By Liam Houghton
Employment contracts aren’t a legal requirement. They don’t have to be written in stone (or on paper for that matter). It may surprise you, but as a small business owner you have a contract with your employees, whether it’s written down or not.
It’s easy when you start out in business to think you can do it all yourself. It saves money and you know for sure you’ll be getting things done your way and to your high standards. As written employment contracts aren’t a legal requirement it’s all too often seen as one less job you have to take on.
However, as an employer you are legally required to put some of the main particulars of employment in writing. It is not in itself a contract of employment, but instead a written statement providing evidence of the employment contract (written or unwritten). As an employer you will need to give this statement to your employee within two months of them starting work. ACAS has a Written Statement of Employment template you can download.
You may be thinking, if you have a written statement with your employees anyway, why bother to write a formal contract?
It’s great to have trust in the people you are working with, but the employment statement covers very little and unwritten agreements invite misinterpretation. While everything is hunky-dory in employee relations at the exciting start-up stage, it’s all too easy to fall foul of misunderstandings further down the line.
Any business lawyer will tell you stories of unwritten employment contracts causing costly pitfalls to small businesses. They are filled with uncertainty and ambiguity. And unfortunately for small businesses, legal wrangles in these situations usually work against the employer.
So what exactly is an employment contract?
According to The Advisory, Conciliation and Arbitration Service (ACAS), a contract of employment is an agreement between and employer and an employee and is the basis of the employment relationship. It covers everything from pay, holidays, working hours, sickness reporting and notice periods, to disciplinary rules and confidentiality.
A contract of employment exists even when it isn’t written down. It’s the agreement for someone to work for you and for you to pay your employee for their work. Formalising and detailing all aspects and expectations of employment is best done in a written contract.
Getting legal advice when drawing up employment contracts may seem like an unnecessary cost at the start-up stage of a business, but it really is a worthwhile investment that could save you much more in legal costs later on.
Choosing a legal specialist will ensure you have comprehensive and legally accurate contracts of employment in place to protect, not only you as an employer, but also as protection and an incentive to your employees. When boundaries are clear and employees know what is expected of them, they are more likely to add value to your business.
Not having a written employment contract with your employees though could cost you dearly. And here are three very good reasons why.
A Change in Working Conditions
It’s not uncommon when a small business flourishes for the goal posts to change. That can mean quite significant changes to job roles. As a small business owner you’re more than likely excitedly steering your business through uncertain waters. The expectation is that your staff are excited by the prospect of changes, too.
For many employees the growth and change in a business does pose an exciting prospect. It could even mean a promotion. However, the odds are you’ll find one or two employees that are resistant to change.
Without written employment contracts you could find yourself at the end of an employment lawsuit. Change the goal posts and modify your employees’ duties or reassign them to a new position in the absence of a written contract and your employees may refuse your proposals.
Dismiss them at your peril. If there was no written employment contract laying out the expectations that roles may be changed and the possibility was never discussed, you could find yourself at the expensive end of wrongful dismissal damages.
A well-constructed written employment contract clears up any ambiguity regarding changes to job roles. That’s not to say you’ll avoid any resistance when it comes to reassigning staff to different duties. Inevitably, some people don’t like change. However, you’ll be in a much stronger position as an employer with a written employment contract behind you should you find yourself being taken to an employment tribunal.
Restrictive Covenants and Confidentiality
Every business has a secret formula. The last thing you need is for an employee to leave and take your key ideas or customers with them. A restrictive covenant is basically a clause in any written employment contract prohibiting leaving employees from competing with you for a certain length of time after leaving your business.
There are various types of restrictive covenants, but in essence they can prevent ex-employees from poaching your staff or customers, dealing with your customers or suppliers, or working for a competitor.
For a restrictive covenant to stand up in court it must not be drafted too widely. For example, preventing an ex-employee from setting up a similar business across a wide geographical area, or restricting them from working for a competitor for longer than 12 months are difficult to justify. Seeking legal advice on such matters is highly advisable to ensure the covenants in your contracts are legally compliant and enforceable.
Termination of Employment
Whether an employee is terminating his or her contract by resigning from your business, or you as an employer are ending a contract by dismissing an employee, a written contract can limit and define the notice required.
Employees need to give just one week’s notice or the amount stated in the contract. Employers are required to give at least the notice stated in the contract or the statutory minimum, whichever is longer. The statutory minimum is one week for employment between one month and two years, plus one week for each complete year of employment thereafter (up to a maximum of 12 weeks).
For an employer without written employment contracts, losing a key employee at the short-notice of one week could be devastating for the smooth running of the business. A written contract can stipulate the requirement of a longer notice period.
A written employment contract makes clear the expectations and procedures for terminating employment (i.e. the notice period required and that termination requests must be in writing). Inevitably employees will leave. It’s life. It happens. But having clear guidelines about notice periods and pay will save unnecessary business expense.
Isn’t it time your small business took employment contracts seriously? You could be damned if you don’t.