Learn about the ‘contract of service’, the written statement of particulars, and varying the contractual terms
These Q&As should be read in conjunction with our Case law on terms and conditions of employment.
COVID-19: for guidance on managing the end of the Coronavirus Job Retention Scheme, see our Coronavirus (COVID-19): Post-furlough guide.
A contract of employment is a legally binding agreement between an employer and an employee, which sets out the staff member’s employment conditions, rights, responsibilities and duties. This provides legal protection for both employee and employer and must be adhered to until the contract ends or an amendment is agreed by both parties.
While the fundamental starting point for considering the legal relationship between employer and employee is always the contract itself, legislation mandates certain minimum requirements in addition to what has been agreed between the parties themselves.
The main piece of legislation which governs terms and conditions of employment is the Employment Rights Act 1996.
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Many contracts are a mixture of written and oral terms. It is best practice to have written contracts and most employers do. However, it is not compulsory for employees to have their entire contract in written form.
To be binding, enforceable agreements under contract law, contracts of employment do not have to be in writing. However, by statute, under section 1 of the Employment Rights Act 1996, certain particulars do have to be put into writing within two months of the start of the contract. This 'written statement of employment particulars' advises the employee of the more important aspects of the terms of employment. There is no small-employer exclusion in relation to this requirement to provide a written statement.
Employers normally satisfy the obligation for a written statement of employment particulars by providing an employment contract which includes the necessary details. From April 2020, the statutory requirements changed and additional information must be provided. The duty also now applies to all workers, not just employees. Employers must adjust their precedent agreements to comply with the current rules.
The strict legal position is that the statutory written statement of particulars is not itself a contract. However, it is certainly evidence of it. The fact that the employer asserts that this statement properly reflects the contractual terms is not the final decision on what the terms of the contract are; the employee may still disagree. However, a tribunal may decide that the statement does reflect the terms (see Parker v Northumbrian Water Ltd, 2008).
Many employees only skim-read or do not read their contracts, and many do not have a written one at all.
Acas provides some basic guidance on employment contracts.
Some provisions in a staff handbook will be part of an employee’s written contract but not all of them. It is common for contracts of employment to contain a reference to some other document, including a staff handbook, which will contain express contractual terms together with those in the contract itself.
An employer should make it clear if the handbook does form part of the contract and, if so, which parts are intended to have contractual effect and which parts are mere expressions of policy.
The parts of the handbook which are to have contractual effect should be brought to the employee’s attention before the employment relationship starts. An employer should also include a clause in the employment contract in which the employee confirms that:
- they have been provided with a copy of the handbook
- the handbook includes various policies, for example the discipline and grievance procedures, the equal opportunities policy, the internet and communications policy and the health and safety policy
- they have read and accept any terms and conditions of employment stated in the provisions of the handbook.
Problems can arise regarding attempts to vary the handbook if its provisions have become contractual terms, as contracts can only be varied by agreement of all parties.
Employers should not only clarify exactly which terms are intended to be contractual, but should also consider having a completely non-contractual staff handbook which will be much easier to vary. Employers should also inform employees of changes to non-contractual policies and the disciplinary consequences of breaching them.
The case Harlow v Artemis International Corporation Ltd (2008) concerned provisions in a staff handbook becoming part of the contractual terms. An enhanced redundancy policy in a staff handbook was regarded as an express contractual term (although the employer denied this) and the employee was entitled to the enhanced payment. As it had been the employer's policy over the years to make enhanced redundancy payments, there was also an implied contract term relating to the enhanced payment.
In Sparks and others v Department for Transport (2015) the High Court (HC) held that the Department for Transport was not entitled to unilaterally change the terms of its staff handbook which had become incorporated into its employees’ contracts of employment.
The HC found that the absence management provisions in the handbook, which the employer tried to change, were sufficiently clear and precise and read as though they were contractual provisions. Part A of the handbook contained these contractual provisions and was stated to be incorporated into employees' contracts. Therefore, the employees won their claim for declarations that:
- the terms of their contracts were as set out before the purported change
- the new procedures did not vary the original terms and were not contractually binding
- the employer committed an anticipatory breach of contract in imposing the new procedures.
In Newbound v Thames Water Utilities Ltd (2015), the employers failed to alert an employee to changes in a health and safety policy. The employee breached the new provisions in the policy by going into a sewer without the required breathing equipment. This was a practice that the employer had allowed for many years, effectively condoning it. The employee was dismissed and won his claim for unfair dismissal as it had not been made clear to him that his actions could result in dismissal. Also, he had an unblemished record of over 30 years’ service and the employer had not attached enough importance to his clean disciplinary record.
Written statements of employment particulars
Those with employee or worker status under employment law have the right to a written document summarising the main terms of their employment (the law changed to include workers on 6 April 2020 – see below). An employment contract covers a much broader range of terms.
The following should be supplied in the written statement:
- Names of the employer and employee or worker.
- Date when the engagement or employment began.
- Date when the employee's period of continuous employment began (taking into account any employment with a previous employer that counts towards that period).
- Job title or a brief description of the work for which the employee has been hired.
- Remuneration details, including pay scale or rate information, timing of payment (this could be daily, weekly, monthly for example) and the method of payment.
- Terms and conditions relating to hours of work and the normal working hours.
- Working days and whether hours and days are variable and, if so, how they vary.
- Details of the period of notice to be given by the employer and the employee or worker
- The period for any non-permanent employment or, if it is for a fixed term, the date when it ends.
- Terms and conditions relating to holiday entitlement including bank holidays.
- Any other benefits (including non-contractual benefits).
- Details of any probationary period which starts at the beginning of the engagement.
- Any training entitlement which the employer requires employees or workers to complete, including training which the employer requires but does not pay for.
- The place of work or, where the employee or worker is required or permitted to work at various places, an indication of this requirement plus details of the employer's address.
The following should also be supplied within two months of commencement, either in the written statement or in an accompanying document:
- Any other paid leave.
- Terms and conditions relating to incapacity for work due to sickness or injury, and details of sick pay provisions (including statutory and any company sickness scheme).
- Details of pensions and pension schemes.
- Details of the period of notice to be given by the employer and the employee.
- The period for which any non-permanent employment is expected to continue or, if it is for a fixed term, the date when it is to end.
- Details of any collective agreements which directly affect the terms and conditions of employment, irrespective of whether the employee is party to these agreements.
- Any other training entitlement.
- Where an employee is required to work outside the UK for more than one month, details of:
- length of time
- what currency the salary will be paid in
- additional remuneration and benefits relating to the posting outside the UK (eg flights home, schooling)
- terms and conditions for returning to work in the UK.
- Details of any procedure relating to dismissal, or the procedure applicable to the taking of disciplinary decisions.
- Specific details of the person to apply to if seeking redress for any grievance and the manner in which such an application should be made.
On 6 April 2020, the rules about written statements changed:
- Written statements must be provided to all workers, not just employees.
- The right to a written statement is a day-one right so that any new workers after 6 April 2020 should get a written statement before or on their start date. Previously this right only arose once an employee accrued one month’s service.
- Current workers can request a written statement including the additional information.
These are bare minimum requirements primarily to protect the employee. Prudent employers will have additional provisions in their written contracts which reflect the needs of their business, for example, appropriate restrictive covenants. (Small employers are no longer exempt, so all employers must supply these particulars even if they have only one employee.)
Most employers will have needed to update current template employment contracts and service agreements in April 2020 and prepare a pro forma written statement for workers who are not employees. There will be differences: for example, probationary periods and disciplinary and grievance procedures will not usually apply to workers (but do apply to employees), so written statements need to be tailored to the individual situation.
For more information on employee status generally, see our Employee status Q&As.
