Contracts (Premium)

Guidance to contractual rights

Forming the Contract of Employment

A contract is a legally binding agreement between two or more parties, such as an employment contract made between an employer and an employee. It is vital this is correctly set out at the start of employment and is maintained to reflect changes in the law. To purchase a standard statement of terms and conditions

There are four elements to the formation of a legally enforceable contract.

  1. Offer: One party (the employer) makes an offer of terms to another party. For example, the employer offers to employ the employee on certain terms.
  2. Acceptance: The other party (the employee) must accept these terms
  3. Consideration: This is a legal term meaning something of value has to pass from each party to the other. For example, the employer will pay wages in return for the employee working.
  4. Intention to be bound: Both parties intend to create a legally binding agreement.

In standard contract law, the contract is whatever the parties have agreed to, even if it is not a good bargain, but employment contracts are not so simple. It is not legal to ask an employee to waive their statutory rights and case law affects what those rights are, and it frequently changes.

This is not always understood by lawyers who do not specialise in employment law and clauses such as “after 3 months’ sick absence your contract will be terminated” can be seen. It may be a perfectly valid general contract term, but if you carried it out, you would almost certainly lose a claim for unfair dismissal and possibly a claim for discrimination (disability or sex discrimination if related to pregnancy or childbirth for example).

Oral Contracts

A contract does not need to be in writing, a verbal contract is just as legally binding but the difficulty being proving what was agreed between the parties. Care must be taken when recruiting employees not to make inadvertent oral contracts.For more information go to recruitment.

In the absence of written contractual terms a court will tend to ask who has the most reason to remember correctly what was said. As employment terms affect the employee personally, whereas they generally do not affect the manager personally, except where the manager is the owner, the employee is often given the benefit of the doubt. It is therefore very important to be clear in the offer letter what the key terms are and in the full terms of employment. It is important to know how to deal with mistakes or a conflict in the information between the interview, the offer letter and the written terms.

Contract Terms

The terms of a contract can be:

  • Express (those which are explicitly set out either in writing or orally)
  • Implied (terms which are not specified but are necessary to make it work)
  • Incorporated terms (which include statutory terms).

Express terms are those set out in the statement of terms and conditions or contract but may also be incorporated into individual contracts by reference to other documents, such as collective agreements made with the recognised trade union and company handbooks.

Implied terms are not expressly agreed between the parties but which the courts may regard as just as binding. A term will not automatically be implied just because it may be reasonable to do so or because the contract is unfair. The court will also look at the intention of the parties at the time the contract was made. A term will, in general, be implied where it is:

  • Necessary to make the contract work eg the need for the skills to do the job such as to able to speak the language
  • So obvious the parties must have intended to put it in eg the employee will not steal from the employer
  • Normal custom and practice in that particular industry which has been adopted over a period of time
  • Implied by the common law.

 Statutory terms are those implied or imposed by an Act of Parliament or Statutory Instrument, eg: the entitlement to be paid the national minimum wage or given a minimum period of notice. Agreements to contract out of statutory terms are normally void under the law.

Collective Agreements may be incorporated into a contract but this is not automatically the case.

Misrepresentation and Mistakes

At the recruitment stage care has to be taken not to misrepresent the contractual terms as the employee may have legal redress. What is offered at interview, if accepted, takes precedence over any subsequent contract.

If a mistake is made in the contract terms it is possible to correct it if this is done before he employee (or prospective employee) unequivocally accepts. The employee is deemed to have accepted once they have sent the acceptance. It may also possible to change the term if it is so obvious that it couldn’t be correct and the employee could not have accepted it in good faith. In practice it is often possible to get the employee to agree to the correct terms as they want a job or want to keep their job.

Variation of Terms and Conditions

At some point, either party bound by a contract of employment may want to change it.

For example:

  • An employer may want to vary the terms of the contract because of changed economic circumstances, a reorganisation of the business or changes due to new technology. This might mean changing pay rates, hours or days worked, supervisory relationships or place of work.
  • An employee may seek improvements in their pay or holidays, or want to change the hours they work due to domestic responsibilities.

Varying Contracts

The general contract position is that an existing contract can be varied only with the agreement of both parties. In employment contracts changes can be agreed with either on an individual basis or through a collective agreement with either a trade union or employee representatives.

