What is a Contract of Employment?

When an employer decides to hire someone, they'll usually share what the role includes. A great way to present this is through a contract of employment.

This is a legally-binding agreement between an employer and another person. Once it’s written down or verbally agreed to, an employment contract is in place.

Employers should be aware of the consequences for neglecting the agreement. You could end up facing employment tribunal claims, hefty compensation, and major business losses.

You may also be wondering what happens if an employee refuses to sign a new contract? Find out more here.

In this guide, we’ll look at what a contract of employment is, different types of contracts, and what to include in them.

What is a contract of employment?

A contract of employment is a legal agreement between an employer and an employee or worker.

Contracts start as soon as a job offer is accepted. They usually outline job conditions, work duties, and employment law rights - usually through verbal or written statements.

Employment contracts are often drafted based on what the employer desires. But it's perfectly common to negotiate terms before they're signed. After this point, the contract becomes a legally-binding agreement.

Why is a contract of employment important?

A contract of employment is an important tool that solidifies work relations between an employer and a new employee or worker.

Employment contracts ensure both parties know their expectations regarding the job offer. Contracts offer transparency and compliance with employment law (which is particularly helpful during potential disputes).

In the UK, it's not a legal requirement to provide a written employment contract. However, most people see the benefits from documenting the conditions of a job. Whichever you offer, be sure to provide some form of employment contract to all new employees.

Are there different types of employment contracts?

Yes, there are several different types of employment contracts to choose from. It all depends on what job is being offered and what is expected for the role. Employers can offer:

• Full-time or part-time contract.
• Permanent and non-permanent employment contract.
• Fixed-term contract.
• Agency worker contract.
• Freelancer, consultant, or contractor contract.
• Apprenticeships or internship contracts.

Do self-employed people need an employment contract?

Yes, if you plan on hiring a self-employed person, they’ll be given a contract called a consultancy agreement. This can be verbal, but it's always advisable to have a written agreement.

Employers generally don't need to worry about working hours or taking breaks for self-employed people. However, there are relevant legal requirements you must comply with; like  safe working conditions.

What is the law on employment contracts?

Contracts are governed by all areas of employment law. Wherever they reach, it falls on every employer to comply with laws that relate to their business. Employment law includes:

• The Employment Rights Act 1996 (ERA): This act outlines basic rights of an employee. For example, the right to statutory sick pay (SSP) or request flexible working.
• The Equality Act 2010 (EA): This act prohibits discrimination against nine protected characteristics. These include; age; disability; gender reassignment; marriage and civil partnership; pregnancy and maternity; race; religion or belief; sex; sexual orientation.
• The National Minimum Wage Act 1998 (NMW): This act presents the right to be paid no less than the legal minimum wage rate.
• The Working Time Regulations 1998 (WTR): These regulations set out the maximum number of work hours allowed per week. It also covers legal rights to rest breaks and paid annual leave.
• The Health and Safety at Work Act 1974 (HSWA): This act outlines an employer's duty to protect the health, safety, and welfare of everyone on their work premises. This includes employees; as well as customers, clients, and the general public.

If an employee is denied their employment rights, they could decide to raise this to an employment tribunal (ET). Successful claims could result in paying compensation or being forced to issue new employment contract terms.

Does an employment contract have to be written?

No, an employment contract legally doesn't have to be written. However, having a written contract does provide additional benefits to both the employer and employees (specifically legal protection).

If the employee agrees to the written statement, they should sign it before starting their job. Both you and the employee should keep a signed copy of the agreement.

Can you change the terms of an employment contract?

An employer can’t change the terms of an employee's contract without written consent. However, they can through a contractual clause or legal requirement. For example, updating contracts to comply with the new National Minimum Wage law.

If an employer wants to change terms for their business needs, the contracts should include variation clauses. These can temporarily render or even supersede an entire agreement between two parties.

What happens if an employment contract is breached?

If an employee breaches their contract terms, you need to respond in an appropriate manner. For smaller issues, like constant lateness or missing work, you could issue a verbal warning.

Serious acts of gross misconduct can be seen as a direct breach to statutory rights - even if they're not added to contracts. For example, physical violence at work. Employers must follow proper disciplinary and grievance procedures to deal with such issues.

Can you terminate an employment contract?

An employee's contract can be terminated for a number of reasons. For example, an employee may wish to resign from their current role to seek work elsewhere. Or an employer may decide to make people redundant due to company-wide layoffs.

When terminating an employment contract, you must ensure it's done in accordance with employment law and employee handbook. For example, completing notice periods before leaving. Failure to terminate contracts properly could result in an unfair dismissal.

Download our free employee contract template today. and ensure you're creating a legal document for your staff.

What terms are added to a contract of employment?

There are several types of terms you can add to a contract of employment. Choosing them will depend on what agreement needs to be met between both parties. Let's look at a few examples:

Express terms

Express terms are conditions that are shared or specifically agreed to between parties. These terms can include things like hours of work, notice periods, or flexible working requests.

Implied terms

Implied terms aren't usually added to an employment contract but they're expected from both parties. For example, the right against unfair dismissal. Implied terms are commonly found in custom and practice or employee handbook.

