Employers: Penalty For Not Issuing Contract Of Employment (5 Reasons)

Most employers think that they’re being clever by not issuing a contract of employment – what could the harm of that be? Is there even a penalty for not issuing a contract of employment? The answer is actually quite a lot of risk involved.  Here is a short guide as to why you must issue one, no matter how much you don’t want to…

1. It’s the law!
2. Notice periods
3. Gardening leave in employment
4. PILON (Payment In Lieu Of Notice)
5. The financial side

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Reason 1 (but not the most important one!): Not Issuing A Contract Of Employment Is Against The Law!

Since April 2020 the law has become a lot stricter about issuing written contracts of employment. You now have to give employees a contract of employment by the end of their first day of working for you. It used to be within two months of them starting.

What is the penalty for not issuing an employment contract? Immediately, nothing. But if they take you to tribunal for any other reason (unfair dismissal, discrimination, etc) then it will be added on to their claim and will cost an extra 3 or 4 weeks money. It will also be a sign, for the Court, that you are not “fulfilling your obligations under employment law” and will be a black mark against you. The penalty for not issuing a contract of employment could be as little of a few hundred pounds at tribunal to thousands of pounds and losing your case.

Even if you don’t issue them with a written contract, they have a verbal one: you have offered them a job, they have accepted, they turn up to work for you in the expectation of getting paid, and you pay them.

The law is even more specific since April 2020. You now have to have all paid benefits, statutory or otherwise, written in the contract. If you used to pay company sick pay “at your discretion” that is no longer possible. Holidays, pensions, medical insurance, etc have to be in there. Even statutory benefits, that you have no influence over such as statutory sick pay and maternity pay, have to be in there. This is to enable employees to potentially compare what they are paid, for equal pay purposes.

You cannot stop employees from comparing their contracts and benefits for equal pay purposes, but you can if it is unrelated to discrimination. For example a woman and man, doing the same job, can compare contracts and benefits. Two white men doing different jobs could not without you being able to discipline them for breach of confidentiality.

If you don’t issue an employment contract, other legal protections still start. For example, protection from discrimination on the basis of: gender, gender reassignment, marital status, pregnancy & maternity, age, race, religion, disability, sexual orientation) starts from the recruitment stage, with or without a contract. Employees also accrue annual leave, with or without a contract.

You also should be aware that you cannot get an employee to sign away, in an employment contract, their legal rights.

You can’t get them to agree that if they are sick, that they do not need to be paid anything. If you try and impose less than the statutory minimum, they will always apply in any dispute, so what’s the point of trying to do so? Employees have access to a lot of free legal advice, so they will find out what you are trying to do fairly easily and then your business will be in trouble. Save yourself the hassle and at least stick to the legal requirements, for your safety and bank balance!

Reason 2: Notice Periods

One of the most important reasons why an employer should issue an employment contract is the notice period. The penalty for not issuing a contract of employment is that the statutory minimum notice periods will automatically apply, and they are amazingly short.

In the first month of employment they are instantaneous on both sides.

After the first month of service, the 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 ever have to give you one week’s notice.  Even if they have been with you for ten years, they would still only need to give you one week’s notice.

This will obviously be a problem if they are a valued employee and decide after 10 years that they want to go, they give you one week’s notice, and then take their outstanding holiday leave during that week. You would instantly be without your employee but there would be nothing legally you could do about it.

The statutory minimum notice periods are not the same for employers. You need to give them 1 week’s notice for every completed year of service up to a maximum of 12 weeks.

You cannot get an employee to sign away, in an employment contract, their legal rights. Whichever notice period is longer will apply, contractual vs statutory.

If you have your own contract you would normally say, after someone has completed their probationary period, that 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.

The added silver lining is that if you have a longer notice period and an employee walks out and refuses to work it, you would not have to pay it at all.

So if you don’t want to be left in the lurch, you need to put an adequate notice period in the contract.  Also make sure that it says “in writing” to stop spur of the moment resignations/firings being treated as valid, which in the heat of the moment they were, but in the cold light of day (and having to pay mortgages) they aren’t.

Reason 3: Gardening Leave in Employment Contracts

There is no legal right, unless it is in the employment contract, to send an employee home instead of letting them work out their notice. This would apply when somebody has either resigned or you’ve given them notice. If you have a clause regulating this in your employment contract, you can then decide whether you are going to make them work their notice or whether you would rather send them home.

You might put them on gardening leave if you feel there could be problems with them being at work or you don’t think they’ll be motivated. They aren’t allowed to work for someone else, though they can look for work, but effectively they are being paid to sit at home in the garden.

We would normally recommend that if you have given them notice, that they are then put on gardening leave. If they have resigned, then do ask them to work their notice period.

As you have not issued a contract of employment, it means that you don’t have a paragraph in their contract saying you have the right to put the employee on gardening leave. If you do put them on gardening leave or pay them in lieu of notice, you will be removing their right to provide you with work, which is a breach of contract.

The cost of the penalty for not issuing a contract of employment? An extra 3-4 weeks pay awarded against you if it came to court.

You could also have an employee who insists on their right to come in and work – which could be at the best awkward and at worst damaging for the business, especially if the employee is acquiring information that they shouldn’t or bad-mouthing you, their employer, whilst in the office.

Reason 4: PILON (Payment in Lieu of Notice)

Another good reason for giving them a contract is that you might want to give staff who are leaving payment in lieu of notice (PILON). This means that you terminate the employment immediately, issue the P45, and just pay them for the notice you do not want them to work – you unfortunately always have to pay the notice.

We usually use PILON when the employer has given notice. If the employee has given notice, then we usually make them work it.

Most employees are usually happy to have the PILON option, but you need to have that in the contract, otherwise some troublesome employees may sue you for breach of contract, as well as anything else, because you have done something that is not in their contract…

Reason 5: Financial penalty for not issuing a contract of employment

What if I have forgotten to give out a new contract by the end of the employee’s first day of employment? Is the employee entitled to compensation?

There is a set amount of compensation due if you have failed to provide a written statement of employment particulars (more commonly known as a contract of employment). This financial penalty is capped at two or four weeks’ basic pay. For 2021/22, that equates to £1,088 or £2,176, but most tribunal awards are for the lower amount.

“Basic pay” – is the cap that the government puts on compensation payments. It changes every April. It is more often used in statutory redundancy pay calculations as the cap on a week’s pay. In 2021/22 it is £571/week.

However, employees do NOT have an automatic right to compensation, despite there being a set amount due for not issuing a contract of employment. Employees have no right to bring a “stand-alone claim” against an employer for failure to provide a contract of employment.

This means that any claim for not issuing a contract of employment MUST be attached to another type of tribunal claim, e.g. unfair dismissal, unlawful deductions from wages or discrimination, AND that claim must be successful.

So, as long as you issue a contract as soon as you realise your mistake, no employee has any right to demand any compensation, and you effectively dodge the financial penalty for not issuing a contract of employment

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