Failing to provide written particulars
If the employee requests the written statement and it is not provided, this may lead to an application to an employment tribunal who may:
- determine what the written particulars were from the surrounding facts and
- award compensation* which will be at a level of either two or four weeks’ pay up to the current statutory maximum.
*The further compensation is a dependent right and can be claimed only if another claim, for example unfair dismissal, is also being pursued in the tribunal.
The legislation governing compensation for written particulars is more complex than it may appear and many employees and employers misunderstand the rules. It is useful to remember that:
- It is automatically unfair to dismiss an employee, regardless of length of service, because they have been demanding their written particulars.
- The employer may be ordered to pay the employee two weeks’ pay or, if it is just and equitable, a higher amount of four weeks’ pay. Just one of those two fixed amounts is awarded, not a lesser or greater amount, or three weeks’ pay, for example.
- Compensation is only payable where, when the proceedings were begun, the employer was in breach of this duty to supply particulars.
- There is no financial compensation for a stand-alone claim so the employee has to bring another claim against the employer and win, for example an unfair dismissal claim, then the employee can also claim compensation for the non-supply of the written particulars.
- If there are exceptional circumstances, there may be no order for compensation if it would be unjust and inequitable to make an award against the employer. For example, if the employer offered written particulars and the employee refused to accept them for some reason, then no compensation order would be made.
The case O2 (UK) Ltd v Wallace, (2008) is an example of an employment tribunal's power to determine what the written particulars ought to have been. This case confirmed that the tribunal does not have any power to decide what, in the tribunal's view, the parties should have agreed. All the tribunal can do is to determine, if it can, the whole of the parties' agreement on the matter.
In Advanced Collection Systems Limited v Gultekin (2016), part of the employment tribunal claim settled before the hearing and the remaining elements of the claim failed. Therefore, there could not be an award for failure to provide a statement of employment particulars.
The tribunal can only make an award for failure to provide employment particulars where another cause of action in the claim is successful. Here wrongful dismissal had been settled prior to the hearing, and therefore there was no compensation for failure to provide employment particulars.
Cases involving failure to provide written particulars may lead the tribunal to consider wider issues. In Southern Cross Healthcare Co Ltd v Perkins and others (2010), the real question was not about the failure to supply particulars but about whether the amended statements of particulars reflected what had been agreed between the employer and the employees concerning holiday. The Employment Tribunal had the ability (provided by section 11 of the Employment Rights Act 1996) to consider what had been agreed and was correct in deciding that the employees had agreed an additional holiday entitlement.
Express and implied terms
All contracts of employment contain a range of express and implied terms. If the express terms do not cover a really important aspect, then there is a chance that an implied term may be applied to cover the situation.
These are terms which have been expressly agreed between the employer and the employee. They will usually be written, although they may have been agreed orally. Express oral terms are hard to prove and may be uncertain, so it is always prudent to put all express terms in writing.
These terms can be implied both by what is known as the common law and by legislation. They essentially fill in key gaps left by the express terms of the contract. Whether a term is to be implied is a matter for the court or tribunal.
Terms implied by the ‘common law’
These include matters which are implied because of the conduct of the parties or because the term is something the parties would have intended when they entered into the contract. Terms can also be implied as a result of workplace customs. Examples include that the employee will:
- carry out reasonable, lawful instructions given by the employer
- provide personal service by not sub-contracting to another
- be ready and willing to work
- be reasonably competent
- take reasonable care of the employer's property
- behave with trust and confidence.
Other examples include that the employer will:
- provide reasonable working conditions and environment
- provide safe fellow employees, safe equipment, a safe working environment and a safe system of work
- behave with trust and confidence
- pay for work done if this is not explicitly agreed
- provide work
- handle grievances promptly
- protect employees from harassment and bullying.
Terms implied by statute
Other terms are implied by statute such as the National Minimum Wage, the right to a minimum period of notice, an 'equality clause', and a number of terms relating to health and safety. These will be implied into every contract of employment.
Implied terms are continuously evolving as the courts and tribunals develop the terms it is appropriate to imply. In the case of Tasneem v Dudley Hospitals NHS Trust (2010) the Employment Appeal Tribunal (EAT) decided there was no implied term in the claimant's contract of employment. The employee, who was a locum consultant, claimed that he should have been informed of a new permanent job on offer in the NHS. The EAT held that the NHS was not in breach of an implied term in his locum consultant contract by not expressly informing him of the new job, as he could reasonably be expected to know about the new opportunity and, as a matter of fact, did know. (The claimant also lost claims for less favourable treatment on the grounds of fixed-term status, race discrimination and unfair dismissal.)
Despite this case, employers should of course be careful not to discriminate between full, part time and temporary members of staff when making information available about new roles available.
Although implied terms can be read into an employment contract to protect an employer (or employee) it is far better for employers to rely on carefully drafted express written terms. In Ranson v Customer Systems Plc (2012), where an employee left to set up his own business in competition, the Court of Appeal emphasised that the employee's duties went no further than the duty to do his job faithfully and comply with the implied term of trust and confidence. Unlike a director, employees do not generally owe special fiduciary duties to their employer. If employees must owe fiduciary duties to their employer, these must be created by the written contract of employment. Therefore, although the employee had held discussions during his notice period which led to setting up his own business, he did not breach fiduciary duties by not disclosing those discussions.
It is extremely important to ensure that none of the terms and conditions is directly or indirectly discriminatory on the grounds of age, sex, race, national origins, ethnic origins, sexual orientation, religion or belief.
Specific examples of other matters to take into account which are over and above the bare minimum include:
- complying with the Working Time Regulations 1998
- complying with the National Minimum Wage Act 1998
- complying with the Pensions Schemes Act 1993
- protecting intellectual property including complying with the Patents Act 1977
- observing the Equality Act 2010
- including probationary periods
- including a suspension clause
- defining gross misconduct
- contractual/statutory maternity, paternity, adoption leave and pay
- arrangements for flexible working
- reporting sickness absence
- agreement to undergo medical examination
- health and safety provisions
- business travel and expenses, including use of a private car
- confidentiality and data protection
- pay in lieu of notice
- restrictive covenants
- garden leave
- provisions restricting internet and email use.
Some employers include an “entire agreement” clause in the contract to prevent employees raising claims that any verbal statements made before the signing of the written contract constitute terms of the agreement as well.
In law, an employer’s ability to protect its legitimate interests must be balanced against an employee’s ability to trade freely and work elsewhere. Currently, non-compete clauses are only enforceable if they:
- protect an employer’s legitimate business interest
- are no wider than reasonably necessary to protect that interest.
On 4 December 2020 the Government launched a consultation on restrictive covenants which closed on 26 February 2021. The consultation suggests either banning post-termination non-compete clauses completely (which seems unlikely to become law); or changing the law so that post-termination restrictive covenants are only enforceable if the employer pays compensation during the restricted period (during which the departing employee is prevented from working for a competitor or starting their own business).
For employers who already pay a percentage of normal remuneration during the period of restrictions, any changes are unlikely to be very different to their current practice. Similarly, those who use garden leave in conjunction with a non-compete clause and pay the employee whilst they remain at home are already paying during the non-compete period.
Those employers with non-compete provisions which they assume to be effective after the employee is no longer being paid may need to change their practice or they will find the covenants are unenforceable, if the law is changed. The courts are more likely to enforce restrictive covenants anyway if there is payment during the non-compete period and this is something employers should at least consider whilst the law is under review. Restrictive covenants prevent employees from carrying out certain actions both during employment and for some limited time after the employment ceases.
It is crucial to ensure that there are appropriate and well-drafted restrictive covenants in contracts of employment and that immediate legal advice is obtained if an employee is threatening to compete during the notice period or the period of the restrictive covenant.
A common problem with restrictive covenants occurs when employers adapt old contracts for previous employees as a basis for new contracts for subsequent employees. The covenants become progressively widened each time the precedent is used, to such an extent that the covenants become unenforceable.
