What is a Breach of Contract?

When you hire someone, you should outline the responsibilities of their role in an employment contract. This includes the terms of your employment relationship, such as daily duties, working conditions, pay and benefits. If either party fails to meet these terms, you risk a breach of an employment contract.

A breach of employment contract can have a negative impact on your business. If you're at fault, you risk your employee making a breach of contract claim to an employment tribunal. Consequently, your company might face lengthy legal proceedings and even business closure.

In this guide, we'll discuss a breach of employment contracts, how both employers and employees can cause them, and the consequences.

What is an employment contract?

A contract of employment is a legal agreement between an employer and an employee. They outline the contractual terms within a working relationship. These include:

• Working hours.
• Working conditions.
• Duties and responsibilities.
• Notice periods.
• Holiday pay.
• Sick pay.

They also detail an employee's rights, such as their break entitlement. Or any other benefits such as bonuses or remote working.

It's perfectly common for either party to negotiate the terms before they sign. After this, the written contract becomes a legally-binding agreement.

Why do employers use contracts of employment?

The Employment Rights Act states that a business should provide a written statement of employment particulars to new hires. This must be done by the first day of their employment.

Employment contracts ensure both parties know their expectations regarding the job offer. Moreover, contracts offer transparency and compliance with employment law. This can be particularly helpful if disputes arise at work.

What is a breach of employment contract?

A breach of employment contract occurs when either party breaks the contract terms of the agreement. For example, an employer not paying wages - or an employee not working their proper notice period.

A serious, or fundamental breach, could see a business making an alleged breach of contract claim to a county court. If the employer breaches an employee's contract, the employee might make a claim to an employment tribunal.

Let's explore some ways in which an employer fails to meet the terms of an employment contract.

Breach of employment contract by an employer

There are several instances where an employer could break the terms of an employment contract. It's important that you're aware of them all so you know what to avoid if a breach occurs down the line.

Common examples of an employer breach of contract include:

Wrongfully dismissing an employee

An employer's breach of contract might be the result of wrongful dismissal. Wrongful dismissal occurs when a business dismisses a staff member in a way that breaches their employment contract.

For example, a company dismisses an employee on a probation period without letting them work their statutory notice period, without notice pay, or pay in lieu.

As an employer, you are entitled to perform summary dismissals on employees, if their behaviour constitutes gross misconduct. But you must ensure your disciplinary procedure complies with employment law. Otherwise, your employees might claim wrongful dismissal.

Constructively dismissing an employee

An employee might claim constructive dismissal if they believe their employer has seriously breached their employment contract. For example, a staff member experiences bullying in the workplace and flags the issue to their line manager. This could lead to the employee resigning.

Despite being aware of the problem, the manager and employer fail to act on the issue. Consequently, this would breach the employer's implied duty of care and mutual trust - which breaches the employment contract.

Failure to pay wages, contractual entitlements, or National Minimum Wage

Another instance in which an employer could breach an employment contract is if they fail to pay wages. This could be an employee's salary entitlement, or include other contributions, such as pension entitlement or travel expenses.

If this occurs, the employee can make a breach of contract claim. Depending on the case, the employee may also be able to make an unlawful deduction of wages claim.

You should aim to handle minor breaches - such as a small error in pay - internally. It's best to try and approach the issue informally before involving tribunals and civil courts.

Breach of employment contract by an employee

It’s important to act fast during an employee breach of contract. This will help minimise any damage to your business the breach may have caused.

Common examples of employees breaching an employment contract include:

Breach of express terms

Express terms are specific conditions both you and your employee agree to within a contract. This could be in relation to their working hours or working conditions. If an employee breaks the express terms of their contract, this would count as a contract breach.

Examples of these types of breaches include:

• Failure to carry out duties that their contract enforces. For instance, refusing to complete tasks that their job requires.
• Failure to give proper notice periods when resigning. For instance, only working a one week notice period when their length of service equates to over two years.
• Failure to meet the employer's code of conduct. You may outline this in the employee handbook. For instance, dressing inappropriately or using foul language in the workplace.

