the risk of a long notice period with an underperforming employee who then becomes more costly to exit.

Employers therefore need to consider the level of risk and cost they want to expose themselves to, in terms of being on the hook for a longer notice period, against ensuring business stability and giving employees assurance about the company’s commitment to them.

Employers also need to factor in that the statutory notice period may surpass the notice in the employment contract. There should be fall back provisions in the employment contract to reflect that this may be the case to ensure that staff are given the correct notice required by law.

One other element of notice which is important is the method of giving notice by either party. Traditionally, this would be delivered by hand or post, but email may also now be appropriate, especially given greater move to hybrid and remote working. If this is going to be incorporated, then you should consider what deemed receipt/service provisions may be required.

3. Payment in lieu of notice (PILON)

Another important feature in a notice clause is the PILON provisions. You should ensure these are drafted clearly to note that this is at the employer’s discretion; and whether the PILON covers salary only or salary and benefits.

Having a clear PILON clause is important to ensure that post-termination provisions such as covenants and confidentiality are enforceable. If a PILON is made without there being an express contractual right to do so, then there may be arguments about whether the post-termination provisions remain enforceable.

It should also be borne in mind that just because a PILON clause is exercised, it does not mean that a dismissal will be fair for unfair dismissal purposes – there must still be a fair reason and the decision must still be considered as reasonable.

4. Restrictive covenants

Restrictive covenants can be crucial to protect business interests, however, they must be drafted in a manner which is considered reasonable.

If covenants go beyond a reasonable timeframe (e.g., 12-month covenants for a junior employee), or where the scope is excessively wide (e.g., UK wide restriction for an employee who only operates in Scotland) then they are likely to be unenforceable. If an employee is put on garden leave, it is also good practice to reduce the length of the covenants by the time spent on garden leave, to help with enforceability.

Covenants should therefore be considered on an individual basis rather than taking a blanket approach.

5. Confidentiality clauses

Like restrictive covenants, these may be critical to protect business interests and confidential information. Employers should ensure that confidentiality provisions continue to apply post-termination and that they are drafted broadly enough to catch the confidential information required without being so broad as to be unenforceable.

Where there are specific types of confidential information which are relevant to the company or role, such as software, plans, or business contacts, they should be referenced specifically.

6. Contract term

In many cases, the employment contract will be for an unspecified term and will only end once either party has given the appropriate notice. However, where fixed-term contracts are being used, care must be taken to ensure that the term provisions are clear, for example, whether a notice need be served or whether the fixed-term contract will expire automatically on an end date.

If provisions are not clear, there is a risk that the contract will continue rather than end on the intended date.

7. Medical checks

It is becoming increasingly common for employers to include a clause regarding consent to medical checks (usually at the employer’s cost) in the employment contract.

This is often seen in the context of an entitlement to company sick pay or where there are capability concerns, and an employer wants to obtain a medical report to allow a decision to be made about ongoing employment.

Employers must bear in mind that whilst they can try to enforce attendance for a medical check as a matter of contract, this does not provide them with consent to obtain the subsequent medical report. Separate consent must be sought from the employee for disclosure of the actual medical report to obtain this information lawfully.

8. Entire agreement wording

Entire agreement wording ensures that no previous outside discussions, communication, or documents can be relied upon as a contractual term by an employee e.g. emails, verbal agreements, or other policy documents.

You should ensure this is drafted appropriately, accounting for any other documents which may be relevant, for example in some instances bonus arrangements may be contractual and you should ensure there is a carve-out in the entire agreement wording for these.

9. Holiday pay on termination

It’s a legal requirement to have certain information around holiday entitlement in the employment contract. One important point that should be considered is the position regarding payment due for outstanding holidays on termination of employment as employers are required, to make a payment for any outstanding statutory holiday entitlement (which is 5.6 weeks).

Points to consider include: will the employer require the employee to take unused holidays during a notice period; what is the position regarding accrued holiday from the previous holiday year; and, if the employee’s contractual entitlement is more than statutory entitlement, will the additional contractual days be treated differently.

10. Group company wording

If an employer is part of a broader group of companies, consideration should be given to the inclusion of wording around this and what additional duties and responsibilities may be owed by the employee.

For those working at senior level, it may be relevant that their confidentiality clauses and covenants refer to group companies’ information and business. It might also be required that they undertake duties for group companies from time to time or that their employment could be transferred to them.

If this is relevant, it should be set out clearly in the employment contract to ensure appropriate protection of group interests and flexibility for the employer and other entities in the group.

By Burness Paull LLP, Scotland, a Transatlantic Law International Affiliated Firm.  

For further information or for any assistance please contact ukscotland@transatlanticlaw.com

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