The types of restrictive covenant normally contained in employment contracts include:
Non-competition – covenants which seek to prevent the employee carrying on a similar business within a certain radius of the premises of the ex-employer.
- Protection of trade secrets or confidential information – covenants which enhance the implied obligation not to use or disclose information if it amounts to a trade secret or is so highly confidential that it requires the same protection as a trade secret.
- Non-soliciting of the employer’s clients – covenants preventing the ex-employee from soliciting business from customers of the ex-employer.
- Non-poaching of staff or enticement of staff – covenants preventing ex-employees from directly or indirectly enticing or poaching away their former colleagues.
- Non-dealing with clients – covenants preventing ex-employees from dealing with customers of the ex-employer at all.
In addition, a clause requiring employees to inform employers if they receive an approach from a competitor may be useful.
Restrictive covenants should be correctly drafted and ideally included in employment contracts from the outset. If restrictive covenants are imposed subsequently by way of a variation, there must be clear agreement and ideally some monetary or other ’consideration’ given in return for the covenants, otherwise they may be unenforceable. It is for the employer to show that restrictive covenants are reasonable and employers must be particularly careful when trying to introduce covenants part way through employment. For example, in Re-use Collections Ltd v Sendall and another (2014) the High Court refused to allow an employer to enforce non-solicitation, non-dealing clauses and non-competition clauses which had been included part of the way through the employee's employment. The written contract replaced an earlier verbal agreement which had no restrictions. As the employee had not received consideration for the variation, the new restrictions were unenforceable.
It is crucial to include the right types of covenant in employment contracts. Most employers should use both non-solicitation and non-dealing covenants which prevent the ex-employee from both
- dealing with the customers, and
- soliciting the customers.
Non-dealing covenants generally make it easier for the employer to prove that the employee is ‘stealing clients’ and is in breach of its covenants. A non-solicitation restriction alone provides weaker protection to employers, especially where the employee has strong relationships with clients and the clients want to follow the employee. If an employer wants to stop its employees from dealing with their clients, it must have a properly drafted non-dealing restriction.
The case Baldwins (Ashby) Limited v Maidstone (2011) provides useful guidance on:
- the types of behaviour that may constitute a breach of a non-solicitation covenant,
- the importance of including a non-dealing restriction in addition to non-solicitation provisions in employment contracts where the boundary lies between acceptable conduct and what amounts to solicitation in dealing with former clients,
- the fine line between discussing a career move with clients and actively encouraging them to move their business to a new employer.
The defendant sold his accountancy business to Baldwins. Following the sale, he remained with them before moving to another firm called Charnwoods. The sale agreement included a covenant which said that the defendant must not ‘canvass, solicit or endeavour to entice’ any of his former clients. Therefore, there was a non-solicitation covenant but no non-dealing covenant.
Some clients had followed the defendant to Charnwoods but he said that they had independently decided to move their business and he had not ‘canvassed, solicited or enticed’ them away. The High Court said that he was found to be a dishonest and unreliable witness who was clever, devious and arrogant and that there was a secret agreement to poach back the clients.
Merely telling a client that the defendant was moving was not a breach of the non-solicitation covenant. However, if the client said he wanted to move his business, the defendant actively encouraged the client to do so, which was held to be in breach of the restrictive covenant. Conversations with clients during chance meetings were probably breaches, but follow-up formal client meetings were definitely clear breaches of the non-solicitation covenant.
Another case which the strength of a non-dealing post-termination restriction compared to a weaker non-solicitation covenant was Towry EJ Limited v Barry Bennett and others (2012). A number of employees employed by Towry as financial advisers left to join a rival company called Raymond James Investment Services Limited (Raymond). Large numbers of Towry clients wanted to transfer their investments to Raymond. The advisers had enforceable non-solicitation restrictions in their contracts. Towry was convinced that the departing employees must have persuaded the clients to move their investments, but there was no actual evidence of solicitation. The case hinged on whether the employer could infer solicitation from the fact that a 'tidal wave' of clients transferred, or was evidence of requesting or encouragement needed? The defendants argued that the clients had moved of their own volition and there was no restriction in their contracts on 'dealing' with clients.
The High Court held that the employer lost; the mass departure of clients was not enough evidence to establish a breach of a non-solicitation covenant. It said:
- Employees solicit where they 'directly or indirectly request, persuade, or encourage' clients to transfer to the new employer.
- Where there is no direct evidence of solicitation, an inference can sometimes be drawn from a big exodus of clients.
- It is for the employer to prove that the clients transferred as a result of the employee’s persuasion or encouragement, as opposed to mere trust and loyalty towards that employee.
In this case, if the employees had had non-dealing covenants in their contracts, the employer would have won.
The best advice to employers is to have both types of covenant, non-solicitation and non-dealing. If there is a non-solicitation covenant but no non-dealing covenant, then it can be expensive for an employer to argue that the employer should be protected.
The cases show that it does not matter who initiates contact with a former client. If there is solicitation it will depend upon the substance of what passes between the parties.
There will be solicitation of a client by a former employee if the latter conveys the message that they are willing to deal with the client at their new firm and they influence and encourage the client to do so. However, in the absence of evidence of actual solicitation, it may be hard for an employer to prove that this has taken place.
Breaching contracts and breaking covenants
A problem which can lead to restrictive covenants being unenforceable is if the employer breaks the contract by, for example, giving an inadequate notice period. The employer may lose the benefit of their restrictive covenants as the employee will no longer be bound by the terms of the employment and is therefore free to work for competitors or solicit customers without being in breach.
However, if it is the employee who breaks the contract, the restrictive covenants will remain in place.
If the employer handles an employee’s departure correctly, the employer can keep the contract alive and continue to enforce restrictive covenants. For example, in Sunrise Brokers LLP v Michael William Rodgers (2014) an employee accepted a position with a competitor and left the broker where he was working. His contract contained a 12 months' notice provision and enforceable restrictive covenants. The contract also provided for garden leave (at the employer’s discretion). The employee stopped turning up for work and attempted to resign without notice. The employer refused to accept the resignation, but due to the employee's unauthorised absence ceased to pay his salary.
The employee said his contract ended when the employer failed to pay his salary and therefore he was no longer bound by any post-termination restrictions. However, the High Court decided that he was still an employee and would continue to be so until the end of his agreed notice period. An injunction was given in favour of the employer holding the employee to the restrictive covenants.
If the employer had sent the employee a P45 or given any other indication that the resignation had been accepted, the result may have been different. So, employers should handle departures very carefully indeed if they wish to enforce restrictive covenants.
Any restrictive covenant in an employment contract will be void unless the employer can show that it is reasonable. Factors to take into account include:
- Does the employer have a legitimate interest to protect (such as trade secrets/confidential information/trained staff/clients)?
- Is the restriction wider than is necessary to protect that interest (in terms of time, geography and market)?
- The more severe the covenant, the shorter in time it should be.
- The covenants should be prospectively and retrospectively limited in time. For example, limiting a non-solicitation covenant to customers the employee personally dealt with for the last 12 months.
- Consideration of whether the geographical area of the covenant is relevant to the operation of the business.
- If the covenants exclude the employee from earning a living.
- Covenants in sale agreements may be wider than in employment contracts (for example, a three-year covenant in an employment contract would almost always be regarded as in restraint of trade and unenforceable, but it might be upheld if in a sale agreement).
The pitfalls of restrictive covenants which are too widely drafted are illustrated by the following cases.