Incorporated terms

Incorporated terms form part of an employment contract, but they're usually found in policy documents. For example, an employer adds them to their company handbook, making them available for fixed-term contract workers.

Restrictive covenants

Restrictive covenants stop an employee from working with a competing company after they’ve been dismissed. These terms usually have a timeframe, like six months. The aim is to minimise the misuse of intellectual property or sources owned by the previous business. You may also want to include a non-compete agreement, that stops an employee from working with a competitor.

Collective agreements

Collective agreements are terms negotiated between an employer and a trade union (or other employee representatives). This may relate to employee rights, like safer working conditions or equal pay.

Relocation clauses

Relocation clauses are terms that allow an employee to change or move away from their normal work location. This might be a one-off event, like moving to a new office. Or their job could require them to work at multiple sites over a month.

What to include in a contract of employment

Whether you're hiring an agency worker or a self-employed contractor - it's best to outline the conditions of the job. That's where employment contracts come in handy.

You can always download a free employment contract template or create your own. Whichever you choose, ensure contracts are fair and legally compliant.

Let's take a look at what to include in a contract of employment:

Written statement

A written statement (also known as a 'written statement of employment particulars') outlines the terms of a contract - in writing.

Employers must provide written statements to people on the first day of their job. A written statement is made up of two sections:

• Principal statement: This summarises the main terms of the role; including things like, their job title, working hours, or probationary period details.
• Terms of employment: These usually relate to the specific job or business needs. They may cover terms like, potentially overtime, travelling during work, or complying with dress codes.

Basic job information

Written employment contracts should include basic information about the job. For example:

• Name of the employer and employee.
• Job title or a brief description of the role.
• Location, hours of work, and date of continuous employment.
• Work conditions and duties.
• Statutory rights (like fair wages, sick leave, sick pay, or holiday entitlement).
• Contractual rights (like pension schemes or probationary period).

It's normal for people to negotiate other benefits before accepting a job offer. Whatever outcome is reached, it's always best to include them within the agreement.

Pay and benefits

It's always best to be transparent about employee pay and benefits (or other additional remuneration, like bonus schemes or commission pay).

Pay benefits will usually be shared during initial recruitment stages, like in the job advert. This level of clarity helps with attracting people suitable for the role.

Wages are usually negotiated or set at a standard (like the National Minimum Wage). Paying fair and lawful wages can help attract, retain, and motivate employees. For example, negotiating higher holiday pay benefits for those who've passed their probationary period.

Annual leave

Every employee and worker are legally entitled to 5.6 weeks of annual leave per year.

These terms should be added into every employment contract - including whether they’ll receive holiday pay. Other types of leave include:

• Public holidays.
• Shared parental leave (SPL).
• Maternity, paternity, and parental leave.
• Time off for dependants.
• Sick leave.
• Bereavement leave.
• Unpaid leave.

Employment status

Before a person starts a new job, they should know what their employment status is. Under employment law, there are three types of employment status:

• Employee: An employee is someone who agrees to a contract of service. Like, setting conditions for employment.
• Worker: A worker is someone who agrees to a contract on a personal performance of work. Like, working on an irregular or casual basis.
• Self-employed: A self-employed person is someone who agrees to a contract for independent services. Like, providing expertise assistance to meet business needs.

Employment status reflects a person's statutory rights. Depending on their job title or status, they'll receive different employment rights. An employer must state what a new employee's job title and status is before they start working.

Working hours

Employee contracts should highlight how many hours of work is expected from them. This can be added as a unit per day or week.

In some cases, an employee may work longer than their contract states. For example, if an employee continues to work overtime. Their total weekly hours must not be more than 48 hours per week unless they opt-out (according to the Working Time Regulations 1998).

You may also need to highlight normal working hours for vulnerable people, as they'll have separate employment rights. Like, those who are underage, pregnant, or work at night.

Confidential information

Many businesses collect all kinds of personal data from their staff. For example, date of birth, home addresses, and even trade union memberships.

This type of confidential information must be kept safe under the Data Protection Act 2018. Whilst an employer has a lawful right to request it, they also have a legal duty to protect it from security breaches.

Your staff handbook, policies, and contracts should all cover how personal data is collected, stored, and shared (when necessary). They should also include employee rights to delete stored information if requested.

Get expert advice on contract of employment with Peninsula

From sick pay to equality rights, there are so many factors to think about when creating an employment contract.

As an employer, you must maintain legal compliance and mutual trust throughout. That way, new and existing employees will feel safe knowing their employment rights are protected.

If you fail to comply with agreement terms, you're putting your business at serious risk. Employers could end up facing employment tribunal claims, paying hefty compensation, and suffering from major production losses.

Peninsula offers expert advice on a contract of employment. Our teams offer 24/7 HR advice which is available 365 days a year. We take care of everything when you work with our HR experts. Why not check out our employment contract template - it’s a free download. We also have a Scotland contract of employment template available.

Want to find out more? Contact us on 0800 029 4377 and book a free consultation with an HR consultant today.