Many employers think that they are being clever by not issuing an employment contract, but they don’t realise that they are actually harming their business!
Statutory employment laws will apply if there is no other contract, and they are weighted in favour of the employee, not the employer. Read more to find out what you could be exposing your company to!
A conversation between Gap HR Services & an owner of a small business (SME)
GAP HR: There are various reasons why you need to do that. All of them are to help you as the employer rather than the employee. You could get away with not giving people contracts, but the biggest disadvantage of that is that if you don’t have your own contract the default Employment Law will apply to the employees. Employment Law is generally weighted towards the employee’s rights rather than the employer’s rights.
SME: So if we have our own contracts we can at least change some of those things, which might be better for us.
GAP HR: Exactly. One of the most obvious things is the notice periods. If you have your own contract you would normally say, after someone has completed their probationary period they would be on a month’s notice. If they are more senior you might even make it 3 months, so that if they decide to leave you could have some time to find a replacement. If you don’t have that in your contract, the legal minimum requirements will apply. The legal minimum notice period for the employee to give you is just one week. It doesn’t matter how long they’ve been with you, they only have to give you one week’s notice.
SME: So even if they’ve been with us for ten years, they still only need to give us one week’s notice?
GAP HR: Yes. One week. They employer has to give the employee ten week’s notice, but the employee only has to give one week’s notice. Unless you’ve got it written down differently in your contract…
SME: Right. I can see why you would need to put that in your contract then.
GAP HR: Really, it’s to protect your business and enable you to have some time to try to find a replacement. There are also other areas where you need to be aware that the law is not weighted towards what you need as an employer. So that’s the first main reason for having a written contract – you need to do it to protect your business. The second reason is so that you have the freedom to do what you need to do within the business. There are areas that aren’t governed really by the law. So if you put in paragraphs dealing with those issues you will have a flexibility that you wouldn’t otherwise have.
SME: So, what sort of areas do you mean? Can you give me an example?
GAP HR: One of the more common is to do with gardening leave. This would apply when somebody has either resigned or you’ve given them notice. You can then decide whether you are going to make them work their notice or whether you would rather send them home. You might do this if you feel there could be problems with them being at work or you don’t think they’ll be motivated. That’s gardening leave. Now, you need to have a paragraph in their contract saying you have the right to put the employee on gardening leave. Otherwise, you’re removing their right to provide you with work, which is a breach of contract.
SME: So if you didn’t have that in your contract, you couldn’t dismiss someone and tell them not to come in to work out their notice period.
GAP HR: No.
SME: They could insist on coming in?
GAP HR: Yes.
SME: That could be awkward couldn’t it?
GAP HR: Yes, quite.
SME: So, without that in the contract you wouldn’t be able to stop them coming in if they wanted to?
GAP HR: Exactly If you stopped them coming in, they could sue you for breach of contract. This is not the largest settlement in contract law, but it is extra money you might have to pay out and of course it would involve solicitor’s fees as well.
SME: So if the relationship had become problematic anyway, the employee could decide they would try to get whatever they could?
GAP HR: Yes. They could be looking for settlement under discrimination or constructive dismissal.
GAP HR: So, one aspect is that you can then put them on gardening leave. You also might want the option of giving them payment in lieu of notice. So that you terminate the employment immediately and just pay them for the notice. So they could then go and try to find another job.
SME: I would have thought that most employees would be happy to have payment in lieu of notice anyway though.
GAP HR: They usually are, but you still need to have that in the contract. Also, it can affect the length of time they’ve been working for you. If they are coming up to a year and you give them notice at 11 months, it could otherwise take them over the year. Then they have more rights which they wouldn’t otherwise have. So if you terminate their employment before this by paying in lieu of notice you wouldn’t go over the year.
SME: So the employment would be finished?
GAP HR: Yes, exactly. Now, the most interesting one we’ve come across recently is that you can put them on gardening leave for the duration of a redundancy consultation process. This is usually a period of at least seven days while you are looking at all the options… making decisions about whether you are going to make someone redundant. Now, some people may be able to function and indeed may have to function during this time. There might be other people who will really not be able to concentrate or who you do not want to have access to confidential information during this period…
SME: Depending on what their position is?
GAP HR: Exactly. You need to have a sentence in the contract that says that, if they are under the threat of redundancy, you reserve the right to put them on gardening leave. So this is an example of you having the flexibility of being able to do what you need to do for the business. So the interest of the business can be represented rather than just the letter of the law.
SME: Yes, I see.
GAP HR: The other thing is, for the employees’ benefit as well, they know what they’re entitled to. Because if they don’t know exactly what they’re entitled to they are going to talk to their friends. Then you get a situation a bit like sex education at school… “my friend said you can’t get pregnant if there’s an “R” in the month” etc.