In Office Angels v Rainer-Thomas and O'Connor (1991), two employees with the Office Angels employment agency in the City of London supplied temporary workers and recruited permanent staff. The covenants in the employees' contracts of employment provided that for six months after the termination of their employment they could not:
- solicit custom or supply the services of an employment agency to any client of Office Angels at any time during their period of employment; or
- engage in the trade of an employment agency within a radius of 3,000 metres of any branch of Office Angels at which they had worked within the six months prior to the termination of their employment.
The employees left and set up Pertemps City Network working from an office within the 3,000 metre radius, although they subsequently relocated outside that area. They were doing business both with former clients and with temporary workers with whom they had had dealings while with their previous employer.
The Court of Appeal found in favour of the employees – the covenants were too wide to be enforced and did not protect the employer because:
- the geographical restriction was unnecessary as business took place over the telephone and it made no difference where the office was and
- a covenant simply restricting dealing with clients with whom the defendants had had contact during their employment would have been adequate rather than restricting dealings with all the employer’s clients.
In WRN Ltd v Ayris (2008), the covenants were drafted in an attempt to prevent the former employee from having contact with customers whom he had, and had not, dealt with. These covenants were therefore too wide to be enforceable and should have been restricted to the employer’s customers whom the employee personally dealt with.
In Coppage and another v Safetynet Security Ltd (2013) a director's contract of employment stated that for a period of six months following the termination of employment he could not approach any individual or organisation who, during his employment, had been a customer of his employer, if the purpose was to solicit business. The covenant did not contain the usual restrictions that limit the covenant to customers with whom the director had had personal dealings over the last 12 months.
He resigned and set up a new company and some clients quickly moved their business to the new company.
The High Court and Court of Appeal found that the covenant was appropriately drafted and could be enforced. It should not have been limited only to customers that the director had dealings with during the last year of his employment. In this case, his prominent role and his employer's small client base meant a wider restriction was enforceable as it was necessary to protect the business. Importantly, the employee sought to mislead his employer about the nature of his new business and had prepared for trading with clients before his resignation.
Whether or not a restrictive covenant will be enforceable will depend on the circumstances of the case. Generally, employers should continue to limit restrictive covenants retrospectively to clients with whom the employee had dealings for the last year or for another specified period.
Non-solicitation and/or non-dealing covenants can be drafted for a period of up to 12 months as long as that is based on specific business needs. Not all employers can justify a 12-month restriction because in some businesses a shorter period is sufficient to protect their business interests. If the business is one where the internet and competitive quotes make the business a fast-moving one, employers cannot assume that a 12 or possibly even a six-month covenant will protect them. A covenant should last no longer than is required for the employer to re-establish the client relationship.
In Croesus Financial Services Ltd v Bradshaw (2013), the High Court held that a 12-month period was reasonable for employees who were financial advisors who contacted clients on an annual basis. In Customer Systems plc v Jeremy Ranson and others (2011), the employer could not justify why a 12-month period was needed as the High Court found that, in the IT industry, client contact was regular. The period of restraint should last no longer than necessary for the employer to re-establish its client contacts following the employee’s departure. (The case subsequently went to the Court of Appeal on another point).
In Associated Exchange Limited v Abbassi (2010), a 12-month period was held to be too long for a junior employee. In the foreign exchange market, clients moved from business to business and the client base was fluid, with confidential information relating only to rates which lost their confidentiality quickly. In Re-Use Collections Ltd v Sendell and another (2014), it was held that any covenant longer than three months was void because a “replacement team” could easily be in place within that time.
These decisions highlight a number of issues for employers:
- Post-termination restrictions must be tailored to each individual employee.
- Employers must also provide good evidence when trying to prove that there has been a breach of obligations relating to confidential information.
- Drafting good restrictive covenants is a difficult balancing exercise between being wide enough adequately to protect the employer, but not too wide so that they are too restrictive on the employee and therefore unenforceable.
- It is very important to make sure that any restrictions are reasonable in protecting the particular business. For example, in an estate agency context, an apparently reasonable non-competition covenant for 12 months in a five mile radius may be too wide in its scope as most people buy a house only once in an area then go elsewhere. So there may be no customer connection worthy of protection. The key thing is to look at the nature of the business.
- If the employer has sufficient protection from other clauses such as non-solicitation and confidential information clauses then a non-competition clause may not be needed.
Rewriting restrictive covenants
If a restrictive covenant is badly drafted, the employer is usually stuck with the bad drafting and as a result the clause may be worthless. In some cases, the court may be prepared to clarify an ambiguous clause by putting itself in the shoes of the draftsman and trying to interpret the words used. This “purposive” approach to drafting seeks to look at purpose of the parties before deciding what the words mean.
However, clear wording will not be re-written. For example, in Prophet PLC v Huggett (2014), the employer was a software company selling to the fresh produce industry. A restrictive covenant prevented the claimant from selling Prophet's software after he left. He joined a competitor which sold competing software, but not ‘Prophet’ software. Read literally, the restrictive covenant gave no protection to Prophet at all, as only they sold their software. The drafting was clearly mistaken, but the issue was: could the clause be re-interpreted to stop the claimant being directly involved in the provision of competing computer software? The Court of Appeal refused to help the employer and did not re-write the clause to give effect to the intention of the parties and prevent the claimant selling software which was similar to Prophet software. If faced with a term that is ambiguous, the court may help the employer. Here something had gone wrong with the drafting, but it was entirely clear and not ambiguous at all.
A legal test known as the ‘blue pencil’ test may save some post-termination restrictive covenants which attempt to impose a wider restraint than was reasonably necessary for the protection of the employer's interests. Under the blue pencil test, a court may be able to remove the offending part of a clause. If the remainder of the clause makes independent sense, then it is likely to be enforceable; the court cannot rewrite the clause.
‘Garden leave’ is the term used to describe the situation where an employee is required by the employer to remain away from work (perhaps doing the gardening!) during the whole or part of the contractual notice period.
The employment relationship continues to exist during the garden leave period; the employer remains obliged to provide remuneration and contractual benefits and the employee is bound by the implied term of fidelity, that is faithful and loyal service.
Garden leave clauses often contain wording (or are supported by separate contractual terms) which attempts to restrain an employee during the notice or garden leave period from one or all of the following:
- working for a competitor or setting up on their own account in competition
- contacting the employer's customer base with a view to soliciting custom and/or undermining existing contracts
- obtaining/using confidential information
- otherwise damaging the employer's business.
These clauses are known as 'restraint of trade' clauses or restrictive covenants: their presence may be of assistance in persuading a court to grant an injunction to uphold a garden leave clause.
Garden leave clauses are often as useful for employers as restrictive covenants, but they must be carefully worded in order to be effective and at the time of garden leave employers should communicate the arrangements carefully.
In Ashcourt Rowan Financial Planning Ltd v Hall (2013) an employee’s contract contained a garden leave clause and expressly stated that any period spent on ‘garden leave’ would be deducted from the period during which any restrictive covenant would otherwise be in force. The relevant restrictive covenant prevented the employee from competing with the employer for a period of six months following termination of his employment.
The employee resigned and was asked to work at home on the handover of his client work during the notice period, but his employers expressly said he was not on garden leave. The High Court said that he was not on garden leave at any time before his employment ended and was not entitled to have any of his notice period deducted from the period of the restrictions. However, the non-compete clause was found to be void because it was too widely drafted, preventing him from working in any capacity for any business or activity which directly competed with his ex-employers.
Employers must give employees with more than one month's continuous employment but less than two years', a minimum of one week's notice and thereafter one week for each completed year of service subject to a maximum of 12 weeks.
Notice period clauses are actually quite tricky to draft. Employers should think particularly about the wording of payment in lieu of notice clauses. For example, contracts should include a term denying a right to the payment in lieu of notice if the employer subsequently discovers that the employee has committed a prior act of gross misconduct. In Cavanagh v William Evans Ltd (2012), the employer failed to incorporate such a clause and therefore had to pay in lieu of notice to an employee who had committed gross misconduct.
