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Writing Employment Contracts for SMEs

An employment contract, if properly drafted, will set out all of the main rights and obligations of your employee, and will allow you to make sure that the relationship works in the way that is right for your business.

Under the Employment Rights Act, a statement of the main terms and conditions of employment must be provided in writing. Here are some tips on how to write an employment contract for your business.

A well-written employment contract clarifies all expectations from you and protects you in case there are any disputes, or if you have to terminate the contract. Disputes can be costly and for small businesses and are something to be avoided.

An employment contract must include employee:

  • contractual benefits 
  • rights
  • responsibilities, and
  • duties.

Drafting the Employment Contract

  1. Title your document – this can be simply “Employment Contract” or Statement of Terms and Conditions” but it must be clear what the document is. Many small businesses prefer the informality of a contract which is in the form of a letter, and that is fine too.
  2. Identify the parties – you must write your business name and address, as well as the employee’s name and address. If you are a sole trader or partnership, consider the possibility that you could become personally liable for employment debts, and perhaps consider setting up some other business entity to employ your staff.
  3. Length of contract – you will need to specify how long the contract is for, so if it’s a temporary contract make sure you specify dates. If it is a permanent contract you would need to state that the contract will continue indefinitely until terminated by you or the employee by giving a period of written notice, which will usually be determined by the contract itself. Many businesses choose to implement statutory minimum notice, which requires that the employee gives one weeks’ notice for each completed year of service, up to a maximum of 12 weeks.
  4. Job title – this must be included in the contract so the employee knows their role.
  5. Duties – as outlined in the job description you can now expand on what you expect from the employee. However, it is very useful to add a paragraph which makes it clear that employees may be required to carry out other duties, according to the needs of the business.
  6. Hours of work – you will need to explain whether they are doing 9-5 in the office, on shift work or if they are expected to work at nights and weekends.
  7. Holiday entitlement – explain how much holiday they receive and if that includes Bank Holidays. If your employee works flexibly, for example on a casual basis, or part-time, or is paid according to the volume of the work they do, or if they are paid variable sums, because of commission bonus or other premiums, you may need to take advice in relation to holiday and holiday pay, as the law in this area is complicated at the moment.
  8. Work location – if the employee will not be working at your business address you will need to tell them where they will be and if they might have to relocate. You can also state that this is variable depending on the type of work – i.e. a plasterer may have to work on various different sites depending on the daily workload.
  9. Pay – you will need to specify how the employee will be paid, be it hourly or salaried. You will need to specify if overtime is paid, how it is calculated, and when it would be paid. If you do not offer overtime you will need to make this clear. It is often a good idea to specify if there are fixed pay review dates but make sure that you do not commit to pay rises in the contract. 
  10. Receipt of pay – explain the method of payment, frequency of payment, and usual payment date – so will it be by cheque, bank deposit or another means, will payment be monthly or weekly, and will it usually be paid, for example, on the last Thursday of each month?
  11. Benefits – if there are benefits such as health insurance, gym membership or any other employee benefit these should be listed as specifically as possible. If you provide insured benefits, you should make it clear that in the event that the insurer declines payment, then you are not liable to make any substitute payment. It is often a good idea to keep any bonus arrangements flexible, stating that any bonus will be paid according to targets which will be set by the employer in each financial year.
  12. Business information and business protection – if your business uses trade secrets, patents or other confidential information you need to clarify that the employee cannot share this information. You may also wish to make it clear who owns any original works that could be copyrighted whilst they are in your employment. If you are employing someone who might be able to take business away from you, if they were to leave, give careful consideration to including restrictive covenants, which, if properly drafted, can prevent your employee from soliciting or dealing with your customers for a period of time after they leave you.
  13. Termination – include notice period and anything that would lead to immediate dismissal. Even though they are not required by law to be included in an employment contract you may wish to include disciplinary procedures. However, it is a good idea to state explicitly that any disciplinary and grievance procedures are provided for information purposes only and do not form part of the contract itself. This is because you may not want to be bound by exactly the terms of the grievance or disciplinary procedure that you implement, as a contractual obligation.
  14. Signatures – leave a space at the bottom of the contract where you and the employee sign to show you understand the contract and what it means for both of you going forward. Remember that if you choose to use a contract which is in the form of a letter, you must still get it signed by the employee.

If any terms change you should ideally issue a new contract and get it signed again. However, very few employers actually do this in practice, and well-documented changes are still valid and enforceable, even if you do not issue a new contract.

Hopefully the information above has given you an idea of the length and depth of a well written employment contract. After you’ve drafted it you will need to have it looked at by a solicitor who will make sure you have covered everything and in enough detail. A lack of clarity over contractual arrangements can cause confusion and ill feeling between employer and employee, and can sometimes result in legal claims being brought.

Slater and Gordon Employment Solicitors for Business have many years’ experience in advising businesses about employment contracts.

For more information, call us on freephone 0800 916 9060 or contact us online and we will call you.

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