Where an employer is proposing to change an employee’s contract of employment they should fully consult with that employee or his or her representative(s) and explain and discuss the reasons for the change. Employees are far more likely to accept changes if they can understand the reasons behind them and have an opportunity to express their views. Involving employees makes good business sense, as it drives up levels of employee engagement and motivation.

Variations to the contract can be agreed verbally or in writing but it is preferable for any agreed changes to be recorded in writing or any verbal agreement confirmed in writing.

Where a variation to the contract has been agreed and the changes concern particulars which must be included in the written statement of terms and conditions, the employer should give written notification of the change to the employee, within a month of the change taking effect.

Varying contracts by agreement is by far the best way to handle the change. It is possible to vary contracts in other ways and these include:

  • Using a contractual right to vary (tempered by reasonableness)
  • By dismissing the employee (with the correct notice) under the old contract and offering re-engagement under the new contract (risks unfair dismissal claims)
  • By implying the change into the contract by custom and practice (difficult, take advice)
  • And in some circumstances they can even be varied unilaterally (that is the employer just does it without the agreement of the employee). These are rarely legal and should be carefully managed.

This is a difficult area of law so if you need advice we can help you manage the change go to our consultancy service

Types of Employment Contract

  1. Long term – full or part time
  2. Fixed term
  3. Agency workers
  4. Self-employed- freelance, consultants, contractors
  5. Casual workers
  6. Annual hours
  7. Zero hours

Staff employed on Long Term (open) or Fixed Term contracts (full or part time) are employees, as are those on annual hours. Employees employed on temporary contracts have exactly the same rights and protection as employees on long term open ended contracts. Casual staff may be employees or workers and home workers may be employees or self-employed. The law surrounding employee status is complex and changes with decisions of the courts. Typical problems are:

  • Who is the employer of agency workers? Generally the agency is considered to be the employer but care needs to be exercised to prevent this shifting to the principal ie the employer using the agency worker.
  • When is someone self-employed, a contractor or a casual employee? The Inland Revenue and Employment Law do not always come to the same conclusion.
  • Do employees on annual hours have the same rights for holiday and sick pay etc?
  • Is someone on zero hours a casual employee or is there an umbrella contract (connecting periods of work) making them a long term employee?
  • What right does a fixed term worker have?
  • When does employment with the employer start for agency staff who are recruited as employees?

For more information on employment status and the rights associated with it visit our Employee Premium page and take a look at the “Can I claim” section  or for further help contact us or go to our Consultancy service.

Casual Contracts

Casual contracts are generally used where an employer requires workers to work on an “as and when” needed basis to meet fluctuating workloads. The workers are not required to make themselves available for work or to accept work when offered. As they are free to turn work down, there is no mutuality of obligation and the contract does not continue during the breaks. If workers undertake to work on a regular basis, however, continuity could result or mutuality of obligation could be implied, leading to an employment relationship. The key factors relating to casual contracts are as follows.

  • Where work is of a truly casual nature workers are free to turn down work if they choose to do so.
  • The absence of mutual obligation, on the part of the organisation to provide work and on the worker to accept work, means that normally the contract of a casual worker will be a contract for services rather than a contract of employment.
  • Casual workers will, therefore, be excluded from many employment protection rights.
  • A “casual worker” may be an employee in special circumstances.
  • Even where there is no mutuality of obligation it is possible that if the employment is regular over several years, then an “umbrella” contract may be inferred. This means the employment breaks are linked.
  • Where it is the recognised custom and practice for casual workers to be engaged under contracts for services, even a long period of casual working may not result in an employment relationship.
  • If organisations have a regular need for casual labour, it is advisable to:
    • maintain a list of individuals who are prepared to take on casual work
    • offer jobs on a rotating basis
    • avoid approaching the same workers repeatedly.
  • Casual workers who are not employees are still protected against unlawful discrimination under one of the “protected characteristics” of the Equality Act 2010. They are entitled to bring equal pay claims. They are also covered by the unlawful deduction provisions in the Employment Rights Act 1996.

Zero hours contracts

In most situations there is no mutuality of obligation, meaning that workers do not acquire the employment status of an employee and so gain the full range of employment rights, the chief one being protection from unfair dismissal. Contracts need to be drafted carefully and must reflect what actually goes on in practice. In this regard, while an employee may be required to be on call at home waiting for work, if the employer insists that the individual in question is required to undertake the work if offered this may infer employment status. However, this is countered by the fact the employer does not guarantee work. The courts have yet to decide on these matters. For further advice go to our consultancy section.