Changing contractual terms
If a contractual change adversely affects terms and conditions, the employer must follow a variation process with proper consultation and must have the employees’ consent.
First, employers should consider whether employees’ employment terms need altering at all. Acas (see below) emphasises that changing terms may damage workplace relations, lead to claims, disengage staff or trigger industrial action.
Next, employers should consider whether the proposed change is contractual or whether it is merely a change in policy. Policy changes may be implemented without the need to obtain agreement from the employees.
If the change is contractual, then agreement will be needed to implement the change. Unilateral changes are unenforceable and usually are a breach of contract, exposing employers to a claim against them.
At the government’s request, Acas issued guidance in 2021 urging employers to think carefully before unilaterally using dismissal and reengagement (or ‘fire and rehire’) practices to change employees’ terms and conditions. Employers who follow the guidance are more likely to show that any ensuing dismissals were fair, however, the guidance does not have formal legal status and, unlike the Acas Code of Practice on disciplinary and grievance procedures, employees cannot base claims for increased compensation for non-compliance with it.
Acas urges employers to follow the guidance and explore all other options first before considering fire and rehire. There are a number of options to try to achieve change:
1. Consult the employees and hope that they will agree voluntarily.
- Explain the proposed changes to the employees.
- Discuss the reasons behind the change.
- Explain what will happen if the changes do not occur, for example, loss of a major contract.
- Give employees the opportunity to raise their concerns and put forward their suggestions.
2. Offer an incentive to employees to agree, for example, a one-off cash payment. Some employers find that employees willingly agree to changes shortly before the time of their annual pay review. The Acas guidance includes ideas about continuing to seek agreement, such as exploring the changes gradually or agreeing time-limited temporary changes, as well as compensation or incentives, such as giving some beneficial changes at the same time as the change the employer wishes to make.
3. If the employees will not agree to the change the employer may have to impose the change. However, this option should be used as a last resort only. If the change is fundamental, it may amount to a breach of contract entitling the employees to:
- resign and claim constructive unfair dismissal
- continue to work, but make it clear that they object to the change
- claim breach of contract and damages for loss
- make an unlawful deduction of wages claim, if the change results in a reduction in pay.
If an employee continues to work under protest whilst objecting to the changes, the employer may be able to enforce the varied terms. For example, in Robinson v Tescom Corporation (2008), the area the employee had to cover was increased. He agreed to the new terms under protest and then subsequently wanted to return to his ‘old job’. He was dismissed for insubordination. It was held that the contract continued incorporating the varied terms and that the employer could dismiss him for failing to comply and cover the increased area. There was no unfair dismissal. However, in other cases the employee may preserve the right to resign on the basis of a constructive unfair dismissal, if the employer insists on enforcing more fundamental changes.
4. Bring the original contracts to an end by contractual notice and then immediately re-engage on the new terms and conditions. This is not without risk and it is this practice that the Acas guidance emphasises should be a last resort.
By bringing the contract to an end an employer is in effect dismissing the employees and must, therefore, be able to justify its decision based on 'some other substantial reason'. In assessing whether a dismissal is fair the tribunal assesses:
- the presence of a sound business reason for effecting the change
- any alternatives
- the proportion of the workforce who were willing to accept the change
- the impact on the particular employees and their reasons for not agreeing to the change, and whether or not there was adequate consultation.
Acas emphasises that employers that resort to proposals to dismiss and rehire should do so during the negotiations, before proceeding with their proposal. Any variation should be recorded in writing within one month of the change to comply with the Employment Rights Act 1996. If the employees agree to the change, they should be asked to confirm their agreement by signing a document recording the variation. The signed document should then be appended to the contract of employment.
5. An employer can try to make it easier to vary certain aspects by putting an express term into the contract which states that a particular term is variable. It is certainly helpful for employers to include such carefully drafted contractual variation clauses to provide possible flexibility to make changes. At the very least, such clauses may encourage (and perhaps mislead) the employee into assuming that any changes at all are permissible.
However, even an express clause will not guarantee that the employer can significantly vary all contractual terms, especially important ones.
Helpful guidance on contractual variation clauses can be found in the case Bateman v Asda Stores (2010), where Asda wanted to harmonise terms about pay across all its supermarket employees. About 18,000 employees on the old pay structure needed to have their pay terms changed to the new pay structure. Asda commenced an extensive consultation process and 9,300 employees voluntarily agreed to the new structure but, for the remaining 8,700 employees, Asda unilaterally made the changes. To justify imposing this change without consent, Asda relied on a provision in the staff handbook which 'reserved the right to review, revise, amend or replace the contents of the handbook, and introduce new policies from time to time reflecting the changing needs of the business'. The handbook said that the conditions in it were incorporated into the contracts of employment. Asda, therefore, relied on this to force the change upon the employees that did not consent.
The Employment Appeal Tribunal decided that:
- the staff handbook did enable Asda to make the changes to the pay and work regimes without the consent of the claimants, and
- the wording in the staff handbook was wide enough to allow Asda to change the matters and procedures set out in it, including the pay and work structure.
In Norman and others v National Audit Office (2014), the National Audit Office said that its right to unilaterally vary employees’ terms meant that it could reduce their paid leave entitlement. The employees said the variation clauses were not effective and the EAT agreed with them. The relevant wording said the conditions of service were 'subject to amendment' and significant changes 'will be notified' to employees. The EAT said this was not a valid variation or flexibility clause. For a flexibility clause to be effective, it must unambiguously give the employer the right to vary the employment contract unilaterally. For example, this might involve wording such as 'The employer reserves the right at any time during your employment to…' In this case the clauses in question had not been varied.
The first case suggests that contractual variation clauses may give employers larger powers to make unilateral changes than was previously thought. However, the second case shows that employers do not have free rein to make any contractual changes they wish because of a contractual variation clause. The employer will have to:
- consult about proposed changes
- comply with the implied duty of trust and confidence
- ensure that the change or variation falls within the contractual power to vary
- draft variation clauses carefully
- ensure that there is an express, clear and unambiguous right to vary particular terms unilaterally to maximise the chances of being able to successfully rely on a variation clause
- not assume that a particular variation will be enforceable even if it appears to be permitted by a variation clause.
Changes which involve employees suffering financial loss will usually be a breach of the implied term of trust and confidence, even if there was a variation clause incorporated into the contracts of employment.
Employees continuing to work
The case of Khatri v Cooperatieve Centrale Raiffeisen-Boerenleenbank BA (2010), shows that if an employee continues to work after unilateral changes have been imposed by the employer, this does not automatically mean that the employees have accepted that variation. In this case the employer’s attempt to alter a formula-based bonus into a discretionary bonus was not valid.
In Morgan v Network Europe Group Ltd (2011), the EAT held that any change in an employee’s terms of conditions of employment must be brought to their attention and their agreement obtained. The fact that the employee continues working is not always enough to mean automatically that they have accepted the change. If the employer had obtained a signed second statement of terms and conditions incorporating the new handbook, then there would have been an express agreed variation.
The case of FW Farnsworth Ltd and another v Lacy and others (2013), concerned an employee who had only ’skim-read’ new restrictions in his contract. He was not happy with these new restrictions and so decided not to sign the contract. The court had to decide if the variations were binding. The employer had been at the employer since 2000 and in 2003 was issued with a written contract of employment with no post-termination restrictions. Six years later in 2009 he was promoted and given a new written contract which included:
- post-termination restrictions which applied for six months after the termination of his employment to prevent him from working for competitors and soliciting business from specified customers
- changes to his pension scheme
- private medical insurance (PMI) and
- a better car.