Breach of implied terms

Whilst implied terms aren't necessarily laid out in an employment contract, they are implied into a contract by law. For example, a business will expect an employee not to damage company property. If the employee does so, they would breach the implied terms of their employment contract.

Other examples of breaching implied terms include:

• Gross misconduct of any kind. For instance, bullying or victimising another co-worker.
• Behaving in a dishonest manner. For instance, falsifying sales or other financial data.
• Failure to exercise reasonable care and skill when performing their duties. For instance, sharing a customer's personal data with others and causing a data breach.

Consequences of breaching an employment contract

As mentioned, it's best to handle minor breaches internally. This could be through mediation or alternative dispute resolution. However, if the instance is more serious, there could be severe consequences.

These are:

Employment tribunal claim

If you breach an employee's contract, they could make a breach of contract claim to an employment tribunal. An employment tribunal is a public body that deals with work-related disputes. These can be lengthy and costly processes, so it's best to do everything you can to avoid them.

If you are ever called to one because of a breach, you could see if the employee is willing to sign a settlement agreement instead. Whilst you'll still have to pay compensation, you could also seek to benefit.

For example, in exchange for compensation, you might ask the employee not to speak about their time of employment with you to others. This might help minimise damage to your reputation. But mostly, businesses use settlement agreements to prevent an employee raising a claim against them down the line.

Claim for financial losses

If your employee breaches their contract, you can take legal action in a civil court. If successful, this could result in your employee paying you for damages that occur as a result of the breach. The same still applies if the roles were reversed, but the claim would likely be settled at a tribunal instead.

Whilst the compensation is capped at £25,000 at a tribunal, there is no limit when making claims to civil courts.

Reputational damage

If either you or your staff breach an employment contract, it could result in damage to your business's reputation.

For example, your employee breaches their contract by refusing to follow your code of conduct. Instead of acting professional, they use crass language in front of clients and dress inappropriately.

Whilst this breach is no fault of your own, it still creates a poor portrayal of your business. Ultimately, this could have a negative impact on your customer and client relationships.

In contrast, if you breach an employee's contract by failing to care for them, they might share their experience with others. If they share it with individuals in your industry it could result in a smaller applicant pool when recruiting. This may mean you miss out on the best talent.

What is the maximum compensation awarded to an employee if you breach their contract?

The maximum compensation an employment tribunal can provide is capped at £25,000. The tribunal will request the employer make a payment - if the employee can prove they lost out financially due to the contract breach.

The employer must then pay the employee what they would have paid if they didn't breach the contract.

Can you sue an employee for breach of contract?

Yes, if the employee breaches the terms of their employment contract, you can sue them for financial loss arising from the breach. The employer would usually pursue this in a county court. But, if a staff member makes a claim to an employment tribunal, the employer can respond with their claim via this instead.

Can you withhold wages if an employee breaches a contract?

Yes, but only if the employer has expressed this in their employment contract. For example, the contract may state that in cases of an actual breach from an employee, the employer will withhold payment of wages.

Get expert advice on breach of employment contracts from Peninsula

You should ensure your contracts with staff set out legally enforceable terms. This includes maintaining legal compliance and ensuring your employees are clear on what you expect from them.

If you fail to do so, you or your employees may breach your employment contracts. Consequently, you could put your business at serious risk.

You could handle a minor breach internally and with minimal damage. But a serious breach might mean you end up facing contract claims, paying hefty compensation, and suffering from reputational damage.

Peninsula offers expert advice on breach of employment contracts. Our teams provide 24/7 HR advice on workplace disciplinary matters - which is available 365 days a year. We take care of everything when you work with our HR experts. We even have a free employment contract template for you to download now. We also have a contract of employment template for Scotland available.

Want to find out more? Contact us on 0800 028 2420 and book a free consultation with an HR consultant today.