SME: Chinese whispers!
GAP HR: Then you get lots of horrible myths that go round and, because they don’t know what the situation is, and they don’t always feel comfortable talking to the employer about it, people come up with all sorts of ideas.
SME: So people decide they should be getting this or should be getting that and get upset because they’re not.
GAP HR: yes, and they spend time gossiping about it at the water machine or coffee machine.
SME: Whereas if it’s all written down in their contracts, they all know exactly where they stand.
GAP HR: Yes, if it’s all down in black and white, it’s quite straightforward…
SME: And there’s no arguing about it, because it’s all written down.
GAP HR: Exactly. Also, if they have a question, at least they can come and ask: “what does this paragraph mean?” and you can then clarify what the situation is and there’s no need for all the gossiping.
SME: So that’s a good thing for both sides really then isn’t it? Everyone knows exactly where they stand about everything.
GAP HR: Exactly. The biggest thing is that there really is no advantage to NOT having a written contract. You’re not getting yourself any advantage as an employer from not having contracts. I’ve had clients who’ve said they don’t give contracts until the employee has been there for six months. Well, as we’ve seen, there’s no advantage to that. A lot of the employee’s rights are from day one and you can’t NOT give them what they’re entitled to. They’ve got the rights whether they’ve got a contract or not.
SME: At what stage is an employer required by law to give a written contract?
GAP HR: Within two months. You have to give them a written statement of their terms and conditions of employment within two months.
SME: But there’s not really any advantage to even leaving it until the two months?
GAP HR: No.
SME: So you might as well do it straight away?
GAP HR: Yes. Because then it’s clear to them what they’re entitled to and what’s expected of them.
SME: In fact there are advantages really to doing it immediately.
GAP HR: Yes.
SME: So everyone knows where they stand and there are no misunderstandings.
GAP HR: Another thing you need to remember when you’re drawing up your contract is that what you put down on paper needs to reflect what is happening in reality. There’s no point putting down – and I’ve had this example from more than one client before – that we don’t pay sick pay, we only pay SSP. At least that’s what’s in their contract. But then you find that the employees say, “but we’re always paid full pay when we’re off sick”. There’s no point doing this because then that becomes “custom and practice” and this overrules what’s in the contract. In other words, it will have changed the terms and conditions.
SME: But if you got it written in the contract, can you not fall back on that?
GAP HR: No.
SME: Not at all? Can you decide not pay any sick pay at all then? If you pay any at all will that mean you have to pay everyone? Does it make a difference if you just occasionally pay it rather than you always pay everyone?
GAP HR: If you are always paying everyone full sick pay and you’ve done this for more than two months, then that will override the written contract as it is the reality of the situation, “custom and practice” in HR jargon. If you’ve done it with no provisos, and haven’t said that it is an exception… A court would find that this is the reality of the situation.
SME: And that will override the written contract?
GAP HR: Yes.
SME: OK… Is there any way of incorporating something in the contract to allow for occasional payments of sick pay?
GAP HR: Yes and no. There is provision for making discretionary payments but you have to be careful because then you may set a precedent… so if one person breaks their leg and you pay them for six weeks and then another person breaks a leg you can’t then say I’m not paying you for six weeks. Because then you would have discrimination.
SME: So you would have to look really carefully at who you pay and who you don’t pay and why, so that you don’t have that sort of problem.
GAP HR: Yes. You need to be clear about what your justification is.
SME: So you might have to decide is a broken arm as bad as a broken leg?
GAP HR: You could say if someone has been with us for more than a year, or five years, then we will pay, otherwise we won’t.
SME: So it’s OK to do that. To pay according to whether they have been with you for a certain length of time?
GAP HR: Yes… but it would be better…
SME: To put it all in the contract?
GAP HR: Exactly!
SME: So I can see it would be better to incorporate something in the contract. So you could have a proper structure according to how long they’ve been with you. So for example after three years they get three weeks and after five years they get six weeks or whatever.
GAP HR: Yes.
SME: So you would be better deciding what you do in reality and incorporating that into the contract?
GAP HR: Exactly. Even if you are looking at it a long time after contracts have been done, it’s worth making sure the contracts agree with the reality. If they don’t agree, a court will ignore that term in your contract.
SME: So it would be worth getting the contract changed to agree with what actually happens.
GAP HR: Yes. And it’s the same for notice periods or whatever else… but you would have to officially change the terms and conditions…
GAP HR: But that’s the subject of another discussion.
GAP HR: So is that a bit clearer now about why you need contracts?
SME: Yes. Thank you very much!
GAP HR: My pleasure!
Gap HR is delighted to help all sizes of business, from start ups with one employee to those with up to 100 employees.
We can help you prevent unplanned surprises!