As he was not happy with the new restrictions, he decided not to sign the contract. Three years later he resigned from his employment to work for a competitor and denied that he was bound by the 2009 changes. In the meantime, he had benefited from the pension scheme changes and had taken active steps to apply to join the PMI scheme. The fundamental question was whether, by continuing to work, the employee had accepted the new terms imposed by the employer. The court found in the employer’s favour that he had accepted the 2009 contract and was bound by the post-termination restrictions.
However, the employer was lucky in this case. If there had been just the restrictive covenants, in the absence of express agreement, the court would have been reluctant to conclude that the employee had agreed to the contractual variation. It is risky for employers to assume that the law will imply an agreement to new terms.
Although in this case the employer managed to establish new terms, vast amounts of legal fees would have been saved by securing the employee’s signature showing acceptance of the new terms of employment. When seeking consent to a variation, such as more onerous restrictive covenants, employers could try linking the change to a pay increase or other enhanced terms; this then will assist in establishing a binding variation.
In Wess v Science Museum Group (2014) the Employment Appeal Tribunal (EAT) held that an employee had impliedly accepted a variation of her contract of employment by continuing to work, without expressly objecting to it, for nine years. She did not sign the contract, but did not expressly object to the new terms either. She was eventually dismissed and a dispute arose about whether she had impliedly assented to a variation of her contract. The EAT held that she had assented by implication. Although the mere passage of time on its own does not mean an employee has accepted a change to a contractual term, this case involved more than a unilateral change of one term of the contract. An entirely new package had been introduced with new terms and conditions, new job description and a new handbook. Some of that had an impact on the claimant straightaway and she continued to work for some nine years without objection. The claimant also had held a trade union role and could be expected to raise queries about the detail of the terms and conditions.
Special rules apply to attempts to vary terms and conditions in the context of a transfer of an undertaking under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). For more information on changes to terms and conditions after a TUPE transfer, see our Transfer of undertakings (TUPE) Q&As.
Q: Can we change terms and conditions post-furlough?
Employers can change terms and conditions now that furlough has ended, but will need to obtain express agreement in writing from the employees to any contractual variations.
Variations may address matters such as reduced pay and hours, or continued working from home. Changes which adversely affect terms and conditions require a variation process with proper consultation, including formal collective consultation in certain cases.
Any agreed variation should have been recorded in writing within one month of the change, with employees confirming their agreement by signing a document which can be attached to the contract of employment.
Some policy changes may be possible without obtaining agreement from employees, but contractual changes require agreement; unilateral changes are unenforceable and usually are a breach of contract, exposing employers to claims.
Does an employer need to collectively consult if it intends to try and change employees' terms and conditions by dismissal and re-engagement (fire and rehire)?
If an employer intends to effect changes to contractual terms by dismissing and re-engaging employees on new terms, it will need to collectively consult with those employees in accordance with sections 188 and 188A of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA) prior to any dismissals.
Acas guidance issued in November 2021 on changing terms (without resorting to dismissal and reengagement) stresses the importance of exploring all other options and consulting employees in a genuinely meaningful way to try and reach agreement. The Acas advice is that a fire and rehire approach seriously damages working relations, causes conflict and carries significant legal risk.
Fire and rehire must be the last resort, having exhausted all other options. In certain very limited situations, employees may be able to obtain an injunction preventing an employer from using the controversial ‘fire and rehire’ approach. For example, in USDAW v Tesco Stores (2022), an employer’s ability to take the risky approach of terminating contracts was restricted due the parties’ mutual intention at the time a key term was agreed between them.
If dismissal and reengagement is attempted, both information and consultation are needed as distinct processes.
Information: the employer gives details about the proposed change to enable employees and their representatives to consider it and reach an informed view on the proposals. The Acas guidance lists examples of information to be provided including the proposed changes and the reasons.
Consultation: this entails exchanging views with a view to reaching an agreement. It is a two-way process. Employers should fully consider employees’ views and provide further information if needed.
The exact process will vary depending on whether there are existing employees’ representatives, or a recognised trade union. Obviously, if a union is recognised, employers should follow their normal collective bargaining processes in relation to changes to policies and procedures before giving notification of the changes.
A number of local authorities have attempted dismissal and re-engagement on different pay and conditions. The Unite union staged a protest in one city following the council’s decision to dismiss 4,300 workers and re-engage them on reduced terms, including reductions in overtime rates.
If an employer is proposing to dismiss as redundant 20 or more employees 'at one establishment' within a period of 90 days or less, the employer should consult with all those who are appropriate representatives of the employees who may be affected.
If there are between 20 and 100 proposed dismissals, consultation with representatives should take place at least 30 days before the first dismissal notices are issued.
If there are 100 or more proposed dismissals, consultation must begin at least 45 days before the first dismissal notices are issued.
If an employer fails to comply with their obligation to collectively consult, the employees may be able to claim a protective award of up to 90 days' pay for each employee concerned.
If the company recognises an independent trade union, the obligation to collectively consult will be with the trade union representatives. In the absence of a recognised independent trade union, the employees affected must elect suitable representatives for the purpose of collective consultation. Section 188A(1) of TULRCA details the requirements for the election of employee representatives.
If an employer fails to comply with its obligation to collectively consult, the employees may be able to claim a protective award of up to 90 days' pay for each employee concerned.
The meaning of what is meant by 20 or more employees 'at one establishment' is a difficult issue. A major legal battle following the collapse of the UK’s Woolworths chain over this wording because it implied some Woolworths employees were not eligible to receive a protective award simply because they worked in shops with fewer than 20 employees (see USDAW v Ethel Austin Ltd, 2017).
In addition to the TULCRA obligations, the Information and Consultation of Employees Regulations 2004 (SI 2004/3426), in force from 6 April 2005, apply to organisations with 50 or more employees. Employees have the right to be informed of, and consulted about, business matters which affect their employment. The employer must set up a regular system for information and consultation within the framework set out in the Regulations, if at least 10% of the workforce requests it. The Employment Appeals Tribunal has the power to impose a maximum penalty of £75,000 on employers who do not comply with the Regulations.
The right extends to being informed of and consulted on management decisions affecting employees' future, for example, decisions relating to changes to terms and conditions and work organisation (including redundancies and job transfers).
However, if a negotiated outcome proves elusive, trade unions do not have a veto over changes to employees’ terms (see the Supreme Court decision in Kostal UK Ltd v Dunkley and others, 2021).
What are zero-hours contracts and what issues should employers who use these contracts be aware of?
Zero-hours contracts are generally contracts where there is no obligation for employers to offer any hours of work.
A more legal definition is that zero-hours contracts are contracts to do, or perform, work or services conditional on the employer making work available and where there is no certainty that any such work will be made available for the worker. (The Small Business, Enterprise and Employment Act 2015 which came into force in 2015 introduced this definition for the purposes of the legislation on exclusivity clauses).
The key elements of zero-hours contracts are therefore the absence of set contracted hours, with employees only working as and when they are needed. Sick pay is often not included, though holiday pay should be included because of the Working Time regulations.
Employers who use zero-hours contracts should therefore be aware of the changes to the law and the remedies available. Employers who engage staff without guaranteeing them work may need to use more permanent arrangements in the future to avoid the new zero-hours contract rules. Further details are set out below:
Exclusivity clauses in zero-hours contracts are clauses which seek to prevent the zero-hours worker from working elsewhere, even when their employer was not guaranteeing work. This means that individuals may struggle to boost their income.
Under the Small Business, Enterprise and Employment Act 2015, any term of a contract which tries to prevent a zero-hours worker from working under another contract became unenforceable from 26 May 2015. An employer cannot therefore prevent a person on a zero-hours contract from accepting work elsewhere, or request that that person seek permission before finding alternative work.
This means that no worker will be tied into a contract without any guarantee of paid work.
All those on zero-hours contracts and on low incomes are protected from unfair exclusivity clauses and can look for additional work to boost their income. However, if an employer can guarantee a certain weekly income, then they may be able to prevent that worker from working elsewhere.
Exclusivity clauses are unenforceable for workers on zero-hours contracts. Workers who have no certainty of work being made available can therefore work for another employer without restriction.
The Exclusivity Terms in Zero Hours Contracts (Redress) Regulations 2015 stop employers avoiding this ban and came into force in Great Britain on 11 January 2016.
These Regulations provide the following:
- Zero-hours employees have an automatic claim of unfair dismissal, if the reason for the dismissal is because the employee works for another employer or seeks consent from their original employer to do so. Any employee dismissed for failing to comply with an exclusivity clause can bring a claim in the employment tribunal without having 24 months continuous employment.
- Zero-hours employees and workers also have the right to not be subjected to a detriment because the worker has done work or performed services under another contract or arrangement.
- If a zero-hours worker wins a tribunal claim they can seek a declaration of the rights and/or compensation.
- A prospective claimant must first contact Acas about their dispute and consider conciliation before presenting a claim to an employment tribunal.
The Department for Business, Energy and Industrial Strategy will undertake an internal review of these Regulations within 5 years of implementation.
The Employment Tribunals Act 1996 (Application of Conciliation Provisions) Order 2015 (SI 2015/2054) also came into force on 11 January 2016 and extends the time limit for bringing a claim where this is necessary to facilitate Acas early conciliation.
Employers who use zero-hours contracts should bear in mind the following general issues highlighted by critics of the contracts:
- Lack of financial stability, security and enough hours for employees.
- Potentially not giving employees the same employment rights as those on traditional contracts.
- Failure to provide written terms and conditions.
- Workers having pre-arranged work cancelled with no notice, or at the start of a shift.
- Possible perception of zero-hours employers as attempting to avoid responsibilities to employees.
Another issue relating to zero hours is the relationship with benefits. Under the jobseeker's allowance rules claimants did not face penalties for turning down zero-hours contract jobs. However, it has been suggested that jobseekers may lose their benefits for three months if they do not accept zero-hours contracts under the new universal credit system. It appears that claimants are at risk of sanctions if they do not apply for, and accept certain zero-hours jobs.
The case of Gabriel-Abraham v Sports Direct settled before a final hearing. Sports Direct had engaged over 20,000 workers on zero-hours contracts which meant that some of these workers did not receive paid holidays, sick pay or bonuses which were available to full-time staff. This use of zero-hours contracts was challenged as indirect sex discrimination and under the Part-Time Workers Regulations.
As a result of the case, Sports Direct eventually agreed to major changes in their recruitment and policy practices for zero-hours staff, including:
- Re-writing their job adverts and employment contracts for future zero-hours staff to expressly state that the roles do not guarantee work.
- Producing clear written policies setting out what sick pay and paid holiday their zero-hours staff are entitled to.
- Displaying copies of the new policies in all staff rooms used by zero-hours staff across its 400-plus stores in the UK.
- Sending copies of their Equal Opportunities policy to all store managers and assistant managers with a written reminder that the policy applies to zero-hours staff.
Does demotion amount to a unilateral variation of contractual terms?
Yes. Demotion from one post to another will almost always be capable of being a repudiatory breach of contract, entitling the employee to claim:
- breach of contract
- unlawful deduction from wages (if there is a reduction in salary) and
- constructive unfair dismissal.
This will not apply if there is any express provision which states that the new role will be for a trial period. If so, does the oral or written term specify what will happen in the event of the trial period being unsuccessful, for example, that the employee will revert back to the original position and terms and conditions? If no such provision exists, then a return to the original role and terms and conditions can be affected only with the employee's agreement or consent.
Employers should therefore be extremely careful when considering the demotion of an employee or a variation of contract following disciplinary action. There needs to be express agreement on the part of the employee concerned and if the demotion is a disciplinary sanction, the organisation's disciplinary procedures and Acas code of practice on disciplinary and grievance procedures should have been followed in full.
Are illegal contracts enforceable?
Illegal contracts are contracts which breach the law in some way. In an employment law context, the most common examples are:
- Contracts designed to defraud the HM Revenue and Customs or the Department of Works and Pension by not paying income tax and/or national insurance (for example cash in hand contracts where the employee actually knew they were paid in this way to avoid paying tax or national insurance contributions).
- Contracts for immoral or illegal acts, for example involving illegal gambling, prostitutes or illegal drugs.
- Contracts to employ illegal workers work in breach of immigration rules.
As a general rule, the English courts will not enforce an illegal employment contract or any other illegal contract. An employment tribunal or the court should therefore refuse to hear any claim made an employee if there was an illegal employment contract in existence.
However, the courts and tribunals see a difference between contracts which were illegal from the start and those that are ultimately performed illegally by one of the parties – this does not always make the contract unenforceable.
Where an employment contract is lawful in its inception it will not become illegal and unenforceable by any incidental act of illegality in the performance of that contract. However, an employee who has been involved in an illegal employment contract may still be able to claim discrimination, as discrimination claims do not rely on a contract of employment.
In Hall v Woolston Hall Leisure Ltd (2000), an employee knew from her pay slips that her employer was defrauding the Inland Revenue (her employment contract was therefore tainted with illegality). However, the Court of Appeal held that she was entitled to damages for sexual discrimination when she was dismissed because of her pregnancy.
Case law indicates that if the employment contract is found to be illegal the employee will not be able to enforce any contractual or statutory rights, for example claiming unpaid wages, or claiming unfair dismissal or redundancy. In Colen and another v Cebrian UK Ltd (2003), a husband and wife worked for the same employer and claimed commission owing from before their dismissal. The husband had been evading tax by transferring commission which he had earned to his wife. The Court of Appeal held that at the date of inception, the husband and wife’s employment contracts were perfectly lawful and the effect of the later illegal performance did not automatically make the two contracts wholly unenforceable.
What are the consequences of imposing garden leave where the contract has no garden leave clause?
Unless there is a contractual term allowing an employer to place an employee on garden leave, the failure to make work available may constitute a repudiatory breach of contract by the employer. This is especially so where the employee loses more money by being on garden leave where, for example:
- pay is dependent upon being able to work, for example piece work or commission-only employment
- a career is dependent on publicity
- work is necessary for the maintenance of skills.
In such an event the employee would be entitled to:
- accept the repudiation and treat the contract as at an end,
- claim constructive unfair dismissal (if the employee has more than one year's service or two years’ service for employees starting employment on or after 6 April 2012) and
- claim to be no longer bound by any express restrictive covenants contained in the contract.
Can a bonus scheme be genuinely discretionary?
The short answer to this question is yes. Employers can have a bonus scheme which is genuinely discretionary. Since the banking crisis, bonuses have been frequently in the news. The Government and the Financial Services Authority (FSA) wished to regulate bonuses in certain sectors to discourage excessive risk-taking. Financial services businesses are therefore to be restricted in the bonus schemes they may adopt. However, other employers and employees are free to agree a very wide variety of bonus schemes.
Bonuses are normally categorised as either contractual or discretionary (the latter are not contractual). However, bonus schemes referred to as non-contractual or discretionary may also end up being enforceable against employers.
Two key points to remember are:
- The bonus scheme has really to be discretionary, both in the way it is drafted and in the way it does work within the organisation.
- An employer may not act irrationally or perversely in exercising their discretion.
Bonus payment disputes regularly arise between employers and employees. The employer may refuse to pay a bonus when an employee leaves. The law of contract governs the payment of bonuses. There may be simply an oral agreement or there may be complex rules which govern the manner and method in which bonuses are calculated and paid. The rules may have been recorded in writing in a company handbook or have arisen through past practice.
A prudent employer will take legal advice when implementing a bonus scheme in order to ensure that any bonuses are entirely discretionary in nature. A well-drafted scheme should mean that employers can vary or alter the bonus scheme and cease payments without notice. Schemes will often be in separate bonus scheme documents which can be changed annually. Such documents should explain how the bonus is calculated and the relevant factors applicable to the exercise of discretion. Areas to deal with include whether the employee gets a bonus on the bonus payment date when working their notice period or when on garden leave. There may also be provision for pro-rata payments at the start and end of the job.
Despite the wording of the scheme, if the employer always pays bonuses in a certain way and a fixed method of calculating and paying bonuses evolves, then employees may be able to argue that a contractual right to a bonus has arisen.
Discretionary bonus schemes
A discretionary scheme can mean:
- that the decision to pay the bonus that year is discretionary or
- how to calculate the bonus is discretionary or
- that the amount is discretionary or
- that all aspects are discretionary.
A case which provides guidance about what is meant by ‘discretionary’ bonus schemes is Small and others v Boots Co plc (2009). This case shows that simply labelling a bonus scheme as discretionary does not mean that it is not binding contractually. It is necessary to look at the substance of the scheme, not just the labels attached to it. A dispute arose concerning non-payment of performance-related bonuses following a TUPE transfer. The warehouse men affected stated they had a contractual entitlement to bonuses. The scheme, of course, described bonuses as discretionary. The EAT held that labelling a bonus scheme as discretionary could carry any of the meanings set out in bullet points above. All the relevant circumstances were used to decide if the discretion had contractual effect, especially Boots’ invariable practice of making bonus payments over many years.
Another helpful example is Kent Management Services Ltd v Butterfield (1992). A recruitment consultant's letter of appointment referred to a commission and bonus scheme which stated 'Whereas the intention of the commission and bonus schemes is to stimulate motivation and provide a fair return for additional effort, there are circumstances, however unlikely, when payment may be either not justified or not possible. An extreme example would be bankruptcy. Consequently, for legal purposes the schemes will be defined as discretionary and ex gratia and will not constitute a contractual arrangement'.
When the consultant left, he calculated that he was due nearly £2,500 but the employer said that the scheme was discretionary and paid only £1,227. The EAT said that the extra commission due to the consultant was payable because it was within the reasonable contemplation of both parties that in ordinary circumstances it was payable. There was no suggestion that there were any special circumstances for non-payment.
Therefore, bonus clauses, even if discretionary, are very strictly interpreted by the courts and tribunals. If the rules state that the bonus will not be paid if there are extreme circumstances, then it will require extreme circumstances to justify non-payment. If a bonus is based on performance, employers must take performance into account. Bonus schemes must be clear about any factors which affect the exercise of discretion.
Even if a scheme is genuinely discretionary, an employer must not exercise its discretion irrationally or perversely. The court or tribunal will consider what a reasonable employer would have done.
In Clark v Nomura International plc (2000), a senior investment banker was dismissed with three months’ notice on garden leave. He was paid his basic salary for the three-month notice period, but was paid no bonus, even though the date for the annual bonus occurred during his notice period. His contract referred to the bonus as being 'not guaranteed in any way, and dependent upon individual performance'.
He had earned profits for his employer of over £6 million and was responsible for another extremely profitable transaction. The High Court held that if an employer is exercising a discretion, there will be a breach of contract if no reasonable employer would have exercised the discretion in that way. The employee was therefore ordered to receive a bonus of £1.35 million.
However, a properly drafted scheme may give an employer quite wide discretion regarding the level of the amount to be paid. If the employer has not acted irrationally, then the employee’s ability to challenge the amount of the bonus will be limited (see Commerzbank AG v Keen, 2007).
Employers also need to be aware of the discrimination risks associated with bonus schemes (see our Maternity, paternity and adoption leave and pay Q&As and our Age discrimination Q&As for further information).
Can mobility clauses in employment contracts require employees to relocate when asked to do so?
The short answer is yes, but employers should only attempt to enforce the clause if it can be objectively justified. Two main problems arise:
- An employer has to exercise this mobility clause in a manner that is consistent with the implied duty of mutual trust and confidence. This will mean consultation with the affected employees, the giving of adequate notice and considering any reasons why they may not be able to comply. Failure to do so could give rise to a claim for constructive unfair dismissal as, for example, in United Bank Ltd v Akhtar (1989). A bank clerk's contract contained an express mobility clause. He was given less than a week's notice to transfer to Birmingham from Leeds. He refused on the basis that he could not afford to move and his wife was ill. He resigned and claimed constructive dismissal. There was no breach of contract as the contract contained an express mobility clause. However, the EAT felt the manner in which the employer had sought to exercise their contractual right had the effect of destroying the mutual trust and confidence.
- The requirement for mobility of location is a requirement that a smaller proportion of women than men can generally comply with and it is possible that this could give rise to a claim of indirect sex discrimination. A greater proportion of women than men were secondary wage-earners and therefore could not comply with the direction to relocate. What is reasonable will depend on the facts of each case and whether an employer can objectively justify the clause.
Can employers include different terms and conditions in employment contracts based on length of service?
Employers can include different terms and conditions in their contracts based on length of service provided that the period of service is either not more than five years or, if more than five years, the employer is able to justify the provisions.
These provisions are contained in the Employment Equality (Age) Regulations 2006 which came into force on 1 October 2006. Their basic premise is that less favourable treatment of an employee based on age will be discriminatory and therefore unlawful; this will include certain benefits based on length of service. However, there are exceptions to enable employers to include different terms and conditions in contracts based on length of service.
It appears easier to establish justification of the provisions than was originally envisaged with the draft legislation. However, some employers may decide that it is easier to dispose of length of service benefits altogether or to award length of service benefits (for example, extra holiday or the granting of share options) to those who have accrued not more than five years length of service. But as long as employers can justify rewarding length of service for periods over five years there should be no difficulties.
To justify service-related pay and benefits the employer will have to show that the benefit is needed to motivate staff, reward loyalty and recognise experience.
To justify differences in benefits to workers with more than five years' service, an employer will need to show that they are fulfilling a business need by, for example, providing information about recruitment and retention or data on the relative efficiency of staff with different levels of service.
Length of service is the same for full-time and part-time workers and the employer can take into account periods of absence, if it is reasonable to do so.
An employee who feels that the benefits structure is discriminatory will be able to make a complaint to an employment tribunal.
Can an employer make payment in lieu of notice if there is no express contractual provision allowing it to do so?
It is preferable to include an express provision as to pay in lieu. The absence of an express contractual provision technically constitutes a breach of contract and could result in a wrongful dismissal claim.
It is also inadvisable for an employer to risk breaching the contract in these circumstances because the employee may then argue that because the employer has breached, it cannot rely upon its restrictive covenants.
Can employers include a term to recover the cost of the training from an employee who leaves?
It is common for employers to include in contracts a term requiring repayment of the training fees if the employee leaves within a certain time. As such terms restrict the employee's freedom to work for others, there is an argument that it is in restraint of trade. If that argument were upheld, the term would be void unless the employer established that it protects a legitimate business interest, is reasonable and is no wider than necessary to protect that legitimate business interest. If the term is void, no money would be recoverable.
In view of the risk of facing such an argument, such terms should be on a sliding scale so that the amount of training fees repayable decreases the longer the employee stays in employment after the training. Some contracts contain an obligation that binds the employee to a certain period of employment after the training, so that the employee is in breach of contract if he leaves before that period expires. The contract then provides for a payment, if the employee breaches the contract by leaving early. In addition to the problem of restraint of trade, such a term may also be unenforceable as a penalty clause unless it is a genuine pre-estimate of the loss that the employer will suffer as a result of the employee's breach. In this case the employer may still be able to recover damages for breach of contract.
It is recommended that advice from a solicitor is taken on the drafting and enforceability of these terms.
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